As filed with the U.S. Securities and
Exchange Commission on September 11, 2015
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
ARCH THERAPEUTICS, INC.
(Exact name of registrant as specified in
its charter)
Nevada |
3841 |
46-0524102 |
(State or other jurisdiction of
incorporation or organization) |
(Primary Standard Industrial
Classification Code Number) |
(I.R.S. Employer
Identification Number) |
235 Walnut St., Suite 6
Framingham, MA 01702
(617) 431-2313
(Address, including zip code, and telephone
number, including
area code, of registrant’s principal
executive offices)
Terrence W. Norchi
President and Chief Executive Officer
235 Walnut St., Suite 6
Framingham, MA 01702
(617) 431-2313
(Name, address, including zip code, and
telephone number, including
area code, of agent for service)
With Copies to:
Michael J. Lerner
John “Jack” D. Hogoboom
Lowenstein Sandler LLP
1251 Avenue of the Americas, 18th
Floor
New York, New York 10020
(973) 597-6394
Approximate date of commencement of proposed
sale to the public: As soon as possible after the effective date hereof.
If any of the securities being registered on this Form are
to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.
x
If this Form is filed to register additional securities
for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant
to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company x |
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered |
|
Amount to be
Registered(1) |
|
Proposed
Maximum
Offering Price
per Share(2) |
|
Proposed
Maximum
Aggregate
Offering
Price(2) |
|
Amount of
Registration
Fee |
|
|
|
|
|
|
|
|
|
Common Stock, par value $0.001 per share |
|
28,781,508 |
|
$ |
0.32 |
|
$ |
9,210,082.56
|
|
$ |
1,070.21 |
| (1) | Consists of 14,390,754 shares of Common Stock, par value $0.001 per share (“Common Stock”) and an aggregate
of 14,390,754 shares of Common Stock currently issuable upon the exercise of Arch Therapeutics, Inc.’s (the “Company”)
Series D Warrants. Pursuant to Rule 416 under the Securities Act of 1933, as amended, there is also being registered hereby
such indeterminate number of additional shares of Common Stock as may be issued or issuable because of stock splits, stock dividends,
stock distributions, and similar transactions. |
| (2) | Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended. The
proposed maximum offering price per share and proposed maximum aggregate offering price are based upon the average of the high
$0.325 and low $0.315 bid prices of our Common Stock on September 8, 2015 as reported by on the QB tier of the OTC Marketplace. |
The registrant hereby amends this registration statement
on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section
8(a), may determine.
The information in this prospectus
is not complete and may be changed. The selling securityholders named herein may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED
SEPTEMBER 11, 2015
ARCH THERAPEUTICS, INC.
PROSPECTUS
Up to 28,781,508 Shares of Common Stock
This prospectus relates to the offering and resale by the selling
securityholders of Arch Therapeutics, Inc. named herein of up to 28,781,508 shares of common stock, par value $0.001 per share
(“Common Stock”). These shares include 14,390,754 shares of issued and outstanding Common Stock currently held
by the selling securityholders and 14,390,754 shares of Common Stock currently underlying Series D Warrants held by the selling
securityholders, all of which were initially issued and sold in a private placement offering that was concluded on July 2, 2015
(the “2015 Private Placement Financing”). The Common Stock issued in the 2015 Private Placement Financing was
sold as a part of a unit (“Unit”) consisting of a share of our Common Stock and a Series D Warrant at a purchase
price of $0.22 per Unit. The Series D Warrants entitle the holders thereof to purchase shares of Common Stock at an initial exercise
price of $0.25 per share, were exercisable immediately upon issuance and expire five years thereafter.
The selling securityholders may sell the shares of Common Stock
to be registered hereby from time to time on any national securities exchange or quotation service on which the securities may
be listed or quoted at the time of sale, in the over-the-counter market, in one or more transactions otherwise than on these exchanges
or systems or in the over-the-counter market, such as privately negotiated transactions, or using a combination of these methods,
and at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or
at negotiated prices. See the disclosure under the heading “Plan of Distribution” in this prospectus for more
information.
We will not receive any proceeds from the resale of Common Stock
by the selling securityholders.
Our Common Stock is traded on the QB tier of the OTC Marketplace
(“OTCQB”) under the symbol “ARTH”. On
September 10, 2015, the closing price of our Common Stock was $0.33 per share.
We originally offered and sold the securities issued in the
2015 Private Placement Financing under an exemption from the registration requirements of the Securities Act of 1933, as amended
(the “Securities Act”), pursuant to Section 4(a)(2) thereof.
Investing in our Common Stock involves a high degree of
risk. Before making any investment in our Common Stock, you should read and carefully consider the risks described in this prospectus
under the heading “Risk Factors” beginning on page 12 of this prospectus.
You should rely only on the information contained in this
prospectus or any prospectus supplement or amendment thereto. We have not authorized anyone to provide you with different information.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
This prospectus is dated ____________,
2015
TABLE OF CONTENTS
About This Prospectus
You should rely only on the information that we have provided
or incorporated by reference in this prospectus, any applicable prospectus supplement and any related free writing prospectus that
we may authorize to be provided to you. We have not authorized anyone to provide you with different information. No dealer, salesperson
or other person is authorized to give any information or to represent anything not contained in this prospectus, any applicable
prospectus supplement or any related free writing prospectus that we may authorize to be provided to you. You must not rely on
any unauthorized information or representation. This prospectus is an offer to sell only the securities offered hereby, but only
under circumstances and in jurisdictions where it is lawful to do so. You should assume that the information in this prospectus,
any applicable prospectus supplement or any related free writing prospectus is accurate only as of the date on the front of the
document and that any information we have incorporated by reference is accurate only as of the date of the document incorporated
by reference, regardless of the time of delivery of this prospectus, any applicable prospectus supplement or any related free writing
prospectus, or any sale of a security registered under the registration statement of which this prospectus is a part.
This prospectus contains summaries of certain provisions contained
in some of the documents described herein, but reference is made to the actual documents for complete information. All of the summaries
are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will
be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and
you may obtain copies of those documents as described below under the heading “Where You Can Find More Information.”
As used in this prospectus, unless the context indicates or
otherwise requires, the “Company”, “we”, “us”, “our”
and “Arch” refer to Arch Therapeutics, Inc., a Nevada corporation, and its consolidated subsidiary, and the
term “ABS” refers to Arch Biosurgery, Inc., a private Massachusetts corporation that, through a reverse merger
acquisition completed on June 26, 2013, has become our wholly owned subsidiary.
On May 24, 2013, we effected a forward stock split, by way of
a stock dividend, of our issued and outstanding shares of Common Stock at a ratio of 11 shares to each one issued and outstanding
share. Unless the context indicates or otherwise requires, all share numbers and share price data included in this prospectus have
been adjusted to give effect to that stock split.
Our trademarks include AC5 Surgical Hemostatic Device™,
AC5™, Crystal Clear Surgery™, NanoDrape™ and NanoBioBarrier™. All other trademarks, trade names and service
marks included in this prospectus are the property of their respective owners.
SUMMARY
This summary does not contain all of the information
that should be considered before investing in our Common Stock. Investors should read the entire prospectus carefully, including
the more detailed information regarding our business under the heading “OUR BUSINESS” beginning on page 54
of this prospectus, the risks of purchasing our Common Stock discussed in this prospectus under the heading “Risk
Factors” beginning on page 12 of this prospectus and our consolidated financial statements and the accompanying
notes beginning on page F-1 of this prospectus.
Our Company
We are a life science medical device company in the development
stage with limited operations to date. We aim to develop products that make surgery and interventional care faster and safer by
using a novel approach that stops bleeding (referenced as “hemostatic” or “hemostasis”),
controls leaking (referenced as “sealant” or “sealing”), and provides other advantages during
surgery and trauma care. Our core technology is based on a self-assembling peptide solution that creates a physical, mechanical
barrier, which could be applied to seal organs or wounds that are leaking blood and other fluids. We believe our technology could
support an innovative platform of potential products in the field of stasis and barrier applications. Our lead product candidate,
the AC5 Surgical Hemostatic Device™ (which we sometimes refer to as “AC5™”), is designed to achieve
hemostasis in minimally invasive and open surgical procedures, and we hope to develop other hemostatic or sealant product candidates
in the future based on our self-assembling peptide technology platform. Our plan and business model is to develop products that
apply that core technology to use with human bodily fluids and connective tissues.
AC5 is designed to be a biocompatible synthetic peptide comprising
naturally occurring amino acids. When applied to a wound, AC5 intercalates into the interstices of the connective tissue where
it self-assembles into a physical, mechanical structure that provides a barrier to leaking substances, such as blood. AC5 is designed
for direct application as a liquid, which we believe will make it user-friendly and able to conform to irregular wound geometry.
Additionally, AC5 is not sticky or glue-like, which we believe will enhance its utility in the setting of minimally invasive and
laparoscopic surgeries. Further, AC5 is transparent, which should make it easier for surgeons or other healthcare providers to
maintain a clear field of vision during a surgical procedure and prophylactically stop bleeding as it starts, which we call Crystal
Clear Surgery™.
We currently have no products that have obtained marketing approval
in any jurisdiction, we have not generated revenues since inception and we do not expect to do so in the foreseeable future due
to the early stage nature of our current product candidates. We had net losses for the year ended September 30, 2014 and the nine
months ended June 30, 2015 of $8,142,823 and $1,850,066, respectively, and we had an accumulated deficit as of June 30, 2015 of
$14,624,760. To date, we have financed our operations primarily through funding received from private placement offerings, such
as the 2015 Private Placement Financing, the 2014 Private Placement Financing (as later defined), the Notes Offering (as later
defined), and under the MLSC Loan Agreement (as later defined). We have devoted much of our operations to date to the development
of our core technology, including selecting our lead product composition, conducting initial safety and other related tests, generating
scale-up, reproducibility and manufacturing and formulation methods, and developing and protecting the intellectual property rights
underlying our technology platform.
For more information regarding our business, see the
disclosure under the headings “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Our Business” included elsewhere in this prospectus. For a description of
certain risks related to our business, see the disclosure under the heading “Risk Factors” beginning on
page 12 of this prospectus.
2015 Private Placement Financing
Beginning June 22, 2015 and through June 30, 2015, we entered
into a series of substantially similar subscription agreements (each a “Subscription Agreement”) with twenty
accredited investors providing for the issuance and sale by us to such investors, in a private placement, of an aggregate of 14,390,754
Units at a purchase price of $0.22 per Unit (the “2015 Private Placement Financing”). Each Unit consisted of
a share of our Common Stock and a Series D Warrant (“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 shares issuable upon exercise of the Series D Warrants, the “Series D Warrant Shares”). The number
of shares of Common Stock into which each of the Series D Warrants is exercisable and the exercise price therefor are subject to
adjustment as set forth in the Series D Warrants, including adjustments for stock subdivisions or combinations (by any stock split,
stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, (i) at anytime during the term
of the Series D Warrants, we may reduce the then current exercise price to any amount and for any period of time deemed appropriate
by our Board of Directors (the “Board”); and (ii) certain of the Series D Warrants provide that they shall not
be exercisable in the event and to the extent that the exercise thereof would result in the holder of the Series D Warrant or any
of its affiliates beneficially owning more than 4.9% of our Common Stock, but such ownership limitation may be waived at the holder’s
discretion, provided that such waiver will not become effective until the 61st day after delivery of such waiver
notice. We did not engage any underwriter or placement agent in connection with the 2015 Private Placement Financing. The aggregate
gross proceeds raised by us in the 2015 Private Placement Financing totaled approximately $3,166,000, and upon the Second Closing
(as later defined) on July 2, 2015, the number of shares of our Common Stock outstanding increased by over eighteen percent (18%)
from 78,766,487 to 93,157,241.
The Company’s obligation to issue and sell the Units,
and the corresponding obligation of the investors to purchase such securities were subject to a number of conditions precedent
including, but not limited to, the amendment of the Series A Warrants and Series C Warrants that we had previously issued in the
2014 Private Placement Financing to delete certain of the anti-dilution provisions contained therein, and other customary closing
conditions. The conditions precedent were satisfied June 30, 2015 (the “Initial Closing Date”), and on that
date we conducted an initial closing (the “Initial Closing”) pursuant to which we sold and 19 of the investors
(the “Initial Investors”) purchased 13,936,367 Units at an aggregate purchase price of approximately $3,066,000.
On July 2, 2015, we conducted a second closing (the “Second Closing” and together with the Initial Closing,
the “Closings”) pursuant to which we sold and the remaining investor purchased 454,387 Units at an aggregate
purchase price of approximately $100,000.
Our existing stockholders will experience dilution upon any
exercise of the Series D Warrants issued in the 2015 Private Placement Financing. Such Series D Warrants are currently exercisable
for an aggregate of 14,390,754 shares of our Common Stock which, assuming no adjustments to and the full exercise of the Series
D Warrants and no other issuances of our Common Stock would equal approximately 14% of the 105,742,885 shares of Common Stock
outstanding as of the date of this prospectus, and approximately 12% of the 120,133,639 shares of Common Stock that would be outstanding
after giving effect to the exercise of all such warrants.
On the Initial Closing Date, we entered into a registration
rights agreement with the Initial Investors (the “2015 Registration Rights Agreement”), pursuant to which we
became obligated, subject to certain conditions, to file with the Securities and Exchange Commission (the “SEC”)
within 90 days after the closing of the 2015 Private Placement Financing one or more registration statements to register the shares
of Common Stock issued in the Closings and the Series D Warrant Shares for resale under the Securities Act of 1933, as amended
(the “Securities Act”). The remaining investor became a party to the 2015 Registration Rights Agreement upon
the consummation of the Second Closing. As a result, we are registering for resale under this registration statement an aggregate
of 28,781,508 shares of Common Stock, representing the 14,390,754 shares issued at the closing of the 2015 Private Placement Financing
and the 14,390,754 shares underlying the Series D Warrants.
Pursuant to our filing of this registration statement, we are
in compliance with such filing obligation under the 2015 Registration Rights Agreement. Our failure to satisfy certain deadlines
with respect to this registration statement, including with respect to the effectiveness hereof within five (5) business days after
the SEC notifies us that no review of the registration statement will be made or that the SEC has no further comments on the registration
statement, and certain other requirements set forth in the 2015 Registration Rights Agreement may require us to pay monetary penalties
to the investors in the 2015 Private Placement Financing and/or their assignees. Because the Series D Warrants are subject to certain
adjustments and permit, in certain circumstances, the “cashless” exercise thereof, the number of shares that will actually
be issuable upon any exercise thereof may be more or less than the number of shares being offered by this prospectus. In the event
of any such adjustment to the number of shares issuable upon exercise of the Series D Warrants, the provisions of the 2015 Registration
Rights Agreement would obligate us to register for resale any additional shares of our Common Stock that may then be issuable upon
exercise of the Series D Warrants.
Under the 2015 Registration Rights Agreement, subject to exception
in certain circumstances, we have agreed to keep this registration statement effective until the earlier of the date on which all
shares of Common Stock to be registered hereunder have been sold, and the twelve month anniversary of the date the registration
statement of which this prospectus is a part is declared effective by the SEC. If there is not an effective registration statement
covering the resale of any of the shares issued in or issuable upon exercise of the Series D Warrants issued in the 2015 Private
Placement Financing, then the selling securityholders will be entitled to exercise their Series D Warrants on a “cashless
exercise” or “net exercise” basis during the period when the shares issuable upon exercise of such Series D Warrants
are not so registered.
Three of the selling securityholders, Anson Investments Master
Fund LP (“Anson”), Intracoastal Capital, LLC (“Intracoastal”) and the Keyes Sulat Revocable
Trust (the “Trust”), or their respective affiliates, have participated in previous financings that were either
conducted by us or our affiliates. In particular, Anson and Equitec Specialists, LLC (“Equitec”), an affiliate
of Intracoastal, were issued 2,000,000 and 800,000 shares of Common Stock, respectively, and Series A Warrants, Series B Warrants
and Series C Warrants (collectively, the “2014 Warrants”), each exercisable for 2,000,000 and 800,000 shares,
respectively, at the closing of the 2014 Private Placement Financing on February 4, 2014. On March 13, 2015, each of Anson and
Equitec were issued a Convertible Note (as defined below) in the aggregate principal amount of $250,000 upon the closing of the
Notes Offering. In May 2015, Equitec assigned the remaining securities it acquired in the 2014 Private Placement Financing and
Notes Offering to Intracoastal.
The Trust, in turn, previously purchased a promissory note in
the aggregate principal amount of $75,000 and warrants from our wholly-owned subsidiary, ABS, on June 19, 2013. In contemplation
of the Merger (as later defined), the securities purchased by the Trust were amended and restated to provide for (i) the conversion
of all amounts owed under the promissory note into an aggregate of 273,277 shares of the Company’s Common Stock upon the
closing of the Merger, calculating to approximately one share of the Company’s Common Stock for each $0.27 outstanding under
the promissory note, and (ii) the cancellation of the warrants in full upon the closing of the Merger. Accordingly, upon the closing
of the Merger on June 26, 2013, the promissory note was converted into 273,277 shares of our Common Stock and the warrants were
cancelled. James R. Sulat, who was appointed as a member of our Board on August 19, 2015, is a co-trustee of the Trust along with
his wife. On June 18, 2013, we awarded Mr. Sulat a stock option award to purchase 30,000 shares of Common Stock at an exercise
price of $0.37 per share in consideration for services rendered to us as a consultant, and on August 19, 2015, we awarded Mr. Sulat
an additional stock option award to purchase 200,000 shares of Common Stock at an exercise price of $0.27 per share in connection
with his appointment to the Board.
On June 30, 2015, the Initial Closing Date, the Series D Warrants
had an exercise price lower than the market value of our Common Stock, which closed at $0.26 on the OTCQB on such date, resulting
in an aggregate discount to the market price of our Common Stock of $139,364. On July 2, 2015, the date of the Second Closing,
Series D Warrants had an exercise price higher than the market value of our Common Stock, which closed at $0.23 on the OTCQB on
such date, and therefore did not have any discount to the market price of our Common Stock as of such date. The tables below indicate
the total possible discount to the market price of our Common Stock as of June 30, 2015 for the shares of our Common Stock underlying
the Series D Warrants issued upon the Initial Closing, as well as similar information for the Series D Warrants issued upon the
Second Closing.
Series D Warrants Issued on June 30, 2015
Market price per share of our Common Stock on June 30, 2015, the Initial Closing Date: | |
$ | 0.26 | |
| |
| | |
Exercise price per share of the Series D Warrants on the Initial Closing Date: | |
$ | 0.25 | |
| |
| | |
Total possible shares of Common Stock underlying the Series D Warrants issued on the Initial Closing Date: | |
| 13,936,367 | |
| |
| | |
Aggregate market price of all shares of Common Stock underlying the Series D Warrants issued on the Initial Closing Date, based on the market price of our Common Stock on June 30, 2015: | |
$ | 3,623,455 | |
| |
| | |
Aggregate exercise price of all shares of Common Stock underlying the Series D Warrants issued on the Initial Closing Date, based on the exercise price on the Initial Closing Date: | |
$ | 3,484,092 | |
| |
| | |
Total possible discount of the exercise price of the Series D Warrants issued on the Initial Closing Date to the market price of our Common Stock as of June 30, 2015: | |
$ | 139,364 | |
Series D Warrants Issued on July 2, 2015
Market price per share of our Common Stock on July 2, 2015, the date of the Second Closing: | |
$ | 0.23 | |
| |
| | |
Exercise price per share of the Series D Warrants on the date of the Second Closing: | |
$ | 0.25 | |
| |
| | |
Total possible shares of Common Stock underlying the Series D Warrants issued on the date of the Second Closing: | |
| 454,387 | |
| |
| | |
Aggregate market price of all shares of Common Stock underlying the Series D Warrants issued on the date of the Second Closing, based on the market price of our Common Stock on July 2, 2015: | |
$ | 104,509 | |
| |
| | |
Aggregate exercise price of all shares of Common Stock underlying the Series D Warrants issued on the date of the Second Closing, based on the exercise price on the date of the Second Closing: | |
$ | 113,597 | |
| |
| | |
The net proceeds to us from the 2015 Private Placement Financing,
after giving effect to legal and other expenses incurred through the date of this prospectus, were approximately $3.0 million.
The table below describes in more detail these costs associated with the 2015 Private Placement Financing through the date of this
prospectus:
Gross proceeds of the 2015 Private Placement Financing: | |
$ | 3,166,000 (1) | |
| |
| | |
Legal and other expenses incurred in connection with the 2015 Private Placement Financing: | |
$ | 150,000 (2) | |
| |
| | |
Resulting net proceeds to the Company: | |
$ | 3,016,000 (3) | |
| |
| | |
Total possible profit to be realized by the selling securityholders and/or their assignees as a result of any exercise discounts underlying the Series D Warrants: | |
$ | $139,364 (4) | |
| (1) | Does not include potential gross proceeds payable to us upon exercise of the Series D Warrants issued in the 2015 Private Placement
Financing, which would equal approximately $3,597,689 if all of the Series D Warrants were exercised on a cash basis on the date
of this prospectus. |
| (2) | This amount represents our legal, accounting, registration and other fees and expenses associated with the 2015 Private Placement
Financing (collectively, “Transaction Expenses”), which were estimated to total $150,000. This amount does not
include additional payments that we may be required to make under certain circumstances but that are not currently determinable,
including the following: (a) potential partial damages for failure to register and keep registered for the period specified in
the 2015 Registration Rights Agreement the Common Stock issued in the 2015 Private Placement Financing or issuable upon exercise
of the Series D Warrants (in a cash amount equal to 1.5% of the price paid to us by each investor in the 2015 Private Placement
Financing on the date of and on each 30-day anniversary of such failure until the cure thereof, with no quantitative cap to the
aggregate amount of such); and (b) payments in respect of claims for which we provide indemnification in the 2015 Registration
Rights Agreement. Although we intend to comply with the requirements of the Subscription Agreements and the 2015 Registration Rights
Agreement and do not currently expect to make any such payments, it is possible that such payments may be required. |
| (3) | Calculated by subtracting Transaction Expenses from the gross proceeds to us from the 2015 Private Placement Financing. |
| (4) | Calculated by adding the total possible discount of the exercise prices of the Series D Warrants to the market price of our
Common Stock as of June 30, 2015, as reflected in the tables set forth above. |
Notes Offering
Beginning March 11, 2015 and through March 13, 2015, we entered
into a series of substantially similar subscription agreements (each a “Convertible Notes Subscription Agreement”)
with each of Anson, Equitec and Capital Ventures International (collectively, the “Convertible Notes Investors”)
pursuant to which we issued unsecured 2016 8% Convertible Notes (the “Convertible Notes”, and such transaction,
the “Notes Offering”) to the Convertible Notes Investors in the aggregate principal amount of $750,000. On the
Closing of the Notes Offering on March 13, 2015, each Convertible Notes Investor was issued a Convertible Note in the principal
amount of $250,000. As noted above, Anson and Intracoastal, or their respective affiliates, also purchased Units in the 2015 Private
Placement Financing. We did not engage any underwriter or placement agent in connection with the Notes Offering.
On September 8, 2015, we, along with the current holders of
the Convertible Notes, entered into a series of substantially similar subordination agreements with the Massachusetts Life Sciences
Center (“MLSC” and such agreements, the “Subordination Agreements”), pursuant to which the
holders of the Convertible Notes agreed to subordinate their right to payment under the Convertible Notes to MLSC’s right
to receive payments under the MLSC Loan Agreement. Under the terms of the Subordination Agreements, the indebtedness accrued under
the Convertible Notes may not be repaid unless and until all indebtedness and fees owed to MLSC under the MLSC Loan Agreement
are repaid in full, but the right to convert the Convertible Notes into shares of Common Stock is expressly allowed.
Subject to the terms and conditions of the Subordination Agreements,
the Convertible Notes issued in the Notes Offering become due and payable on March 13, 2016 (the “Stated Maturity Date”)
and may not be prepaid. The Convertible Notes bear interest on the unpaid principal balance at a rate equal to eight percent (8.0%)
(computed on the basis of the actual number of days elapsed in a 360-day year) per annum until either (a) converted into shares
of our Common Stock; or (b) the outstanding principal and accrued interest on the Convertible Notes is paid in full by us. Interest
on the Convertible Notes becomes due and payable upon their conversion or the Stated Maturity Date and may become due and payable
upon the occurrence of an event of default under the Convertible Notes. In the event that the Stated Maturity Date occurs and repayment
of the indebtedness accrued under the Convertible Notes is not permitted under the Subordination Agreements, (1) the term of the
Convertible Notes and the holders’ rights to convert such Convertible Notes into shares of Common Stock will automatically
be extended until repayment is permitted under the Subordination Agreements; and (2) interest will continue to accrue at a rate
equal to eight percent (8.0%) (computed on the basis of the actual number of days elapsed in a 360-day year) per annum. The Convertible
Notes contain customary events of default, which include, among other things, (i) our failure to pay other indebtedness of $100,000
or more within the specified cure period for such breach; (ii) the acceleration of the stated maturity of such indebtedness; (iii)
our insolvency; and (iv) the receipt of final, non-appealable judgments in the aggregate amount of $100,000 or more.
At any time prior to the Stated Maturity Date, the holders of
the Convertible Notes have the right to convert some or all of such Convertible Notes into the number of shares of our Common Stock
determined by dividing (a) the aggregate sum of the (i) principal amount of the Convertible Note to be converted, and (ii) amount
of any accrued but unpaid interest with respect to such portion of the Convertible Note to be converted; and (b) the conversion
price then in effect (the shares of Common Stock issuable upon such conversion, the “Conversion Shares”). The
initial conversion price is $0.20 per share, and it may be (A) reduced to any amount and for any period of time deemed appropriate
by our Board, or (B) reduced or increased proportionately as a result of stock splits, stock dividends, recapitalizations, reorganizations,
and similar transactions. A holder shall not have the right to convert any portion of a Convertible Note, if after giving effect
to such conversion, the holder, together with its affiliates collectively, would beneficially own more than 4.99% or 9.99% (at
the holder’s discretion) of the shares of Common Stock outstanding immediately after giving effect to such conversion.
2014 Private Placement Financing
On January 30, 2014, we entered into a securities purchase agreement
(the “Securities Purchase Agreement”) with nine accredited investors (which included Anson and Equitec) providing
for our issuance and sale to such investors, in a private placement, of an aggregate of 11,400,000 shares of our Common Stock at
a purchase price of $0.25 per share and 2014 Warrants, for aggregate gross proceeds to us of $2.85 million (the “2014
Private Placement Financing”). The 2014 Private Placement Financing closed on February 4, 2014.
Upon the closing of the 2014 Private Placement Financing, we
issued to each investor therein a Series A Warrant, a Series B Warrant and a Series C Warrant, each to purchase up to a number
of shares of our Common Stock equal to 100% of the shares of Common Stock purchased by such investor in the 2014 Private Placement
Financing. The Series A Warrants had an initial exercise price of $0.30 per share, were exercisable immediately upon their issuance
and have a term of exercise equal to five years after their issuance date. The Series B Warrants had an initial exercise price
of $0.35 per share, were exercisable immediately upon their issuance and had a term of exercise equal to the shorter of 12 months
after their issuance date and six months after the first date on which the resale of all Registrable Securities (as defined in
the Securities Purchase Agreement) is covered by one or more effective registration statements. The Series B Warrants expired on
January 3, 2015. The Series C Warrants had an initial exercise price of $0.40 per share, were exercisable immediately upon their
issuance and had an initial term of exercise equal to the shorter of 18 months after their issuance date and nine months after
the first date on which the resale of all Registrable Securities (as defined in the Securities Purchase Agreement) is covered by
one or more effective registration statements. As described below, the term of the Series C Warrants has been extended to July
2, 2016. The number of shares of our Common Stock into which each of the 2014 Warrants is exercisable and the exercise price therefor
were subject to adjustment as set forth in the 2014 Warrants, including, without limitation, adjustments in the event of certain
subsequent issuances and sales of shares of our Common Stock (or securities convertible or exercisable into shares of our Common
Stock) at a price per share lower than the then-effective exercise price of the 2014 Warrants, in which case the per share exercise
price of the 2014 Warrants would be adjusted to equal such lower price per share and the number of shares issuable upon exercise
of the 2014 Warrants would be adjusted accordingly so that the aggregate exercise price upon full exercise of the 2014 Warrants
immediately before and immediately after such per share exercise price adjustment were equal (the “Anti-Dilution Provisions”),
as well as customary adjustments in the event of stock dividends and splits, subsequent rights offerings and pro rata distributions
to our Common Stockholders. As described below, the outstanding 2014 Warrants were amended on June 22, 2015 to remove the Anti-Dilution
Provisions. The 2014 Warrants also provide that they shall not be exercisable in the event and to the extent that the exercise
thereof would result in the holder of the 2014 Warrant or any of its affiliates beneficially owning more than 4.9% of our Common
Stock.
On December 1, 2014, we entered into an agreement with Cranshire
Capital Master Fund, Ltd. (“Cranshire”) to amend certain provisions of the 2014 Warrants (the “December
2014 Amendment”). Under the terms of the December 2014 Amendment, the 2014 Warrants were amended to (i) reduce the exercise
price of the Series B Warrants from $0.35 to $0.20; (ii) reduce the exercise price of the Series C Warrants from $0.40 to $0.20;
and (iii) clarify that each series of 2014 Warrants may be amended without having to amend all three series of 2014 Warrants. The
number of shares of our Common Stock which could be purchased upon exercise of each 2014 Warrant remained unchanged following the
December 2014 Amendment.
As noted above, between March 11, 2015 and through March 13,
2015, we entered into substantially similar Convertible Notes Subscription Agreements with each of the Convertible Notes Investors
pursuant to which we issued Convertible Notes to the Convertible Notes Investors in the aggregate principal amount of $750,000.
Because the conversion price of the Convertible Notes on the date the Notes Offering closed ($0.20 per share) was below the then
current exercise price of the Series A Warrants, the issuance of the Convertible Notes triggered the anti-dilution provisions of
the Series A Warrants and, as a result, the exercise price of the Series A Warrants was reduced to $0.20 per share and the aggregate
number of shares issuable under the Series A Warrants increased by 5,700,000 shares (or fifty-percent (50%)) from 11,400,000 shares
to 17,100,000 shares, in each case effective as of March 13, 2015.
On March 13, 2015 and May 30, 2015, we also entered into amendment
agreements with Cranshire to extend the expiration date of the Series C Warrants to 5:00 p.m., New York time, on June 2, 2015,
and 5:00 p.m., New York time, on July 2, 2015, respectively. On June 22, 2015, we entered into an additional amendment agreement
with Cranshire pursuant to which to the Anti-Dilution Provisions contained in the Series A Warrants and Series C Warrants were
removed in consideration for (a) further extending the expiration date of the Series C Warrants to 5:00 p.m., New York time, on
July 2, 2016; and (b) agreeing to issue the holders of the Series A Warrants and Series C Warrants up to an additional 570,000
shares of Common Stock, subject to the delivery by each such holder of an investor certificate (such shares of Common Stock, the
“Inducement Shares”). As of the date of this prospectus, all 570,000 Inducement Shares have been issued.
Also upon the closing of the 2014 Private Placement Financing,
we entered into a registration rights agreement (the “2014 Registration Rights Agreement”) with the investors
in such financing pursuant to which we became obligated to file with the SEC one or more registration statements to register for
resale under the Securities Act the shares of Common Stock issued in and underlying the 2014 Warrants issued in the 2014 Private
Placement Financing. As a result, we initially registered for resale under a registration statement on Form S-1 (File Number 333-194745,
and such registration statement, the “2014 Registration Statement”) an aggregate of 45,600,000 shares of Common
Stock, representing the 11,400,000 shares issued at the closing of the 2014 Private Placement Financing and the 34,200,000 shares
underlying the 2014 Warrants upon the closing of the 2014 Private Placement Financing. Our failure to satisfy certain other deadlines
with respect to the 2014 Registration Statement and certain other requirements set forth in the 2014 Registration Rights Agreement
may require us to pay monetary penalties to the investors in the 2014 Private Placement Financing. Additionally, we may be required
in the future to amend the 2014 Registration Statement or to file a new registration statement in order to register additional
shares of our Common Stock for resale by the investors in the 2014 Private Placement Financing to account for adjustments, if any,
to the number of shares underlying the 2014 Warrants including, but not limited to, the additional 5,700,000 shares that became
exercisable under the Series A Warrants as a result of the Notes Offering. Under the 2014 Registration Rights Agreement, subject
to exception in certain circumstances, we have agreed to keep the 2014 Registration Statement effective until the earlier of the
date on which all shares of Common Stock to be registered thereunder have been sold or may be sold without restriction pursuant
to Rule 144 promulgated under the Securities Act (“Rule 144”). If there is not, at any time during the period
required by the 2014 Registration Rights Agreement, an effective registration statement covering the resale of any of the shares
issued in or issuable upon exercise of the 2014 Warrants issued in the 2014 Private Placement Financing, then the investors in
the 2014 Private Placement Financing or their assignees (collectively, the “2014 Investors”) (i) will have “piggyback”
registration rights with respect to any such shares that are not eligible for resale pursuant to Rule 144 in connection with any
other registration statement we determine to file that would permit the inclusion of those shares; and (ii) will be entitled to
exercise their 2014 Warrants on a “cashless exercise” or “net exercise” basis during the period when the
shares issuable upon exercise of such 2014 Warrants are not so registered.
We did not engage any underwriter or placement agent in connection
with the 2014 Private Placement Financing. We also did not make any payments, in cash or equity, to any of the selling securityholders
in connection with the 2014 Private Placement Financing, except that we have reimbursed, or have agreed to reimburse, Cranshire,
one of the investors in the 2014 Private Placement Financing, an aggregate cash amount of up to $35,000 for costs and expenses
incurred by it or its affiliates in connection with the transactions contemplated by the 2014 Private Placement Financing and the
registration of the securities issued in the 2014 Private Placement Financing. After deducting for the expense reimbursement to
Cranshire, the net proceeds to us from the 2014 Private Placement Financing on the date it closed were approximately $2.815 million.
Corporate Information
We were incorporated under the laws of State of Nevada on September
16, 2009 as Almah, Inc. On May 10, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”)
with ABS and Arch Acquisition Corporation, our wholly owned subsidiary formed for the purpose of the transaction, pursuant to
which Arch Acquisition Corporation merged with and into ABS and ABS thereby became our wholly owned subsidiary (the “Merger”).
The Merger closed on June 26, 2013. In contemplation of the Merger, we changed our name from Almah, Inc. to Arch Therapeutics,
Inc. Our principal executive offices are located at 235 Walnut St., Suite 6, Framingham, Massachusetts 01702. The telephone number
of our principal executive offices is (617) 431-2313. Our website address is http://www.archtherapeutics.com. We have not
incorporated by reference into this prospectus the information on our website, and you should not consider it to be a part of
this document.
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., and on June 26, 2013, ABS changed its name from Arch Therapeutics, Inc. to Arch Biosurgery, Inc.
Prior to the completion of the Merger, we were a “shell
company” under applicable rules of the SEC, and had no or nominal assets or operations. Upon the closing of the Merger, we
abandoned our prior business plan and began pursuing, as our sole business, our current business as a life science medical device
company.
The Offering
This prospectus relates to the resale from time to time by the
selling securityholders identified in this prospectus of up to 28,781,508 shares of our Common Stock issued or underlying the Series
D Warrants issued in the 2015 Private Placement Financing. None of the shares to be registered hereby are being offered for sale
by us.
Common stock outstanding prior to offering |
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105,742,885 (1) |
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Common stock offered by the selling securityholders |
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28,781,508 (2) |
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Common stock to be outstanding after the offering |
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120,133,639 (3) |
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Use of proceeds |
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We will not receive any proceeds from the sale of Common Stock offered by the selling securityholders under this prospectus. |
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OTCQB symbol |
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“ARTH” |
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Risk Factors |
|
See “Risk Factors” beginning on page 12 and other information in this
prospectus for a discussion of the factors you should consider before you decide to invest in our Common Stock and
warrants. |
| (1) | As of September 10, 2015, includes an aggregate of 14,390,754 shares of our Common Stock issued to the selling securityholders
in connection with the Closings conducted under the 2015 Private Placement Financing. Includes 19,307,272 shares of Common Stock
held by our affiliates. |
| (2) | Consists of: (a) 14,390,754 shares of Common Stock that were issued in connection with the Closings conducted under the 2015
Private Placement Financing; and (b) 14,390,754 shares of Common Stock issuable upon exercise of the Series D Warrants determined
as if the Series D Warrants were exercised in full (without regard to any limitations on exercise contained therein). |
| (3) | Assumes (a) no further adjustment to the number of shares underlying
the Series D Warrants; and (b) the full exercise of the Series D Warrants held by the selling securityholders as of the date of
this prospectus, which would result in the issuance of an aggregate of 14,390,754
shares of Common Stock. Excludes (i) 12,327,362 shares of Common Stock that are reserved for future issuance under our 2013 Stock
Incentive Plan (the “2013 Plan”), of which 11,809,837 shares are subject to outstanding option awards granted
under the 2013 Plan at exercise prices ranging from $0.17 to $0.40 per share and with a weighted average exercise price of $0.30
per share; (ii) 145,985 shares of Common Stock issuable upon the exercise of outstanding warrants issued in connection with the
MLSC Loan, with an exercise price of $0.274 per share (the “MLSC Warrant”), none of which are being registered
pursuant to the registration statement of which this prospectus forms a part; (iii) 4,050,000 shares of Common Stock issuable
upon the conversion of the Convertible Notes (assuming, in each case, that the Convertible Notes are held on March 13, 2016 and
the accrued interest thereunder is converted, along with the outstanding principal, into shares of our Common Stock), none of
which are being registered pursuant to the registration statement of which this prospectus forms a part; (iv) 3,550,000 shares
of Common Stock issuable upon the exercise of the Series C Warrants, none of which are being registered pursuant to the registration
statement of which this prospectus forms a part; and (v) 11,100,000 shares of Common Stock issuable upon the exercise of the Series
A Warrants, none of which are being registered pursuant to the registration statement of which this prospectus forms a
part. |
RISK FACTORS
Investment in our Common Stock involves a high degree of
risk. You should carefully consider the following risk factors before making an investment decision. If any of the following risks
and uncertainties actually occurs, our business, financial condition, and results of operations could be negatively impacted and
you could lose all or part of your investment.
Risks Related to our Business
There is substantial doubt about our ability to continue
as a going concern.
We are a development stage company with no commercial products.
Our primary product candidate is in the process of being developed, and will require significant additional clinical development
and investment before it could potentially be commercialized. As a result, we have not generated any revenue from operations since
inception, and we have incurred substantial net losses to date. Moreover, our cash position is vastly inadequate to support our
business plans and substantial additional funding will be needed in order to pursue those plans, which include research and development
of our primary product candidate, seeking regulatory approval for that product candidate, and pursuing its commercialization in
the U.S., Europe and other markets. Those circumstances raise substantial doubt about our ability to continue as a going concern.
In particular and as discussed in greater detail below 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,” we believe that our current cash and
cash equivalents on hand will only be sufficient to meet our anticipated cash requirements through May 2016.
We have incurred significant losses since inception. We
expect to continue to incur losses for the foreseeable future, and we may never generate revenue or achieve or maintain profitability.
As noted above under the risk factor entitled “There
is substantial doubt about our ability to continue as a going concern,” we are a development stage
company with no commercial products. Consequently, we have incurred losses in each year since our inception and we expect that
losses will continue to be incurred in the foreseeable future in the operation of our business. To date, we have financed our operations
entirely through equity and debt investments by founders, other investors and third parties, and we expect to continue to rely
on these sources of funding, to the extent available in the foreseeable future. Losses from operations have resulted principally
from costs incurred in research and development programs and from general and administrative expenses, including significant costs
associated with establishing and maintaining intellectual property rights, significant legal and accounting costs incurred in connection
with both the closing of the Merger and complying with public company reporting and control obligations, and personnel expenses.
We have devoted substantially all of our time, money and efforts to date to the advancement of our technology and raising capital
to support our business, and expect to continue to devote significant time, money and efforts to such activities going forward.
We expect to continue to incur significant expenses and we anticipate
that those expenses and losses may increase in the foreseeable future as we seek to:
| • | develop our principal product candidate, AC5, including further development of the product’s composition and conducting
preclinical biocompatibility studies; |
| • | raise capital needed to fund our operations; |
| • | build and enhance investor relations and corporate communications capabilities; |
| • | conduct clinical trials relating to AC5 and any other product candidate we seek to develop; |
| • | attempt to gain regulatory approvals for any product candidate that successfully completes clinical trials; |
| • | establish relationships with contract manufacturing partners, and invest in product and process development through such partners; |
| • | maintain, expand and protect our intellectual property portfolio; |
| • | advance additional candidates through our research and development pipeline; |
| • | seek to commercialize selected product candidates for which we may obtain regulatory approval; and |
| • | hire additional regulatory, clinical, quality control, scientific, financial, and management, consultants and advisors. |
To become and remain profitable, we must succeed in developing
and eventually commercializing product candidates with significant market potential. This will require us to be successful in a
number of challenging activities, including successfully completing preclinical testing and clinical trials of product candidates,
obtaining regulatory approval for our product candidates and manufacturing, marketing and selling any products for which we may
obtain regulatory approval. We are only in the preliminary stages of many of those activities. We may never succeed in those activities
and may never generate operating revenues or achieve profitability. Even if we do generate operating revenues sufficient to achieve
profitability, we may not be able to sustain or increase profitability. Our failure to generate operating revenues or become and
remain profitable would impair our ability to raise capital, expand our business or continue our operations, all of which would
depress the price of our Common Stock. A further decline or lack of increase in the prices of our Common Stock could cause our
stockholders to lose all or a part of their investment in the Company.
We will need substantial additional funding and may be
unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization
efforts and could cause our business to fail.
Based on our current operating expenses and working capital
requirements, we believe that our current cash and cash equivalents on hand will only be sufficient to meet our anticipated cash
requirements through May 2016. In addition to the funds raised from our previous equity and convertible debt financings and borrowings
under the Life Sciences Accelerator Funding Agreement (the “MLSC Loan Agreement”) that we entered into with
MLSC, we will need to obtain additional financing on or prior to May 2016 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, particularly as we commence preclinical and clinical development
for our lead product candidate, AC5. In particular, we currently estimate that we will require up to $10,000,000 to $14,000,000
and potentially more in additional capital to obtain regulatory approval of AC5 in the U.S. and Europe. Our future capital requirements
will depend on many factors, including:
| • | the scope, progress and results of our research and preclinical development activities; |
| • | the scope, progress and results of our research and development collaborations; |
| • | the extent of potential direct or indirect grant funding for our research and development activities; |
| • | the scope, progress, results, costs, timing and outcomes of any regulatory process and clinical trials conducted for any of
our product candidates; |
| • | the timing of entering into, and the terms of, any collaboration agreements with third parties relating to any of our product
candidates; |
| • | the timing of and the costs involved in obtaining regulatory approvals for our product candidates; |
| • | the costs of operating, expanding and enhancing our operations to support our clinical activities and, if our product candidates
are approved, commercialization activities; |
| • | the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs
and liabilities; |
| • | the costs associated with maintaining and expanding our product pipeline; |
| • | the costs associated with expanding our geographic focus; |
| • | operating revenues, if any, received from sales of our product candidates, if any are approved by the U.S. Food and Drug Administration
(“FDA”) or other applicable regulatory agencies; |
| • | the cost associated with being a public company, including obligations to regulatory agencies, and increased investor relations
and corporate communications expenses; and |
| • | the costs of additional general and administrative personnel, including accounting and finance, legal and human resources employees. |
We intend to obtain additional financing for our business through
public or private securities offerings, the incurrence of additional indebtedness, or some combination of those sources. We have
sought funding through collaborative arrangements, such as the Project Agreement that we entered into with the National University
of Ireland Galway (“NUIG”) on May 28, 2015, and we may continue to seek funding through additional collaborative
arrangements with strategic partners if we determine them to be necessary or appropriate, although these arrangements could require
us to relinquish rights to our technology or product candidates and could result in our receipt of only a portion of any revenues
associated with the partnered product. We cannot provide any assurance that additional financing from these sources will be available
on favorable terms, if at all. In addition, we are bound by certain contractual terms and obligations that may limit or otherwise
impact our ability to raise additional funding in the near-term, including restrictions in the MLSC Loan Agreement on our ability
to incur certain types of additional indebtedness. 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 additional 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 our debt facilities and the Convertible Notes that we issued in the Notes
Offering 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.
Our current and any future debt facilities or instruments
may require us to use our limited capital to repay amounts owed and may impose limitations on our operations, which could negatively
affect our business plans.
On the Closing of the Notes Offering on March 13, 2015, we issued
to each Convertible Notes Investor a Convertible Note in the principal amount of $250,000. Unless converted on or prior to March
13, 2016 into shares of our Common Stock, we will be obligated to repay the $750,000 in principal borrowed under and up to an aggregate
of $60,000 in interest incurred in connection with the Convertible Notes on that date, which we may not have or be able to obtain;
provided, however, that in the event that the repayment of the indebtedness accrued under the Convertible Notes is not permitted
under the Subordination Agreements, (1) the term of the Convertible Notes and the holders’ rights to convert such Convertible
Notes into shares of Common Stock will automatically be extended until repayment is permitted under the Subordination Agreements;
and (2) interest will continue to accrue at a rate equal to eight percent (8.0%) (computed on the basis of the actual number of
days elapsed in a 360-day year) per annum.
On September 30, 2013, we entered into the MLSC Loan Agreement
with MLSC pursuant to which MLSC has provided us an unsecured subordinated loan in principal amount of $1,000,000 (such loan, the
“MLSC Loan”). The MLSC Loan bears interest at a rate of 10% per annum, and will become fully due and payable
on the earlier of (i) September 30, 2018; (ii) the occurrence of an event of default under the MLSC Loan Agreement; or (iii) the
completion of a sale of substantially all of our assets, a change-of-control transaction or one or more financing transactions
in which we receive from third parties other than our then existing shareholders net proceeds of $5,000,000 or more in a 12-month
period. We will need substantial amounts of cash in order to repay the principal and interest owed under MLSC Loan, as it becomes
due, which we may not have or be able to obtain. Any failure to make payments as required under the MLSC Loan Agreement would constitute
an event of default, and could result in, among other things, MLSC’s acceleration of all amounts due thereunder.
Further, the MLSC Loan Agreement restricts our use of the proceeds
of the MLSC Loan to funding working capital requirements and/or the purchase of capital assets in the life sciences field, and
we are expressly prohibited from using any such proceeds for any severance payment, investment in certain securities or payment
for goods or services to a related party of the Company. Additionally, the MLSC Loan Agreement provides that, for so long as any
of the MLSC Loan remains outstanding, our headquarters and at least a majority of our employees must be located in Massachusetts
and we must not take certain actions without obtaining MLSC’s prior consent, including without limitation paying dividends
on our capital stock, redeeming any of our outstanding securities, and completing a sale of substantially all of our assets or
a change-of-control transaction. Further, our failure to remain a “certified life sciences company” under the Massachusetts
General Law would constitute an event of default under the MLSC Loan Agreement. Our ability to pursue our business plans during
the term of the MLSC Loan may be severely limited as a result of those restrictions, which could cause our operations and financial
condition to suffer.
In addition, the MLSC Loan Agreement restricts our ability,
without the prior written consent of MLSC, to incur certain types and amounts of additional indebtedness, including indebtedness
senior or, in certain circumstances, equal to the MLSC Loan and any indebtedness to any of our stockholders or employees that is
subject to a security interest and not expressly subordinated to the MLSC Loan. Our ability to finance our operations could be
limited if, while the MLSC Loan is outstanding, the only source of capital available to us is prohibited by the restrictions set
forth in the MLSC Loan Agreement, in which case we may be forced to curtail or eliminate some or all of our operations.
Our short operating history may hinder our ability to
successfully meet our objectives.
We are a development stage company subject to the risks, uncertainties
and difficulties frequently encountered by early-stage companies in evolving markets. Our operations to date have been primarily
limited to organizing and staffing, developing and securing our technology and undertaking or funding preclinical studies of our
lead product candidate. We have not demonstrated our ability to successfully complete large-scale, pivotal clinical trials, obtain
regulatory approvals, manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales
and marketing activities necessary for successful product commercialization.
Because of our limited operating history, we have limited insight
into trends that may emerge and affect our business, and errors may be made in developing an approach to address those trends and
the other challenges faced by development stage companies. Failure to adequately respond to such trends and challenges could cause
our business, results of operations and financial condition to suffer or fail. Further, our limited operating history may make
it difficult for our stockholders to make any predictions about our likelihood of future success or viability.
If we are not able to attract and retain qualified management
and scientific personnel, we may fail to develop our technologies and product candidates.
Our future success depends to a significant degree on the skills,
experience and efforts of the principal members of our scientific and management personnel. These members include Terrence Norchi,
MD, our President and Chief Executive Officer. The loss of Dr. Norchi or any of our other key personnel could harm our business
and might significantly delay or prevent the achievement of research, development or business objectives. Further, our operation
as a public company will require that we attract additional personnel to support the establishment of appropriate financial reporting
and internal controls systems. Competition for personnel is intense. We may not be able to attract, retain and/or successfully
integrate qualified scientific, financial and other management personnel, which could materially harm our business.
If we fail to properly manage any growth we may experience,
our business could be adversely affected.
We anticipate increasing the scale of our operations as we seek
to develop our product candidates, including hiring and training additional personnel and establishing appropriate systems for
a company with larger operations. The management of any growth we may experience will depend, among other things, upon our ability
to develop and improve our operational, financial and management controls, reporting systems and procedures. If we are unable to
manage any growth effectively, our operations and financial condition could be adversely affected.
We have identified material weaknesses in our internal
control over financial reporting, which could, if not remediated, result in material misstatements in our financial results.
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). As disclosed in Item 9A of Part II of our Annual Report filed
December 12, 2014 and in Item 4 of Part I of our Quarterly Reports on Form 10-Q that we filed on February 9, 2015, May 7, 2015
and August 7, 2015, management has identified material weaknesses in our disclosure controls and procedures and our internal control
over financial reporting as of September 30, 2014. A material weakness in internal control over financial reporting is defined
as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely
basis. As a result of these material weaknesses, our management concluded in our latest annual assessment that our internal control
over financial reporting was not effective as of September 30, 2014, based on criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated Framework.
During the quarter ended September 30, 2014, we took steps to
remediate certain material weaknesses we have identified in our internal control over financial reporting. On July 7, 2014, we
hired a new Chief Financial Officer who serves on a full-time basis. He has, working with the CEO and the Board of Directors, implemented
increased segregation of responsibilities, improved policies and procedures relating to purchases of materials and supplies, and
developed increased checks and balances as they relate to financial reporting and control policies and procedures. If our remedial
measures are insufficient to address the material weaknesses we have identified, or if additional material weaknesses or significant
deficiencies in our internal control are discovered or occur in the future, there may be an increased likelihood that our consolidated
financial statements contain material misstatements. A restatement of our financial results could result in substantial costs to
us for accounting and legal fees and could lead to litigation against us. In addition, even if we are successful in strengthening
our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or errors
or to facilitate the fair presentation of our consolidated financial statements. If we fail to achieve and maintain the adequacy
of our internal controls in accordance with applicable standards, we would be unable to conclude that we have effective internal
controls over financial reporting. If we cannot produce reliable financial reports, our business and financial condition could
be harmed, investors could lose confidence in our reported financial information, and the market price of our stock could decline
significantly. Moreover, our reputation with lenders, investors, securities analysts and others may be adversely affected.
We rely significantly on information technology
and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm
our ability to operate our business effectively.
We maintain sensitive data pertaining to our Company on our
computer networks, including information about our research and development activities, our intellectual property and other proprietary
business information. Our internal computer systems and those of third parties with which we contract may be vulnerable to damage
from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical
failures, despite the implementation of security measures. System failures, accidents or security breaches could cause interruptions
to our operations, including material disruption of our research and development activities, result in significant data losses
or theft of our intellectual property or proprietary business information, and could require substantial expenditures to remedy.
To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications or inappropriate
disclosure of confidential or proprietary information, we could incur liability and our research and development programs could
be delayed, any of which would harm our business and operations.
Risks Related to the Development and
Commercialization of our Product Candidates
Our current business plan is dependent on the success
of one product candidate.
Our business is currently focused almost entirely on the development
and commercialization of one product candidate, AC5. Our reliance on one primary product candidate means that, if we are not able
to obtain regulatory approvals and market acceptance of that product, our chances for success will be significantly reduced. We
are also less likely to withstand competitive pressures if any of our competitors develops and obtains regulatory approval or certification
for a similar product faster than we can or that is otherwise more attractive to the market than AC5. Our current dependence on
one product candidate increases the risk that our business will fail if our development efforts for that product candidate 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 candidate, the
CMC process, including product scale-up activities, 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 anticipated clinical trial and 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 start a clinical trial and could
severely limit the long-term viability of our business.
Our principal product candidate is inherently risky because
it is 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 AC5 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 commence and/or complete a clinical trial, and overall chances
for success.
The manufacturing, production, and sterilization methods
that we intend to be utilized are detailed and complex and are a difficult process to manage.
We intend to utilize third party manufacturers to manufacture
and sterilize our products. We believe that our proposed manufacturing methods make our choice of manufacturer and sterilizer critical,
as they must possess sufficient expertise in synthetic organic chemistry and device manufacturing. If such manufacturers are unable
to properly manufacture to product specifications or sterilize our products adequately, that could severely limit our ability to
market our products.
Compliance with governmental regulations regarding the
treatment of animals used in research could increase our operating costs, which would adversely affect the commercialization of
our technology.
The Animal Welfare Act (“AWA”) is the federal
law that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of specific regulations
that govern the humane handling, care, treatment and transportation of certain animals by producers and users of research animals,
most notably relating to personnel, facilities, sanitation, cage size, and feeding, watering and shipping conditions. Third parties
with whom we contract are subject to registration, inspections and reporting requirements under the AWA. Furthermore, some states
have their own regulations, including general anti-cruelty legislation, which establish certain standards in handling animals.
Comparable rules, regulations, and or obligations exist in many foreign jurisdictions. If our contractors or we fail to comply
with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity,
and our operations could be adversely affected.
If the FDA or similar foreign agencies or intermediaries
impose requirements or an alternative product classification more onerous than we anticipate, our business could be adversely affected.
The development plan for our lead product candidate is based
on our anticipation of pursuing the medical device regulatory pathway, and in February 2015 we received confirmation from The British
Standards Institution (“BSI”), a Notified Body (which is a private commercial entity designated by the national
government of an 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, that AC5 fulfills the definition of a medical device
within the EU and will be classified as such in consideration for CE mark designation. However, the FDA and other applicable foreign
agencies, including European Competent Authorities, will have authority to finally determine the regulatory route for our product
candidates in their jurisdictions. If the FDA or similar foreign agencies or intermediaries deem our product to be a member of
a category other than a medical device, such as a drug or biologic, or impose additional requirements on our pre-clinical and clinical
development than we presently anticipate, financing needs would increase, the timeline for product approval would lengthen, the
program complexity and resource requirements world increase, and the probability of successfully commercializing a product would
decrease. Any or all of those circumstances would materially adversely affect our business.
If we are not able to secure and maintain relationships
with third parties that are capable of conducting clinical trials on our product candidates and support our regulatory submissions,
our product development efforts, and subsequent regulatory approvals could be adversely impacted.
Our management has limited experience in conducting preclinical
development activities and clinical trials. As a result, we have relied and will need to continue to rely on third party research
institutions, organizations and clinical investigators to conduct our preclinical and clinical trials and support our regulatory
submissions. If we are unable to reach agreement with qualified research institutions, organizations and clinical investigators
on acceptable terms, or if any resulting agreement is terminated prior to the completion of our clinical trials, then our product
development efforts could be materially delayed or otherwise harmed. Further, our reliance on third parties to conduct our clinical
trials and support our regulatory submissions will provide us with less control over the timing and cost of those trials, the ability
to recruit suitable subjects to participate in the trials, and the timing, cost, and probability of success for the regulatory
submissions. Moreover, the FDA and other regulatory authorities require that we comply with standards, commonly referred to as
good clinical practices (“GCP”), for conducting, recording and reporting the results of our preclinical development
activities and our clinical trials, to assure that data and reported results are credible and accurate and that the rights, safety
and confidentiality of trial participants are protected. Additionally, both we and any third party contractor performing preclinical
and clinical studies are subject to regulations governing the treatment of human and animal subjects in performing those studies.
Our reliance on third parties that we do not control does not relieve us of those responsibilities and requirements. If those third
parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our preclinical development
activities or clinical trials in accordance with regulatory requirements or stated protocols, we may not be able to obtain, or
may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our
efforts to, successfully commercialize our product candidates. Any of those circumstances would materially harm our business and
prospects.
Any clinical trials that are planned or are conducted
on our product candidates may not start or may fail.
Clinical trials are lengthy, complex and extremely expensive
processes with uncertain expenditures and results and frequent failures. While we believe that the first clinical trial for AC5
will be initiated during the fourth quarter of calendar year 2015, clinical trials that are planned or which commence for any of
our product candidates could be delayed, limited or fail for a number of reasons, including if:
| • | the FDA or other regulatory authorities, or other relevant decision making bodies do not grant permission to proceed or place
a trial on clinical hold due to safety concerns or other reasons; |
| • | sufficient suitable subjects do not enroll or remain in our trials; |
| • | we fail to produce necessary amounts of product candidate; |
| • | subjects experience an unacceptable rate of efficacy of the product candidate; |
| • | subjects experience an unacceptable rate or severity of adverse side effects, demonstrating a lack of safety of the product
candidate; |
| • | any portion of the trial or related studies produces negative or inconclusive results or other adverse events; |
| • | reports from preclinical or clinical testing on similar technologies and products raise safety and/or efficacy concerns; |
| • | 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; |
| • | 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; |
| • | 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; |
| • | third-party contractors become debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities
for violations of regulatory requirements; |
| • | 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; |
| • | one or more IRBs refuses to approve, suspends or terminates a trial at an investigational site, precludes enrollment of additional
subjects, or withdraws its approval of the trial; |
| • | 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; |
| • | 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 |
| • | the FDA or other regulatory authorities impose prohibitive post-marketing restrictions on any of our product candidates that
attain regulatory approval. |
Any delay or failure of one or more of our clinical trials may
occur at any stage of testing. Any such delay could cause our development costs to materially increase, and any such failure could
significantly impair our business plans, which would materially harm our financial condition and operations.
We cannot market and sell any product candidate in the
U.S. or in any other country or region if we fail to obtain the necessary regulatory approvals or certifications from applicable
government agencies.
We cannot sell our product candidates in any country until regulatory
agencies grant marketing approval or other required certifications. 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 will likely require the process of FDA Premarket Approval (“PMA”) for the product,
which is based on novel technologies and likely will be classified as a Class III medical device. This approval pathway can be
lengthy and expensive, and is estimated to take from one to three years or longer from the time the PMA application is submitted
to the FDA until approval is obtained, if approval can be obtained at all.
Similarly, to obtain approval to market our product candidates
outside of the U.S., we will need to submit clinical data concerning our product candidates to and receive marketing approval or
other required certifications from governmental or other agencies in those countries, which in certain countries includes approval
of the price we intend to charge for a product. For instance, in order to obtain the certification needed to market our lead product
candidate in the EU, we believe that we will need to obtain a CE mark for the product, which entails scrutiny by applicable regulatory
agencies and bears some similarity to the PMA process, including completion of one or more successful clinical trials.
We may encounter delays or rejections if changes occur in regulatory
agency policies, if difficulties arise within regulatory or related agencies such as, for instance, any delays in their review
time, or if reports from preclinical and clinical testing on similar technology or products raise safety and/or efficacy concerns
during the period in which we develop a product candidate or during the period required for review of any application for marketing
approval or certification.
Any difficulties we encounter during the approval or certification
process for any of our product candidates would have a substantial adverse impact on our operations and financial condition and
could cause our business to fail.
We cannot guarantee that we will be able to effectively
market our product candidates.
A significant part of our success depends on the various marketing
strategies we plan to implement. Our business model has historically focused solely on product development, and we have never attempted
to commercialize any product. There can be no assurance as to the success of any such marketing strategy that we develop or that
we will be able to build a successful sales and marketing organization. If we cannot effectively market those products we seek
to commercialize directly, such products’ prospects will be harmed.
Any product for which we obtain required regulatory approvals
could be subject to post-approval regulation, and we may be subject to penalties if we fail to comply with such post-approval requirements.
Any product for which we are able to obtain marketing approval
or other required certifications, and for which we are able to obtain approval of the manufacturing processes, post-approval clinical
data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review
by the FDA and comparable foreign regulatory authorities, including through periodic inspections. These requirements include, without
limitation, submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements
relating to quality control, quality assurance and corresponding maintenance of records and documents. Maintaining compliance with
any such regulations that may be applicable to us or our product candidates in the future would require significant time, attention
and expense. Even if marketing approval of a product is granted, the approval may be subject to limitations on the indicated uses
for which the product may be marketed or other conditions of approval, or may contain requirements for costly and time consuming
post-marketing approval testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of
previously unknown problems with any approved product candidate or related manufacturing processes, or failure to comply with regulatory
requirements, may result in consequences to us such as:
| • | restrictions on the marketing or distribution of a product, including refusals to permit the import or export of the product; |
| • | the requirement to include warning labels on the products; |
| • | withdrawal or recall of the products from the market; |
| • | refusal by the FDA or other regulatory agencies to approve pending applications or supplements to approved applications that
we may submit; |
| • | suspension of any ongoing clinical trials; |
| • | fines, restitution or disgorgement of profits or revenue; |
| • | suspension or withdrawal of marketing approvals or certifications; or |
| • | civil or criminal penalties. |
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 (the “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 candidate
utilizing the manufacturing methods that are required to produce that product candidate, 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:
| • | 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; |
| • | limitations on supply availability resulting from capacity and scheduling constraints of the third parties; |
| • | 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; |
| • | the possible breach of the manufacturing agreement by the third party; and |
| • | the possible termination or non-renewal of the agreement by the third party at a time that is costly or inconvenient for us. |
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 commercially reasonable terms, or at all, which may delay or otherwise hinder the development and commercialization
of those product candidates.
We will rely on the manufacturers of our product candidates
to purchase from third party suppliers the materials necessary to produce the compounds for preclinical and clinical studies, and
may continue to rely on those suppliers for commercial distribution if we obtain marketing approval or other required certifications
for any of our product candidates. The materials to produce our products may not be available when needed or on commercially reasonable
terms, and the prices for such materials may be susceptible to fluctuations. We do not have any control over the process or timing
of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements relating to the commercial
production of any of these materials. If these materials cannot be obtained for our preclinical and clinical studies, product testing
and potential regulatory approval of our product candidates would be delayed, which would significantly impact our ability to develop
our product candidates and materially adversely affect our ability to meet our objectives and obtain operations success.
We may not be successful in maintaining or establishing
collaborations, which could adversely affect our ability to develop and, if required regulatory approvals are obtained, commercialize
our product candidates.
As demonstrated by the Project Agreement that we entered into
with NUIG on May 28, 2015, we intend to collaborate with physicians, patient advocacy groups, foundations, government agencies,
and/or other third parties to assist with the development of our product candidates. If required regulatory approvals are obtained
for any of our product candidates, then we may consider entering into additional collaboration arrangements with medical technology,
pharmaceutical or biotechnology companies and/or seek to establish strategic relationships with marketing partners for the development,
sale, marketing and/or distribution of our products within or outside of the U.S. If we elect to expand our current relationship
with NUIG and/or seek additional collaborators in the future but are unable to reach agreements with NUIG and/or such other collaborators,
as applicable, then we may fail to meet our business objectives for the affected product or program. Moreover, collaboration arrangements
are complex and time consuming to negotiate, document and implement, and we may not be successful in our efforts, if any, to establish
and implement additional collaborations or other alternative arrangements. The terms of any collaboration or other arrangements
that we establish may not be favorable to us, and the success of any such collaboration will depend heavily on the efforts and
activities of our collaborators. Any failure to engage successful collaborators could cause delays in our product development and/or
commercialization efforts, which could harm our financial condition and operational results.
We compete with other pharmaceutical and medical device
companies, including companies that may develop products that make our product candidates less attractive or obsolete.
The medical device, pharmaceutical and biotechnology industries
are highly competitive. If our product candidates become available for commercial sale, we will compete in that competitive marketplace.
There are several products on the market or in development that could be competitors with our lead product candidate. 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 candidate
depends in part on our and our third party contractors’ ability to establish programs for the training of surgeons in the
proper usage of that product candidate, 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 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, if any are commercialized. In some foreign jurisdictions, marketing
approval or allowance could be dependent upon pre-marketing price negotiations. As a result, any denial of private or government
payer coverage or inadequate reimbursement for procedures performed using our products, before or upon commercialization, could
harm our business and reduce our prospects for generating revenue.
In addition, the U.S. Congress recently adopted legislation
regarding health insurance. As a result of this new legislation, substantial changes could be made to the current system for paying
for healthcare in the U.S., including modifications to the existing system of private payers and government programs, such as Medicare,
Medicaid and State Children’s Health Insurance Program, creation of a government-sponsored healthcare insurance source, or
some combination of those, as well as other changes. Restructuring the coverage of medical care in the U.S. could impact reimbursement
for medical devices such as our product candidates. If reimbursement for our approved product candidates, if any, is substantially
less than we expect, or rebate obligations associated with them are substantially increased, our business could be materially and
adversely impacted.
The use of our product candidates in human subjects may
expose us to product liability claims, and we may not be able to obtain adequate insurance or otherwise defend against any such
claims.
We face an inherent risk of product liability claims and do
not currently have product liability insurance coverage. We will need to obtain insurance coverage if and when we begin clinical
trials and commercialization of any of our product candidates. We may not be able to obtain or maintain product liability insurance
on acceptable terms with adequate coverage. 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
our intellectual property rights, 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. 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. One of our licensed MIT
European patents has been opposed in an administrative hearing. 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 is using our proprietary
information, trade secrets and 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 enforce and 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.
We do not have exclusive rights to certain intellectual
property as our patent portfolio includes certain patents that are jointly owned with our collaborators and others that have been
in-licensed on a non-exclusive basis.
As of December 31, 2014, we jointly owned a small number of
U.S. patents, U.S. patent applications and international (PCT) patent applications with certain of our collaborators. The rights
of our collaborators to these patents, patent applications and other compounds under the collaborations may in the future restrict
our ability to further develop or generate revenues from those compounds except through the collaborations.
Our patent portfolio, which covers self-assembling peptides
and methods of use thereof, includes 14 applications, one of which has been allowed and 13 of which are pending in a
total of five jurisdictions. We have also entered into a license agreement with MIT pursuant to which we have been granted exclusive
rights under one portfolio of patents and non-exclusive rights under another portfolio of patents. The portfolio exclusively
licensed from MIT includes seven patents that have been either allowed, issued or granted and 15 applications that are
pending in a total of 10 jurisdictions. The portfolio non-exclusively licensed from MIT includes a number of PCT applications
which have now entered the national and regional phases outside of the US, including 7 issued patents in three jurisdictions
that expire between 2016 and 2027 (absent patent term extension), and three pending patent applications in four jurisdictions.
Because a portion of our patent portfolio has been 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 prospects.
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 candidate and our business plans are dependent on the patent and other intellectual property rights
that are licensed to us under our license agreement with MIT. Although that agreement has a durational term through the life of
the licensed patents, it also imposes certain diligence, capital raising, and other obligations on us, our breach of which could
permit MIT to terminate the agreement. Further, we are responsible for all patent prosecution and maintenance fees under that agreement,
and a failure to pay such fees on a timely basis could also entitle MIT to terminate the agreement. Any failure by us to satisfy
our obligations under our license agreement with MIT or any other dispute or other issue relating to that agreement could cause
us to lose some or all of our rights to use certain intellectual property that is material to our business and our lead product
candidate, 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 D Warrants, the 2014 Warrants
or conversion of our Convertible Notes, our existing stockholders will be diluted.
Our articles of incorporation authorize
the issuance of up to 300,000,000 shares of Common Stock. In connection with the 2015 Private Placement Financing that concluded
on July 2, 2015, we issued an aggregate of 14,390,754 shares of our Common Stock, which equaled approximately 18% of the 78,766,487
shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the 2015 Private Placement
Financing. Upon the closing of the 2015 Private Placement Financing, we also issued Series D Warrants to acquire up to an additional
14,390,754 shares of our Common Stock at an initial exercise price of $0.25 per share.
Similarly, between March 11, 2015 and through March 13, 2015,
we entered into substantially similar Convertible Notes Subscription Agreements with each of the Convertible Notes Investors pursuant
to which we issued Convertible Notes to the Convertible Notes Investors in the aggregate principal amount of $750,000. The Convertible
Notes bear interest on the unpaid principal balance at a rate equal to eight percent (8.0%) (computed on the basis of the actual
number of days elapsed in a 360-day year) per annum until either (a) converted into shares of our Common Stock; or (b) the outstanding
principal and accrued interest on the Convertible Notes is paid in full by us. At any time prior to March 13, 2016, the holders
of the Convertible Notes have the right to convert some or all of such Convertible Notes into the number of shares of our Common
Stock determined by dividing (A) the aggregate sum of the (i) principal amount of the Convertible Note to be converted; and (ii)
amount of any accrued but unpaid interest with respect to such portion of the Convertible Note to be converted; and (B) the conversion
price then in effect, which was $0.20 per share on the date the Notes Offering closed. Interest on the Convertible Notes becomes
due and payable upon their conversion or their maturity date, March 13, 2016, and may become due and payable upon the occurrence
of an event of default under the Convertible Notes, as defined in the Convertible Notes; provided, however, that in the
event that the repayment of the indebtedness accrued under the Convertible Notes is not permitted under the Subordination Agreements,
(1) the term of the Convertible Notes and the holders’ rights to convert such Convertible Notes into shares of Common Stock
will automatically be extended until repayment is permitted under the Subordination Agreements; and (2) interest will continue
to accrue at a rate equal to eight percent (8.0%) (computed on the basis of the actual number of days elapsed in a 360-day year)
per annum. Assuming that the Convertible Notes and the interest accrued thereunder is converted, along with the outstanding principal,
into shares of our Common Stock on March 13, 2016, a total of 4,050,000 shares may be issued upon the conversion of the Convertible
Notes.
Upon the closing of the 2014 Private Placement Financing on
February 4, 2014, we issued an aggregate of 11,400,000 shares of our Common Stock, which equaled approximately 16% of our currently
issued and outstanding Common Stock on the date the 2014 Private Placement Financing closed. Upon the closing of the 2014 Private
Placement Financing, we also issued three series of Warrants to acquire up to an additional 34,200,000 shares of our Common Stock
at initial exercise prices ranging from $0.30 per share (the Series A Warrants), $0.35 per share (the Series B Warrants), and
$0.40 per share (the Series C Warrants). On December 1, 2014, the Company entered into that certain Amendment to Series A Warrants,
Series B Warrants and Series C Warrants to Purchase Common Stock, dated as of December 1, 2014, with Cranshire pursuant to which,
among other things, the exercise prices of the Series B Warrants and Series C Warrants were lowered to $0.20 per share. Following
the December 1, 2014 amendment, 4,000,000 shares underlying the Series B Warrants were exercised, and the remaining 7,400,000
expired unexercised on January 3, 2015 when the term of the Series B Warrants expired. As a result of the conversion price of
our Convertible Notes, the closing of the Notes Offering and the subsequent issuance of the Convertible Notes triggered the anti-dilution
provisions of the Series A Warrants, which in turn reduced the exercise price of the Series A Warrants to $0.20 per share and
increased the aggregate number of shares issuable under the Series A Warrants by 5,700,000 shares (or fifty-percent (50%)) from
11,400,000 shares to 17,100,000 shares. As of September 10, 2015, up to 3,550,000 shares may be acquired upon the exercise of
the Series C Warrants and up to 11,100,000 shares may be acquired upon the exercise of the Series A Warrants.
Additionally, pursuant to the 2013 Plan, as of September 10,
2015, we were authorized to grant equity awards to our employees, directors and consultants for up to an aggregate of 12,327,362
shares (net of 806,250 options already exercised and 300,000 shares of restricted stock awarded) of our Common Stock (and such
authorized amount may increase by up to 3 million shares on the first business day of each following fiscal year as set forth in
the 2013 Plan), and in addition to the Series D Warrants granted in connection with the 2015 Private Placement Financing, the 2014
Warrants granted in connection with the 2014 Private Placement Financing and the Convertible Notes issued in the Notes Offering,
there are currently outstanding warrants to acquire up to 145,985 shares of our Common Stock. Any future grants of options, warrants
or other securities exercisable or convertible into our Common Stock, or the exercise or conversion of such shares, and any sales
of such shares in the market, could have an adverse effect on the market price of our Common Stock.
In addition to capital raising activities, other possible business
and financial uses for our authorized Common Stock include, without limitation, future stock splits, acquiring other companies,
businesses or products in exchange for shares of Common Stock, issuing shares of our Common Stock to partners in connection with
strategic alliances, attracting and retaining employees by the issuance of additional securities under our various equity compensation
plans, compensating consultants by issuing shares or options to purchase shares of our Common Stock, or other transactions and
corporate purposes that our Board of Directors deems are in the Company’s best interest. 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,”
we will need to obtain additional financing prior to or during May 2016 to continue operations and fund our planned future operations.
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.
FINRA sales practice requirements may limit a stockholder’s
ability to buy and sell our stock.
In addition to the “penny stock” rules described
above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA has indicated
its belief that there is a high probability that speculative low priced securities will not be suitable for at least some customers.
These FINRA requirements make it more difficult for broker-dealers to recommend that at least some of their customers buy our Common
Stock, which may limit the ability of our stockholders to buy and sell our Common Stock and could have an adverse effect on the
market for our shares.
There may be additional risks because we completed a reverse
merger transaction in June 2013.
Additional risks may exist because we completed a “reverse
merger” transaction in June 2013. Securities analysts of major brokerage firms may not provide coverage of the Company because
there may be little incentive to brokerage firms to recommend the purchase of our Common Stock. There may also be increased scrutiny
by the SEC and other government agencies and holders of our securities due to the nature of the transaction, as there has been
increased focus on transactions such as the Merger in recent years. Further, since the Company existed as a “shell company”
under applicable rules of the SEC up until the closing of the Merger on June 26, 2013, there will be certain restrictions and limitations
on the Company going forward relating to any potential future issuances of additional securities to raise funding and compliance
with applicable SEC rules and regulations.
The Company may have material liabilities that were not
discovered before the closing of the Merger.
The Company may have material liabilities that were not discovered
before the consummation of the Merger. We could experience losses as a result of any such unasserted liabilities that are eventually
found to be incurred, which could materially harm our business and financial condition. Although the Merger Agreement contained
customary representations and warranties from the Company concerning its assets, liabilities, financial condition and affairs,
there may be limited or no recourse against the Company’s prior owners or principals in the event those prove to be untrue.
As a result, the stockholders of the Company bear risks relating to any such unknown or unasserted liabilities.
Certain of our directors and officers own a significant
percentage of our capital stock and are able to exercise significant influence over the Company.
Certain of our directors and executive officers own a significant
percentage of our outstanding capital stock. As of September 10, 2015, Dr. Terrence W. Norchi, our President, Chief Executive Officer
and a director, Dr. Avtar Dhillon, the Chairman of our Board of Directors, and James R. Sulat, a director, beneficially own (as
determined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) approximately 20% of our shares of
Common Stock. Accordingly, these members of our Board of Directors and management team have substantial voting power to approve
matters requiring stockholder approval, including without limitation the election of directors, and have significant influence
over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in control of our Company,
even if such a change in control would be beneficial to our stockholders.
The elimination of monetary liability against our directors
and officers under Nevada law and the existence of indemnification rights held by our directors, officers and employees may result
in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our articles of incorporation eliminate the personal liability
of our directors and officers to our Company and our stockholders for damages for breach of fiduciary duty as a director or officer
to the extent permissible under Nevada law. Further, our amended and restated bylaws provide that we are obligated to indemnify
any of our directors or officers to the fullest extent authorized by Nevada law and, subject to certain conditions, advance the
expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those
indemnification obligations could result in our Company incurring substantial expenditures to cover the cost of settlement or damage
awards against our directors or officers, which we may be unable to recoup. These provisions and resultant costs may also discourage
us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even if such
actions, if successful, might otherwise benefit us or our stockholders.
We are subject to the reporting requirements
of federal securities laws, compliance with which involves significant time, expense and expertise.
We are a public reporting company in the U.S., and, accordingly,
are subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including the
obligations imposed by the Sarbanes-Oxley Act. The costs associated with preparing and filing annual, quarterly and current reports,
proxy statements and other information with the SEC in the ordinary course, as well as preparing and filing audited financial statements,
has caused, and could continue to cause, our operational expenses to remain at higher levels or continue to increase.
Our present management team has limited experience in managing
public companies. It will be time consuming, difficult and costly for our management team to acquire additional expertise and experience
in operating a public company, and to develop and implement the additional internal controls and reporting procedures required
by Sarbanes-Oxley and other applicable securities laws. We will need to hire additional financial reporting, internal controls,
accounting and other finance staff as well as additional IT systems in order to develop and implement appropriate internal controls
and reporting procedures as required by applicable securities regulations for public companies, which we may not be able to do
on a timely basis or at all.
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. In addition, under the terms of the
MLSC Loan Agreement, we must obtain MLSC’s prior consent before declaring or paying any dividends during the term of the
MLSC Loan Agreement. As a result, our stockholders should not expect that we will ever pay cash or other dividends on our outstanding
capital stock.
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.
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements that involve
risks, uncertainties and assumptions. In some cases, you can identify forward-looking statements by terminology such as “if,”
“shall,” “may,” “might,” “will likely result,” “should,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “project,” “intend,”
“goal,” “objective,” “predict,” “potential” or “continue,” or the negative
of these terms or other comparable terminology. All statements made in this prospectus other than statements of historical fact
are statements that could be deemed forward-looking statements, including without limitation statements about our business plan,
our plan of operations and our need to obtain future financing. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” and the risks
set out below, any of which may cause our or our industry’s actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these
forward-looking statements. These risks include, by way of example and not in limitation, risks related to:
| • | Our ability to continue as a going concern; |
| • | Our ability to obtain financing necessary to operate our business; |
| • | Our limited operating history; |
| • | The results of our research and development activities, including uncertainties relating to the preclinical and clinical testing
of our product candidates; |
| • | The early stage of our primary product candidate presently under development; |
| • | Our ability to develop, obtain required approvals for and commercialize our product candidates; |
| • | Our ability to recruit and retain qualified personnel; |
| • | Our ability to manage any future growth we may experience; |
| • | Our ability to obtain and maintain protection of our intellectual property; |
| • | Our dependence on third party manufacturers, suppliers, research organizations, academic institutions, testing laboratories
and other potential collaborators; |
| • | The size and growth of the potential markets for any of our approved product candidates, and the rate and degree of market
acceptance of any of our approved product candidates; |
| • | Our ability to successfully complete potential acquisitions and collaborative arrangements; |
| • | Competition in our industry; |
| • | General economic and business conditions; and |
| • | Other factors discussed under the section entitled “Risk Factors”. |
New risks emerge in our rapidly-changing industry from time
to time. As a result, it is not possible for our management to predict all risks, nor can we assess the impact of all factors on
our business. If any such risks or uncertainties materialize or such assumptions prove incorrect, our results could differ materially
from those expressed or implied by such forward-looking statements and assumptions. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. These
forward-looking statements speak only as of the date of this prospectus. Except as required by applicable law, we do not intend
to update any of these forward-looking statements.
SELLING
SECURITYHOLDERS
This prospectus covers the resale from time to time by the selling
securityholders identified in the table below of up to an aggregate of 28,781,508 shares of our Common Stock that were either previously
issued or are issuable upon the exercise of our Series D Warrants. The shares of Common Stock being offered by the selling securityholders
were issued in, or issuable upon the exercise of Series D Warrants issued in, the Closings conducted for the 2015 Private Placement
Financing, and consist of (i) 14,390,754 previously issued shares; and (ii) 14,390,754 shares that may be issuable upon exercise
of our Series D Warrants. For additional information regarding the issuance of the shares of Common Stock and the Series D Warrants,
see the description under “Summary—2015 Private Placement Financing” elsewhere in this prospectus.
We are registering the shares of Common Stock hereby pursuant
to the terms of the registration rights agreement (the “2015 Registration Rights Agreement”) among us and the
investors in 2015 Private Placement Financing in order to permit the selling securityholders identified in the table below to offer
the shares for resale from time to time. Because the shares of Commons Stock issuable upon the exercise of our Series D Warrants
are subject to adjustments if our shares of Common Stock are subdivided or combined (by any stock split, stock dividend, recapitalization,
reorganization, scheme, arrangement or otherwise) and our Series D Warrants permit, in certain circumstances, the “cashless”
exercise thereof, the number of shares that will actually be issuable upon any exercise thereof may be more or less than the number
of shares being offered by this prospectus.
The table below (i) lists the selling securityholders and other
information regarding the beneficial ownership (except with respect to the totals in Column 2, as determined under Section 13(d)
of the Exchange Act and the rules and regulations thereunder) of our Common Stock by each of the selling securityholders (including
securities issued in transactions unrelated to the 2015 Private Placement Financing, if any); (ii) has been prepared based upon
information furnished to us by the selling securityholders; and, (iii) to our knowledge, is accurate as of the date of this prospectus.
The selling securityholders may sell all, some or none of their shares in this offering. See the disclosure under the heading “Plan
of Distribution” elsewhere in this prospectus. The selling securityholders identified in the table below may have sold,
transferred or otherwise disposed of some or all of their shares since the date of this prospectus in transactions exempt from
or not subject to the registration requirements of the Securities Act. Information concerning the selling securityholders may change
from time to time and, if necessary, we will amend or supplement this prospectus accordingly and as required.
Column 1 | |
Column 2 | | |
Column 3 | | |
Column 4 | | |
Column 5 | | |
Column 6 | |
Name of Selling Securityholder | |
Number of Shares of Common Stock Issued and Issuable (1) | | |
Number of Shares of Common Stock Beneficially Owned Prior to this Offering (2) | | |
Maximum Number of Shares of
Common Stock to be Sold Pursuant to this Prospectus (3) | | |
Number of Shares of Common Stock Beneficially Owned After This Offering
(4) | | |
Percentage of Shares of Common Stock Beneficially Owned After This Offering
(5) | |
Drake Partners Equity, LLC (6) | |
| 454,546 | | |
| 454,546 | | |
| 454,546 | | |
| 0 | | |
| 0.00 | % |
David Cornett (7) | |
| 427,274 | | |
| 427,274 | | |
| 227,274 | | |
| 200,000 | | |
| 0.19 | % |
Keyes Sulat Revocable Trust (8) | |
| 1,182,369 | | |
| 1,182,369 | | |
| 909,092 | | |
| 273,277 | | |
| 0.26 | % |
Stephanie Plent (9) | |
| 746,714 | | |
| 746,714 | | |
| 454,546 | | |
| 292,168 | | |
| 0.28 | % |
Ende Family Trust (10) | |
| 700,000 | | |
| 700,000 | | |
| 500,000 | | |
| 200,000 | | |
| 0.19 | % |
Condorcet UK LP (11) | |
| 2,272,728 | | |
| 2,272,728 | | |
| 2,272,728 | | |
| 0 | | |
| 0.00 | % |
Scott B and Lucinda S Flaherty (12) | |
| 550,000 | | |
| 550,000 | | |
| 500,000 | | |
| 50,000 | | |
| 0.05 | % |
Anson Investments Master Fund LP (13) | |
| 5,650,000 | | |
| 5,181,401 | | |
| 3,200,000 | | |
| 2,450,000 | | |
| 2.23 | % |
Lorraine A. Malanga (14) | |
| 227,274 | | |
| 227,274 | | |
| 227,274 | | |
| 0 | | |
| 0.00 | % |
Jonathan J. Galli (15) | |
| 700,000 | | |
| 700,000 | | |
| 700,000 | | |
| 0 | | |
| 0.00 | % |
Rocco F. and Jennifer DiFilippo (16) | |
| 227,270 | | |
| 227,270 | | |
| 227,270 | | |
| 0 | | |
| 0.00 | % |
Popham Management, LLC (17) | |
| 909,092 | | |
| 909,092 | | |
| 909,092 | | |
| 0 | | |
| 0.00 | % |
Karen and Ronald Bryan Woodard (18) | |
| 227,274 | | |
| 227,274 | | |
| 227,274 | | |
| 0 | | |
| 0.00 | % |
Steve Lahiji (19) | |
| 300,000 | | |
| 300,000 | | |
| 300,000 | | |
| 0 | | |
| 0.00 | % |
Condorcet, LP (20) | |
| 2,272,728 | | |
| 2,272,728 | | |
| 2,272,728 | | |
| 0 | | |
| 0.00 | % |
Charles and Lisa J. Cunning (21) | |
| 400,000 | | |
| 400,000 | | |
| 400,000 | | |
| 0 | | |
| 0.00 | % |
Column 1 | |
Column 2 | | |
Column 3 | | |
Column 4 | | |
Column 5 | | |
Column 6 | |
Name of Selling Securityholder | |
Number of Shares of Common Stock Issued and Issuable (1) | | |
Number of Shares of Common Stock Beneficially Owned Prior to this Offering (2) | | |
Maximum Number of Shares of Common Stock to be Sold Pursuant to this Prospectus (3) | | |
Number of Shares of Common Stock Beneficially Owned After This Offering (4) | | |
Percentage of Shares of Common Stock Beneficially Owned After This Offering (5) | |
James M. McKeone (22) | |
| 909,092 | | |
| 909,092 | | |
| 909,092 | | |
| 0 | | |
| 0.00 | % |
Armor Securities LLC (23) | |
| 908,774 | | |
| 908,774 | | |
| 908,774 | | |
| 0 | | |
| 0.00 | % |
Michael A. Parker (24) | |
| 10,950,952 | | |
| 5,950,952 | | |
| 10,000,000 | | |
| 950,952 | | |
| 0.86 | % |
Intracoastal Capital, LLC (25) | |
| 5,024,118 | | |
| 4,824,401 | | |
| 3,181,818 | | |
| 1,842,300 | | |
| 1.69 | % |
Total | |
| 35,040,205 | | |
| 29,571,606 | | |
| 28,781,508 | | |
| 6,258,697 | | |
| 5.74 | % |
| (1) | Reflects the total number of shares of Common Stock issued or issuable to each selling securityholder, including (a) all remaining
securities issued in the 2015 Private Placement Financing, in each case without regard to ownership limitations on the exercise
of the Series D Warrants as described in footnote (2) below; (b) in the case of Anson and Intracoastal, all shares of Common Stock
underlying (i) the remaining Series A Warrants issued in the 2014 Private Placement Financing held by such selling securityholder,
in each case without regard to ownership limitations on the exercise of the Series A Warrants as described in footnote (2) below;
and (ii) the Convertible Notes issued in the Notes Offering without regard to ownership limitations on the conversion of such Convertible
Notes as described in footnote (2) below and assuming that the outstanding principal on the Convertible Notes and the accrued interest
thereunder is converted, on March 13, 2016, into shares of our Common Stock at the conversion rate in effect as of the date of
this prospectus, none of which are being offered for resale by this prospectus; and (c) all other securities issued in transactions
unrelated to the 2015 Private Placement Financing, the 2014 Private Placement Financing, or Notes Offering, if any, none of which
are being offered for resale by this prospectus and in each case without regard to any ownership limitations upon the exercise
or conversion of such securities. |
| (2) | Certain of the Series D Warrants issued in the 2015 Private Placement
Financing and all the Series A Warrants issued in the 2014 Private Placement Financing provide that a selling securityholder may
not exercise such warrants to the extent (but only to the extent) that the exercise thereof would result in the selling securityholder
or any of its affiliates beneficially owning more than 4.9% of our Common Stock after giving effect to such exercise; provided,
however, that in the case of any Series D Warrant with an ownership limitation, the holder may waive such ownership limitation,
in which case such waiver will become effective sixty-one (61) days after the holder’s delivery of such wavier notice. Similarly,
the Convertible Notes issued in the Notes Offering provide that the holder may not convert a Convertible Note to the extent (but
only to the extent) that the conversion thereof would result in the holder or any of its affiliates beneficially owning more than
4.99% of our currently outstanding Common Stock (which may be increased to 9.99% at the holder’s discretion). As a result,
the number of shares of Common Stock reflected in this column as beneficially owned by each selling securityholder includes, to
the extent applicable, (a) the shares of Common Stock that were issued in the Closings conducted for the 2015 Private Placement
Financing held by such selling securityholder and/or issuable upon exercise of the Series D Warrants held by such selling securityholder
which, in the case of any Series D Warrant with an ownership limitation that has not been previously waived, is limited to the
number of shares of Common Stock that such selling securityholder has the right to acquire without it or any of its affiliates
beneficially owning more than 4.9% of our currently outstanding Common Stock, based on 105,742,885 outstanding shares of our Common
Stock as of September 10, 2015; (b) the remaining shares of Common Stock held by such selling securityholder that were issued
upon the closing of the 2014 Private Placement Financing and/or acquired upon the exercise of a 2014 Warrant; (c) the number of
shares of Common Stock underlying the Series A Warrants held by such selling securityholder that such selling securityholder has
the right to acquire without it or any of its affiliates beneficially owning more than 4.9% of our currently outstanding Common
Stock, based on 105,742,885 outstanding shares of our Common Stock as of September 10, 2015; (d) the shares of Common Stock underlying
our Convertible Notes that such selling securityholder has the right to acquire without it or any of its affiliates beneficially
owning more than 4.99% of our currently outstanding Common Stock (which may be increased to 9.99% at the holder’s discretion),
based on 105,742,885 outstanding shares of our Common Stock as of September 10, 2015; and (e) shares of our Common Stock beneficially
owned by such selling securityholder that were acquired in transactions unrelated to the 2015 Private Placement Financing, the
2014 Private Placement Financing, or Notes Offering including, but not limited to, the Inducement Shares. |
| (3) | For each selling securityholder, the totals reported in this column reflect the total number of shares of Common Stock registered
for resale under the registration statement of which this prospectus is a part including (a) the shares of Common Stock held by
such selling securityholder that were issued in connection with the closing of the 2015 Private Placement Financing and/or, to
the extent applicable, acquired upon the exercise of the Series D Warrants; and (b) shares of Common Stock issuable upon exercise
of the Series D Warrants held by such selling securityholder, in each case without taking into account the ownership limitations
set forth in the Series D Warrants as described in footnote (2). |
| (4) | For each selling securityholder and to the extent applicable, the totals reported in this column reflect the ownership limitations
set forth in the Convertible Notes and Series A Warrants described in footnote (2), and assume that (a) all of the shares of Common
Stock to be registered by the registration statement of which this prospectus is a part, including the shares of Common Stock held
by such selling securityholder that were issued in connection with the closing of the 2015 Private Placement Financing and the
shares of Common Stock issuable upon exercise of the Series D Warrants held by such selling securityholder (in each case without
taking into account the ownership limitations set forth in certain of the Series D Warrants as described in footnote (2)), are
sold in this offering; (b) the outstanding principal on the Convertible Notes and the accrued interest thereunder is converted,
on March 13, 2016, into shares of our Common Stock at the conversion rate in effect as of the date of this prospectus; (c) the
selling securityholders do not (i) sell any of the securities that have been issued to them in transactions unrelated to the 2015
Private Placement Financing (including, but not limited to, the 2014 Private Placement Financing and Notes Offering) and included
in Column 2; and (ii) acquire additional shares of our Common Stock after the date of this prospectus and prior to completion of
this offering. |
| (5) | Percentage ownership for each selling securityholder is determined in accordance with Section 13(d) of the Exchange
Act and is based on 105,742,885 outstanding shares of our Common Stock as of September 10, 2015, and assumes that all shares underlying
such selling securityholder’s Series D Warrants that are being offered by such selling securityholder by this prospectus
have been issued and are outstanding. |
| (6) | As the managing partner of Drake Partners Equity, LLC (“Drake”), Laurence M. Hicks has voting and dispositive
power over the securities held by Drake, which may be deemed to have beneficial ownership of the following: (i) 227,273 shares
of Common Stock issued to Drake in connection with the 2015 Private Placement Financing; and (ii) 227,273 shares of Common Stock
issuable upon exercise of Series D Warrants issued to Drake in connection with the 2015 Private Placement Financing. Mr. Drake
disclaims beneficial ownership of the securities held by Drake that are covered hereunder except to the extent of his pecuniary
interest therein. |
| (7) | Mr. Cornett may be deemed to have beneficial ownership of the following: (i) 113,637 shares of Common Stock issued to Mr. Cornett
in connection with the 2015 Private Placement Financing; (ii) 113,637 shares of Common Stock issuable upon exercise of Series D
Warrants issued to Mr. Cornett in connection with the 2015 Private Placement Financing; and (iii) 200,000 shares of Common Stock
acquired by Mr. Cornett in transactions unrelated to the 2015 Private Placement Financing, none of which are being registered in
the registration statement of which this prospectus forms a part. |
| (8) | James R. Sulat is a member of the Company’s Board of Directors and a co-trustee of the Trust, of which members of Mr.
Sulat’s immediate family are beneficiaries. As co-trustee, Mr. Sulat has shared voting and dispositive power over the securities
held by the Trust, which may be deemed to have beneficial ownership of the following: (i) 454,546 shares of Common Stock issued
to the Trust in connection with the 2015 Private Placement Financing; (ii) 454,546 shares of Common Stock issuable upon exercise
of Series D Warrants issued to Trust in connection with the 2015 Private Placement Financing; and (iii) 273,277 shares of Common
Stock acquired by the Trust upon the conversion of the $75,000 convertible promissory note that it purchased from the Company on
June 19, 2013 upon the consummation of the Merger, none of which are being registered in the registration statement of which this
prospectus forms a part. Mr. Sulat disclaims beneficial ownership of the securities held by the Trust that are covered hereunder
except to the extent of his pecuniary interest therein. |
The information presented for the Trust in this
table excludes (a) a stock option award exercisable for 30,000 shares of Common Stock at an exercise price of $0.37 granted
to Mr. Sulat on June 18, 2013 for services rendered as a consultant to the Company; and (b) a stock option award exercisable
for 200,000 shares of Common Stock at an exercise price of $0.27 granted to Mr. Sulat on August 19, 2015 upon his
appointment to the Board of Directors.
| (9) | Ms. Plent may be deemed to have beneficial ownership of the following: (i) 227,273 shares of Common Stock issued to Ms. Plent
in connection with the 2015 Private Placement Financing; (ii) 227,273 shares of Common Stock issuable upon exercise of Series D
Warrants issued to Ms. Plent in connection with the 2015 Private Placement Financing; and (iii) 192,168 shares of Common Stock
and a stock option exercisable for 100,000 shares of Common Stock acquired by Ms. Plent in transactions unrelated to the 2015 Private
Placement Financing, none of which are being registered in the registration statement of which this prospectus forms a part. |
| (10) | Eric J. Ende is a co-trustee of the Ende Family Trust. As co-trustee, Mr. Ende has shared voting and dispositive power over
the securities held by the Ende Family Trust, which may be deemed to have beneficial ownership of the following: (i) 250,000 shares
of Common Stock issued to the Ende Family Trust in connection with the 2015 Private Placement Financing; (ii) 250,000 shares of
Common Stock issuable upon exercise of Series D Warrants issued to Ende Family Trust in connection with the 2015 Private Placement
Financing; and (iii) 200,000 shares of Common Stock acquired by Ende Family Trust in transactions unrelated to the 2015 Private
Placement Financing, none of which are being registered in the registration statement of which this prospectus forms a part. Mr.
Ende disclaims beneficial ownership of the securities held by the Ende Family Trust that are covered hereunder except to the extent
of his pecuniary interest therein. |
| (11) | Jonathan and Susan Symonds are the joint
owners of Condorcet UK LP. As joint owners, Mr. and Ms. Symonds have shared voting and dispositive power over the securities held
by Condorcet UK LP, which may be deemed to have beneficial ownership of the following: (i) 1,136,364 shares of Common Stock issued
to Condorcet UK LP in connection with the 2015 Private Placement Financing; and (ii) 1,136,364 shares of Common Stock issuable
upon exercise of Series D Warrants issued to Condorcet UK LP in connection with the 2015 Private Placement Financing. Mr. and Ms.
Symonds disclaim beneficial ownership of the securities held by Condorcet UK LP that are covered hereunder except to the extent
of their pecuniary interest therein. |
| (12) | Mr. Flaherty and Ms. Flaherty may be deemed to have beneficial ownership of the following: (i) 250,000 shares of Common Stock
issued to Mr. Flaherty and Ms. Flaherty in connection with the 2015 Private Placement Financing; (ii) 250,000 shares of Common
Stock issuable upon exercise of Series D Warrants issued to Mr. Flaherty and Ms. Flaherty in connection with the 2015 Private Placement
Financing; and (iii) a stock option exercisable for 50,000 shares of Common Stock acquired by Mr. Flaherty and Ms. Flaherty in
transactions unrelated to the 2015 Private Placement Financing, none of which are being registered in the registration statement
of which this prospectus forms a part. |
| (13) | M5V Advisors Inc. and Frigate Ventures LP (“M5V” and “Frigate”, respectively), the Co-Investment
Advisers of Anson, have voting and dispositive power over the securities held by Anson. Bruce Winson is the managing member of
Admiralty Advisors LLC, which is the general partner of Frigate. Moez Kassam and Adam Spears are directors of M5V. Mr. Winson,
Mr. Kassam and Mr. Spears each disclaim beneficial ownership of the securities held by Anson that are covered hereunder except
to the extent of their pecuniary interest therein. |
Anson may be deemed to have beneficial ownership
(as determined under Section 13(d) of the Exchange Act) of 5,181,401 shares of Common Stock, which consists of the following:
(i) 1,600,000 shares of Common Stock issued to Anson in connection with the 2015 Private Placement Financing; (ii) 100,000 shares
of Common Stock acquired by Anson in transactions unrelated to the 2015 Private Placement Financing; (iii) 1,600,000 shares of
Common Stock issuable upon exercise of Series D Warrants issued to Anson in connection with the 2015 Private Placement Financing;
(iv) a Series A Warrant acquired in the 2014 Private Placement Financing exercisable for 1,000,000 shares of Common Stock, none
of which are being registered in the registration statement of which this prospectus forms a part; and (v) assuming the outstanding
principal on the Convertible Notes and the accrued interest thereunder is converted, on March 13, 2016, into shares of our Common
Stock at the conversion rate in effect as of the date of this prospectus, 881,401 of the 1,350,000 shares of our Common Stock
issuable upon conversion of the Convertible Note held by an Anson because the Convertible Note contains ownership limitations
as described in footnote (2), under which the holder thereof does not have the right to convert the Convertible Note to the extent
(but only to the extent) that such conversion would result in beneficial ownership by the holder thereof or any of its affiliates
of more than 4.99% of our Common Stock (which may be increased to 9.99% at the holder’s discretion). The information presented
for Anson in Column 3 of this table excludes the remaining 468,599 shares of Common Stock issuable upon conversion of the Convertible
Note held by an Anson because of the ownership limitations as described in footnote (2). Without such ownership limitations, Anson,
M5V, Frigate, Admiralty Advisors LLC and Messrs. Winson, Kassam and Spears may be deemed to have beneficial ownership of 5,650,000
shares of our Common Stock.
| (14) | Ms. Malanga may be deemed to have beneficial ownership of the following: (i) 113,637 shares of Common Stock issued to Ms. Malanga
in connection with the 2015 Private Placement Financing; and (ii) 113,637 shares of Common Stock issuable upon exercise of Series
D Warrants issued to Ms. Malanga in connection with the 2015 Private Placement Financing. |
| (15) | Mr. Galli may be deemed to have beneficial ownership of the following: (i) 350,000 shares of Common Stock issued to Mr. Galli
in connection with the 2015 Private Placement Financing; and (ii) 350,000 shares of Common Stock issuable upon exercise of Series
D Warrants issued to Mr. Galli in connection with the 2015 Private Placement Financing. |
| (16) | Mr. and Ms. DiFilippo may be deemed to have beneficial ownership of the following: (i) 113,635 shares of Common Stock issued
to Mr. and Ms. DiFilippo in connection with the 2015 Private Placement Financing; and (ii) 113,635 shares of Common Stock issuable
upon exercise of Series D Warrants issued to Mr. and Ms. DiFilippo in connection with the 2015 Private Placement Financing. |
| (17) | As the manager of Popham Management, LLC (“Popham”), Jerry K. Popham has voting and dispositive power over
the securities held by Popham, which may be deemed to have beneficial ownership of the following: (i) 454,546 shares of Common
Stock issued to Popham in connection with the 2015 Private Placement Financing; and (ii) 454,546 shares of Common Stock issuable
upon exercise of Series D Warrants issued to Popham in connection with the 2015 Private Placement Financing. Mr. Popham disclaims
beneficial ownership of the securities held by Popham that are covered hereunder except to the extent of his pecuniary interest
therein. |
| (18) | Mr. and Ms. Woodard may be deemed to have beneficial ownership of the following: (i) 113,637 shares of Common Stock issued
to Mr. and Ms. Woodard in connection with the 2015 Private Placement Financing; and (ii) 113,637 shares of Common Stock issuable
upon exercise of Series D Warrants issued to Mr. and Ms. Woodard in connection with the 2015 Private Placement Financing. |
| (19) | Mr. Lahiji may be deemed to have beneficial ownership of the following: (i) 150,000 shares of Common Stock issued to Mr. Lahiji
in connection with the 2015 Private Placement Financing; and (ii) 150,000 shares of Common Stock issuable upon exercise of Series
D Warrants issued to Mr. Lahiji in connection with the 2015 Private Placement Financing. |
| (20) | Shumeet Banerji is the general partner of Condorcet LP. As the general partner, Mr. Banerji has voting and dispositive power
over the securities held by Condorcet LP, which may be deemed to have beneficial ownership of the following: (i) 1,136,364 shares
of Common Stock issued to Condorcet LP in connection with the 2015 Private Placement Financing; and (ii) 1,136,364 shares of Common
Stock issuable upon exercise of Series D Warrants issued to Condorcet LP in connection with the 2015 Private Placement Financing.
Mr. Banerji disclaims beneficial ownership of the securities held by Condorcet LP that are covered hereunder except to the extent
of his pecuniary interest therein. |
| (21) | Mr. and Ms. Cunning may be deemed to have beneficial ownership of the following: (i) 200,000 shares of Common Stock issued
to Mr. and Ms. Cunning in connection with the 2015 Private Placement Financing; and (ii) 200,000 shares of Common Stock issuable
upon exercise of Series D Warrants issued to Mr. and Ms. Cunning in connection with the 2015 Private Placement Financing. |
| (22) | Mr. McKeone may be deemed to have beneficial ownership of the following: (i) 454,546 shares of Common Stock issued to Mr. McKeone
in connection with the 2015 Private Placement Financing; and (ii) 454,546 shares of Common Stock issuable upon exercise of Series
D Warrants issued to Mr. McKeone in connection with the 2015 Private Placement Financing. |
| (23) | As the manager Armor Securities LLC (“Armor”), Kazimierz Malik has voting and dispositive power over the
securities held by Armor, which may be deemed to have beneficial ownership of the following: (i) 454,387 shares of Common Stock
issued to Armor in connection with the 2015 Private Placement Financing; and (ii) 454,387 shares of Common Stock issuable upon
exercise of Series D Warrants issued to Armor in connection with the 2015 Private Placement Financing.. Mr. Malik disclaims beneficial
ownership of the securities held by Armor that are covered hereunder except to the extent of his pecuniary interest therein. |
| (24) | Mr. Parker may be deemed to have beneficial ownership of the
following: (i) 5,000,000 shares of Common Stock issued to Mr. Parker in connection with the 2015 Private Placement Financing;
and (ii) 950,952 shares of Common Stock acquired by Mr. Parker in transactions unrelated to the 2015 Private Placement Financing,
none of which are being registered in the registration statement of which this prospectus forms a part. The information presented
for Mr. Parker in Column 3 of this table excludes 5,000,000 shares of Common Stock issuable upon exercise of Series D Warrants
issued to Mr. Parker in connection with the 2015 Private Placement Financing because such warrants contain ownership limitations
pursuant to which the holder is prohibited from exercising such warrants to the extent (but only to the extent) that the exercise
thereof would result in the holder or any of its affiliates beneficially owning more than 4.9% of our Common Stock after giving
effect to such exercise; provided, however, that the holder may waive such ownership limitation, in which case such waiver
will become effective sixty-one (61) days after the holder’s delivery of such wavier notice. As of the date of this prospectus,
Mr. Parker has not waived such limitation. |
| (25) | Mitchell P. Kopin (“Mr. Kopin”) and Daniel B. Asher (“Mr. Asher”), each of whom are managers
of Intracoastal, have shared voting control and investment discretion over the securities reported herein that are held by Intracoastal.
As a result, each of Mr. Kopin and Mr. Asher may be deemed to have beneficial ownership (as determined under Section 13(d) of the
Exchange Act) of the securities reported herein that are held by Intracoastal. |
Cranshire Capital Advisors, LLC (“CCA”)
is the investment manager of Cranshire Capital Master Fund, Ltd. (“Cranshire Master Fund”), and consequently
has voting control and investment discretion over the securities held by Cranshire Master Fund. Mr. Kopin, the president, the
sole member and the sole member of the Board of Managers of CCA, has voting control over CCA. As a result, each of Mr. Kopin and
CCA may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of the securities held
by Cranshire Master Fund.
Mr. Kopin and Mr. Asher may be deemed to have beneficial
ownership (as determined under Section 13(d) of the Exchange Act) of 4,824,401 shares of Common Stock, which consists of (i) 1,590,909
shares of Common Stock issued to Intracoastal in connection with the 2015 Private Placement Financing; (ii) 92,300 shares of Common
Stock acquired by Intracoastal in transactions unrelated to the 2015 Private Placement Financing, none of which are being registered
in the registration statement of which this prospectus forms a part; (iii) 1,590,909 shares of Common Stock issuable upon exercise
of Series D Warrants issued to Intracoastal in connection with the 2015 Private Placement Financing; (iv) 1,350,000 shares of Common
Stock issuable upon conversion of the Convertible Note assigned by Equitec Specialists, LLC (“Equitec”), an
investor in the 2014 Private Placement Financing and an affiliate of Intracoastal, to Intracoastal in May 2015 (the “Intracoastal
Convertible Debenture”), none of which are being registered in the registration statement of which this prospectus forms
a part; and (v) after giving effect to the 357,000 shares of Common Stock held by Cranshire Master Fund, 200,283 shares of Common
Stock issuable upon exercise of Series A Warrants assigned to Intracoastal in May 2015 by Equitec, none of which are being registered
in the registration statement of which this prospectus forms a part. The foregoing excludes the remaining 199,717 shares of Common
Stock issuable upon exercise of the Series A Warrant because such Series A Warrant contains ownership limitations, under which
the holder thereof does not have the right to exercise the Series A Warrants to the extent (but only to the extent) that such exercise
would result in beneficial ownership by the holder thereof or any of its affiliates of more than 4.9% of our common stock. Without
such ownership limitations, Mr. Kopin and Mr. Asher may be deemed to have beneficial ownership of 5,024,118 shares of Common Stock.
Mr. Asher, who is a manager of Intracoastal, is
also a control person of a broker-dealer. As a result of such common control, Intracoastal may be deemed to be an affiliate of
a broker-dealer. Intracoastal acquired the shares of Common Stock being registered hereunder in the ordinary course of business,
and at the time of the acquisition of the shares of Common Stock and Series D Warrants described herein, Intracoastal did not
have any arrangements or understandings with any person to distribute such securities.
CCA may be deemed to have beneficial ownership (as
determined under Section 13(d) of the Exchange Act) of 357,000 shares of Common Stock held by Cranshire Master Fund, none of which
are being registered in the registration statement of which this prospectus forms a part. The foregoing excludes 1,600,000 shares
of Common Stock issuable upon exercise of a Series A Warrant acquired by Cranshire Master Fund in the 2014 Private Placement Financing
because such Series A Warrant contains ownership limitations under which the holder thereof does not have the right to exercise
the Series A Warrant to the extent (but only to the extent) that such exercise would result in beneficial ownership by the holder
thereof or any of its affiliates of more than 4.9% of the Common Stock. Without such ownership limitations, CCA may be deemed
to have beneficial ownership of 1,957,000 shares of Common Stock.
As a result of the foregoing, Mr. Kopin may be deemed
to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of of 5,181,401 shares of Common Stock, which
consists of, which consists of of (i) 1,590,909 shares of Common Stock issued to Intracoastal in connection with the 2015 Private
Placement Financing; (ii) 92,300 shares of Common Stock acquired by Intracoastal in transactions unrelated to the 2015 Private
Placement Financing, none of which are being registered in the registration statement of which this prospectus forms a part; (iii)
357,000 shares of Common Stock held by Cranshire Master Fund, none of which are being registered in the registration statement
of which this prospectus forms a part; (iv) 1,590,909 shares of Common Stock issuable upon exercise of Series D Warrants issued
to Intracoastal in connection with the 2015 Private Placement Financing; (iv) 1,350,000 shares of Common Stock issuable upon conversion
of the Intracoastal Convertible Debenture, none of which are being registered in the registration statement of which this prospectus
forms a part; and (v) 200,283 shares of Common Stock issuable upon exercise of Series A Warrants assigned to Intracoastal in May
2015 by Equitec, none of which are being registered in the registration statement of which this prospectus forms a part. The foregoing
excludes (a) 199,717 shares of Common Stock issuable upon exercise of a Series A Warrant assigned to Intracoastal in May 2015 by
Equitec because the Series A Warrants contains ownership limitations, under which the holder thereof does not have the right to
exercise the Series A Warrants to the extent (but only to the extent) that such exercise would result in beneficial ownership by
the holder thereof or any of its affiliates of more than 4.9% of our common stock; and (b) 1,600,000 shares of Common Stock issuable
upon exercise of a Series A Warrant acquired by Cranshire Master Fund in the 2014 Private Placement Financing because of the aforementioned
ownership limitations. Without such ownership limitations, Mr. Kopin may be deemed to have beneficial ownership of 6,981,118 shares
of Common Stock.
Except for the ownership
of the Common Stock and Series D Warrants issued in the 2015 Private Placement Financing as reflected in the table above and as
otherwise described in this “Selling Securityholder” section below, we have not made, and are not required to make,
any potential payments regarding the 2015 Private Placement Financing to any selling securityholder, any affiliate of a selling
securityholder, or any person with whom any selling securityholder has a contractual relationship, other than as described below.
Additionally, none of the selling securityholders holds any of our securities, other than the Common Stock and/or Series A Warrants
held by Anson and Intracoastal that were originally issued in the 2014 Private Placement Financing, that have been registered under
the Securities Act or that are entitled to registration rights thereunder. We have also been advised that none of the selling securityholders
is a broker-dealer or an affiliate of a broker-dealer, other than (a) Mr. Asher, who is a manager of Intracoastal and also a control
person of a broker-dealer; (b) Mr. Jonathan J. Galli, who is employed by Credit Suisse Securities (USA) LLC as a broker; (c) Ms.
Karen Woodard, who is employed by Credit Suisse; and (d) Mr. James M. McKeone, who is employed by FAS Corp. as a broker.
The holders of the
Series D Warrants issued in the 2015 Private Placement Financing have ongoing rights to exercise those Series D Warrants. We have
described the material terms of the Series D Warrants elsewhere in this prospectus. In addition, the participants in the 2015 Private
Placement Financing have ongoing registration rights related to the securities issued therein pursuant to the terms of the 2015
Registration Rights Agreement, which are described in more detail elsewhere in this prospectus.
We may be required to make certain payments to the investors
in the 2015 Private Placement Financing under certain circumstances pursuant to the terms of the 2015 Registration Rights Agreement.
These potential payments include: (i) potential partial damages for failure to register the Common Stock issued or issuable upon
exercise of Series D Warrants; and (ii) payments in respect of claims for which we provide indemnification or contribution. We
intend to comply with the requirements of the 2015 Registration Rights Agreement and do not currently expect to make any such payments;
however, it is possible that such payments may be required.
DETERMINATION
OF OFFERING PRICE
The selling securityholders will determine at what price they
may sell the shares of Common Stock offered by this prospectus, and such sales may be made at prevailing market prices, at prices
related to the prevailing market price or at privately negotiated prices.
PLAN
OF DISTRIBUTION
We are registering
(i) the shares of Common Stock issued; and (ii) the shares of Common Stock issuable upon exercise of the Series D Warrants, in
each case, originally issued in connection with the 2015 Private Placement Financing to permit the resale of these shares of Common
Stock by the selling securityholders from time to time after the date of this prospectus. We will not receive any of the proceeds
from the sale by the selling securityholders of the shares of Common Stock. We will bear all fees and expenses incident to our
obligation to register the shares of Common Stock.
The selling securityholders
may sell all or a portion of the shares of Common Stock held by them and offered hereby from time to time directly or through one
or more underwriters, broker-dealers or agents. If the shares of Common Stock are sold through underwriters or broker-dealers,
the selling securityholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares
of Common Stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at
varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve
crosses or block transactions, pursuant to one or more of the following methods:
| · | on any national securities exchange or quotation service on which the securities may be listed
or quoted at the time of sale; |
| · | in the over-the-counter market; |
| · | in transactions otherwise than on these exchanges or systems or in the over-the-counter market; |
| · | through the writing or settlement of options, whether such options are listed on an options exchange
or otherwise; |
| · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| · | block trades in which the broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction; |
| · | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| · | an exchange distribution in accordance with the rules of the applicable exchange; |
| · | privately negotiated transactions; |
| · | short sales effected after the date the registration statement of which this prospectus is a part
is declared effective by the SEC; |
| · | broker-dealers may agree with a selling securityholder to sell a specified number of such shares
at a stipulated price per share; |
| · | a combination of any such methods of sale; and |
| · | any other method permitted pursuant to applicable law. |
The selling securityholders
may also sell shares of Common Stock under Rule 144 promulgated under the Securities Act, if available, rather than under this
prospectus. In addition, the selling securityholders may transfer the shares of Common Stock by other means not described in this
prospectus. If the selling securityholders effect such transactions by selling shares of Common Stock to or through underwriters,
broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions
or commissions from the selling securityholders or commissions from purchasers of the shares of Common Stock for whom they may
act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters,
broker-dealers or agents may be in excess of those customary in the types of transactions involved but, except as set forth in
a supplement to this prospectus to the extent required, in the case of an agency transaction will not be in excess of a customary
brokerage commission in compliance with FINRA Rule 5110).
In connection with
sales of the shares of Common Stock or otherwise, the selling securityholders may enter into hedging transactions with broker-dealers,
which may in turn engage in short sales of the shares of Common Stock in the course of hedging in positions they assume. The selling
securityholders may also sell shares of Common Stock short and deliver shares of Common Stock covered by this prospectus to close
out short positions and to return borrowed shares in connection with such short sales. The selling securityholders may also loan
or pledge shares of Common Stock to broker-dealers that in turn may sell such shares.
The selling securityholders
may pledge or grant a security interest in some or all of the Series D Warrants or shares of Common Stock owned by them and, if
they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of
Common Stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act amending, if necessary, the list of selling securityholders to include the pledgee, transferee
or other successors in interest as selling securityholders under this prospectus. The selling securityholders also may transfer
and donate the shares of Common Stock in other circumstances as permitted by their respective Subscription Agreement, the 2015
Registration Rights Agreement, the Series D Warrants and all applicable law, in which case the transferees, donees, pledgees or
other successors in interest will be the selling beneficial owners for purposes of this prospectus.
To the extent required
by the Securities Act and the rules and regulations thereunder, the selling securityholders and any broker-dealer participating
in the distribution of the shares of Common Stock may be deemed to be “underwriters” within the meaning of the Securities
Act. In such event, any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. Selling securityholders who are deemed to be “underwriters”
under the Securities Act (if any) will be subject to the prospectus delivery requirements of the Securities Act and may be subject
to certain statutory liabilities of, including but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act.
Each selling securityholder
has informed us that it is not a registered broker-dealer and does not have any written or oral agreement or understanding, directly
or indirectly, with any person to engage in a distribution of the Common Stock. Upon us being notified in writing by a selling
securityholder that any material arrangement has been entered into with a broker-dealer for the distribution of Common Stock, a
prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of Common Stock being
distributed and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions
and other terms constituting compensation from the selling securityholders and any discounts, commissions or concessions allowed
or re-allowed or paid to broker-dealers.
Under the securities
laws of some states, the shares of Common Stock may be sold in such states only through registered or licensed brokers or dealers.
In addition, in some states the shares of Common Stock may not be sold unless such shares have been registered or qualified for
sale in such state or an exemption from registration or qualification is available and is complied with.
Each selling securityholder
may sell all, some or none of the shares of Common Stock registered pursuant to the registration statement of which this prospectus
forms a part. If sold under the registration statement of which this prospectus forms a part, the shares of Common Stock registered
hereunder will be freely tradable in the hands of persons other than our affiliates that acquire such shares.
The selling securityholders
and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules
and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may
limit the timing of purchases and sales of any of the shares of Common Stock by the selling securityholders and any other participating
person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares
of Common Stock to engage in market-making activities with respect to the shares of Common Stock. All of the foregoing may affect
the marketability of the shares of Common Stock and the ability of any person or entity to engage in market-making activities with
respect to the shares of Common Stock.
We have agreed to
keep this prospectus effective until the earlier of (i) the date on which all of the securities registered under the registration
statement of which this prospectus is a part have been sold; and (ii) the twelve month anniversary of the date the registration
statement of which this prospectus is a part is declared effective by the SEC. We have also agreed to pay all expenses of the
registration of the shares of Common Stock pursuant to the 2015 Registration Rights Agreement, estimated to be $150,000 in total,
including, without limitation, SEC filing fees and expenses of compliance with state securities or “blue sky” laws;
provided, however, a selling securityholder will pay all underwriting discounts and selling commissions, if any.
We have further agreed
to indemnify or provide contribution to the selling securityholders with respect to certain liabilities, including some liabilities
under the Securities Act, in accordance with the 2015 Registration Rights Agreement. Each selling securityholder, severally and
not jointly, has agreed to indemnify or provide contribution to us with respect to certain civil liabilities, including liabilities
under the Securities Act, that may arise from any written information furnished to us by the selling securityholder specifically
for use in this prospectus, in accordance with the Registration Rights Agreement.
USE
OF PROCEEDS
We will not receive proceeds from the sale of Common Stock under
this prospectus. We will, however, receive approximately $3,597,689 from the selling securityholders if they exercise all of the
Series D Warrants on a cash basis (assuming, in each case, no adjustments are made to the exercise price or number of shares issuable
upon exercise of the Series D Warrants), which we expect we would use primarily for working capital purposes. We also expect we
may use a portion of any such proceeds we may receive to satisfy our indebtedness to MLSC and, as applicable, our repayment obligations
under the Convertible Notes.
Pursuant to the MLSC Loan Agreement, we must repay $1 million
plus any unpaid accrued interest, accruing at a rate of 10% per annum, on the earlier of (a) the completion of a sale of substantially
all of our assets, a change-of-control transaction or one or more financing transactions in which we receive net proceeds of $5,000,000
or more in a 12-month period; (b) the occurrence of an event of default by us under the MLSC Loan Agreement; or (c) September 30,
2018. Assuming repayment of the principal amount of the MLSC Loan on September 30, 2018, we anticipate paying an aggregate amount
of $610,510 in accrued interest over the term of the MLSC Loan. We obtained the proceeds of the MLSC Loan on October 4, 2013 and
have used, and expect to continue to use, such proceeds for working capital purposes. Correspondingly, unless converted on or prior
to March 13, 2016 into shares of our Common Stock, we will be obligated to repay the holders of our Convertible Notes an aggregate
of $750,000 in principal and an additional $60,000 in interest on that date; provided, however, that in the event that the
repayment of the indebtedness accrued under the Convertible Notes is not permitted under the Subordination Agreements, the term
of the Convertible Notes and the holders’ rights to convert such Convertible Notes into shares of Common Stock will automatically
be extended until repayment is permitted under the Subordination Agreements.
The holders of the Series D Warrants may exercise their Series
D Warrants at any time at their own discretion, if at all, in accordance with the terms thereof until their expiration, as further
described under “Summary—2015 Private Placement Financing” and “Description of Securities.”
Additionally, if there is no effective registration statement registering the resale of the shares of Common Stock underlying any
of the Series D Warrants as of certain time periods (as provided in the Series D Warrants), then the Series D Warrant holders may
choose to exercise such Series D Warrants on a “cashless exercise” or “net exercise” basis. If they do
so, we will not receive any proceeds from the exercise of the Series D Warrants. As a result, we cannot plan on receiving any proceeds
from the exercise of any of the Series D Warrants, nor can we plan on any specific uses of any proceeds we may receive beyond the
purposes described herein. We have agreed to bear the expenses (other than any underwriting discounts or commissions or agent’s
commissions) in connection with the registration of the Common Stock being offered hereby by the selling securityholders.
DESCRIPTION
OF SECURITIES
Authorized Capital Stock
Effective May 24, 2013, we amended our Articles of Incorporation
to increase our authorized Common Stock from 75,000,000 shares to 300,000,000 shares. Other than our Common Stock, we have no other
class or series of authorized capital stock.
Also on May 24, 2013, we effected a forward stock split, by
way of a stock dividend, of our issued and outstanding shares of Common Stock at a ratio of 11 shares to each one issued and outstanding
share. As a result, our outstanding Common Stock increased from 3,960,000 shares to 43,560,000 shares immediately following the
forward stock split.
Common Stock Issued and
Outstanding; Common Stock Registered Hereby
As of September 10, 2015 there were issued and outstanding
105,742,885 shares of Common Stock. Of our issued and outstanding shares of Common Stock, we are registering under the registration
statement, of which this prospectus forms a part, the 14,390,754 shares of Common Stock that were issued in connection with the
2015 Private Placement Financing that concluded on July 2, 2015.
Description of Common Stock
The holders of our Common Stock, par value $0.001 per share,
are entitled to one vote per share on all matters submitted to a vote of our stockholders, including the election of directors.
Our articles of incorporation do not provide for cumulative voting in the election of directors, and our amended and restated bylaws
provide that directors are elected by a plurality vote of the votes cast and entitled to vote on the election of directors at any
meeting for the election of directors at which a quorum is present. Matters other than the election of directors to be voted on
by stockholders are generally approved if, at a duly convened stockholder meeting, the number of votes cast in favor of the action
exceeds the number of votes cast in opposition to the action, unless a different vote for the action is required by applicable
law, our articles of incorporation or our amended and restated bylaws. Applicable Nevada law requires any amendment to our articles
of incorporation to be approved by stockholders holding shares entitling them to exercise at least a majority of the voting power
of the Company. The holders of our Common Stock will be entitled to cash dividends as may be declared, if any, by our Board of
Directors from funds available. Upon liquidation, dissolution or winding up of our Company, the holders of our Common Stock will
be entitled to receive pro rata all assets available for distribution to the holders. All rights of our Common Stockholders described
in this paragraph could be subject to any preferential voting, liquidation or other rights of any series of preferred stock that
we may authorize and issue in the future. Our Common Stock is presently traded on the QB tier of the OTC Marketplace under the
trading symbol “ARTH”.
Warrants and Options Issued and Outstanding
As of September 10, 2015 there were issued and outstanding:
| • | The Series D Warrants issued to the investors in the 2015 Private Placement Financing to purchase up to an aggregate of 14,390,754
shares of Common Stock at an exercise price of $0.25 per share; |
| • | The Series A and Series C Warrants issued to the investors
in the 2014 Private Placement Financing to purchase up to an aggregate of 14,650,000 shares of Common Stock which include (i)
Series A Warrants to purchase 11,100,000 shares issuable thereunder at an exercise price of $0.20 per share; and (ii) Series C
Warrants to purchase 3,550,000 shares at an exercise price of $0.20 per share; |
| • | The MLSC Warrant issued to MLSC in connection with the MLSC Loan Agreement to purchase up to 145,985 shares of Common Stock
with an exercise price of $0.274 per share; and |
| • | Options granted to employees, directors and consultants under the 2013 Plan to purchase up to an aggregate of 12,384,837 shares
of Common Stock at exercise prices ranging from $0.17 to $0.40 per share and with a weighted average exercise price of $0.30 per
share. |
Description of Series D Warrants Whose Underlying Common
Stock is Registered Hereby
Each of the investors participating in the 2015 Private Placement
Financing was issued a Series D Warrant to purchase up to a number of shares of our Common Stock equal to 100% of the shares of
Common Stock purchased by such investor in such financing. The Series D Warrants had an initial exercise price of $0.25 per share,
were exercisable immediately upon their issuance and have a term of exercise equal to five years after their issuance date. The
number of shares of our Common Stock into which each of the Series D Warrants is exercisable and the exercise price therefor are
subject to adjustment as set forth in the Series D Warrants, including adjustments for stock subdivisions or combinations (by any
stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, (i) at anytime during
the term of the Series D Warrants, we may reduce the then current exercise price to any amount and for any period of time deemed
appropriate by our Board; and (ii) certain of the Series D Warrants provide that they shall not be exercisable in the event and
to the extent that the exercise thereof would result in the holder of the Series D Warrant or any of its affiliates beneficially
owning more than 4.9% of our Common Stock, but such ownership limitation may waived at the holder’s discretion, provided
that such waiver will not become effective until the 61st day after delivery of such waiver notice. In addition,
if there is no effective registration statement registering the resale of the shares of Common Stock underlying the Series D Warrants
as of certain time periods (as provided in the Series D Warrants), the Series D Warrant holders may choose to exercise such Series
D Warrants on a “cashless exercise” or “net exercise” basis.
On June 30, 2015, the Initial Closing Date, the Series D Warrants
had an exercise price lower than the market value of our Common Stock, which closed at $0.26 on the OTCQB on such date, resulting
in an aggregate discount to the market price of our Common Stock of $139,364. On July 2, 2015, the date of the Second Closing,
Series D Warrants had an exercise price higher than the market value of our Common Stock, which closed at $0.23 on the OTCQB on
such date, and therefore did not have any discount to the market price of our Common Stock as of such date. The tables below indicate
the total possible discount to the market price of our Common Stock as of June 30, 2015 for the shares of our Common Stock underlying
the Series D Warrants issued upon the Initial Closing, as well as similar information for the Series D Warrants issued upon the
Second Closing.
Series D Warrants Issued on June 30, 2015
Market price per share of our Common Stock on June 30, 2015, the Initial Closing Date: | |
$ | 0.26 | |
| |
| | |
Exercise price per share of the Series D Warrants on the Initial Closing Date: | |
$ | 0.25 | |
| |
| | |
Total possible shares of Common Stock underlying the Series D Warrants issued on the Initial Closing Date: | |
| 13,936,367 | |
| |
| | |
Aggregate market price of all shares of Common Stock underlying the Series D Warrants issued on the Initial Closing Date, based on the market price of our Common Stock on June 30, 2015: | |
$ | 3,623,455 | |
| |
| | |
Aggregate exercise price of all shares of Common Stock underlying the Series D Warrants issued on the Initial Closing Date, based on the exercise price on the Initial Closing Date: | |
$ | 3,484,092 | |
| |
| | |
Total possible discount of the exercise price of the Series D Warrants issued on the Initial Closing Date to the market price of our Common Stock as of June 30, 2015: | |
$ | 139,364 | |
Series D Warrants Issued on July 2, 2015
Market price per share of our Common Stock on July 2, 2015, the date of the Second Closing: | |
$ | 0.23 | |
| |
| | |
Exercise price per share of the Series D Warrants on the date of the Second Closing: | |
$ | 0.25 | |
| |
| | |
Total possible shares of Common Stock underlying the Series D Warrants issued on the date of the Second Closing: | |
| 454,387 | |
| |
| | |
Aggregate market price of all shares of Common Stock underlying the Series D Warrants issued on the date of the Second Closing, based on the market price of our Common Stock on July 2, 2015: | |
$ | 104,509 | |
| |
| | |
Aggregate exercise price of all shares of Common Stock underlying the Series D Warrants issued on the date of the Second Closing, based on the exercise price on the date of the Second Closing: | |
$ | 113,597 | |
| |
| | |
Description of Series A Warrants and Series C Warrants
Upon the closing of the 2014 Private Placement Financing on
February 4, 2014, we issued to each investor therein a Series A Warrant, a Series B Warrant and a Series C Warrant, each to purchase
up to a number of shares of our Common Stock equal to 100% of the shares of Common Stock purchased by such investor in the 2014
Private Placement Financing. The Series A Warrants had an initial exercise price of $0.30 per share, were exercisable immediately
upon their issuance and have a term of exercise equal to five years after their issuance date. The Series B Warrants had an initial
exercise price of $0.35 per share, were exercisable immediately upon their issuance and had a term of exercise equal to the shorter
of 12 months after their issuance date and six months after the first date on which the resale of all Registrable Securities (as
defined in the Securities Purchase Agreement) is covered by one or more effective registration statements. The Series B Warrants
expired on January 3, 2015. The Series C Warrants had an initial exercise price of $0.40 per share, were exercisable immediately
upon their issuance and had an initial term of exercise equal to the shorter of 18 months after their issuance date and nine months
after the first date on which the resale of all Registrable Securities (as defined in the Securities Purchase Agreement) is covered
by one or more effective registration statements. The Series C warrants were set to expire on April 2, 2015 and, as described later
in this document, were amended to expire on July 2, 2016. The number of shares of our Common Stock into which each of the 2014
Warrants is exercisable and the exercise price therefor were subject to adjustment as set forth in the 2014 Warrants, including,
without limitation, adjustments in the event of certain subsequent issuances and sales of shares of our Common Stock (or securities
convertible or exercisable into shares of our Common Stock) at a price per share lower than the then-effective exercise price of
the 2014 Warrants, in which case the per share exercise price of the 2014 Warrants would be adjusted to equal such lower price
per share and the number of shares issuable upon exercise of the 2014 Warrants would be adjusted accordingly so that the aggregate
exercise price upon full exercise of the 2014 Warrants immediately before and immediately after such per share exercise price adjustment
were equal, as well as customary adjustments in the event of stock dividends and splits, subsequent rights offerings and pro rata
distributions to our Common Stockholders. The 2014 Warrants also provide that they shall not be exercisable in the event and to
the extent that the exercise thereof would result in the holder of the Warrant or any of its affiliates beneficially owning more
than 4.9% of our Common Stock.
Following the closing of the 2014 Private Placement Financing,
we entered into a series of amendments with Cranshire on December 1, 2014, March 13, 2015, May 30, 2015 and June 22, 2015 to amend
the terms of the 2014 Warrants. On December 1, 2014, the 2014 Warrants were amended to (i) reduce the exercise price of the Series
B Warrants from $0.35 to $0.20;(ii) reduce the exercise price of the Series C Warrants from $0.40 to $0.20; and (iii) clarify that
each Series of 2014 Warrants may be amended without having to amend all three series of 2014Warrants. On March 13, 2015 and May
30, 2015, the Series C Warrants were amended to extend their expiration date to 5:00 p.m., New York time, on June 2, 2015, and
5:00 p.m., New York time, on July 2, 2015, respectively. On June 22, 2015, the Series A Warrants and Series C Warrants were amended
to remove the anti-dilution provisions contained in the Series A Warrants and Series C Warrants, and in consideration of such amendment,
(a) the expiration date of the Series C Warrants was further extended to 5:00 p.m., New York time, on July 2, 2016; and (b) we
agreed to issue the holders of the Series A Warrants and Series C Warrants up to an additional 570,000 Inducement Shares. In addition,
as a result of the anti-dilution provisions in the Series A Warrants, the exercise price of the Series A Warrants was reduced from
$0.30 to $0.20 upon the closing of the Note Offering on March 13, 2015.
MLSC Warrants
In connection with and as a condition of the MLSC Loan Agreement,
on September 30, 2013, we issued to MLSC the MLSC Warrant to purchase 145,985 shares of our Common Stock at an exercise price of
$0.274 per share. The MLSC Warrant has been issued as partial consideration for the funding provided under the MLSC Loan Agreement
and for no separate consideration. The MLSC Warrant is exercisable immediately upon its issuance and expires on the earlier of
September 30, 2023 and the completion of a sale of substantially all of our assets or a change-of-control transaction.
Description of Convertible Notes
Upon the closing of the Notes Offering on March 13, 2015, we
issued to each of the Convertible Notes Investors a Convertible Note in the principal amount of $250,000. Subject to the terms
and conditions of the Subordination Agreements, the Convertible Notes issued in the Notes Offering become due and payable on March
13, 2016, the Stated Maturity Date, and may not be prepaid. The Convertible Notes bear interest on the unpaid principal balance
at a rate equal to eight percent (8.0%) (computed on the basis of the actual number of days elapsed in a 360-day year) per annum
until either (a) converted into shares of our Common Stock; or (b) the outstanding principal and accrued interest on the Convertible
Notes is paid in full by us. Interest on the Convertible Notes becomes due and payable upon their conversion or the Stated Maturity
Date and may become due and payable upon the occurrence of an event of default under the Convertible Notes, as defined in the Convertible
Notes. The Convertible Notes contain customary events of default, which include, among other things, (i) our failure to pay other
indebtedness of $100,000 or more within the specified cure period for such breach; (ii) the acceleration of the stated maturity
of such indebtedness; (iii) our insolvency; and (iv) the receipt of final, non-appealable judgments in the aggregate amount of
$100,000 or more.
At any time prior to the Stated Maturity Date, the holders of
the Convertible Notes have the right to convert some or all of such Convertible Notes into the number of shares of our Common Stock
determined by dividing (a) the aggregate sum of the (i) principal amount of the Convertible Note to be converted, and (ii) amount
of any accrued but unpaid interest with respect to such portion of the Convertible Note to be converted; and (b) the conversion
price then in effect; provided, however, that in the event that the repayment of the indebtedness accrued under the Convertible
Notes is not permitted under the Subordination Agreements, the term of the Convertible Notes and the holders’ rights to convert
such Convertible Notes into shares of Common Stock will automatically be extended until repayment is permitted under the Subordination
Agreements. The initial conversion price is $0.20 per share, and it may be (A) reduced to any amount and for any period of time
deemed appropriate by our Board of Directors, or (B) reduced or increased proportionately as a result of stock splits, stock dividends,
recapitalizations, reorganizations, and similar transactions. A holder shall not have the right to convert any portion of a Convertible
Note, if after giving effect to such conversion, the holder, together with its affiliates collectively, would beneficially own
more than 4.99% or 9.99% (at the holder’s discretion) of the shares of Common Stock outstanding immediately after giving
effect to such conversion.
2015
Registration Rights Agreement
On the Initial Closing Date, we entered into the 2015 Registration
Rights Agreement pursuant to which we became obligated, subject to certain conditions, to file with the SEC within 90 days after
the closing of the 2015 Private Placement Financing one or more registration statements to register the shares of Common Stock
issued in the Closings and the Series D Warrant Shares for resale under the Securities Act. As a result, we are registering for
resale under this registration statement an aggregate of 28,781,508 shares of Common Stock, representing the 14,390,754 shares
issued at the closing of the 2015 Private Placement and the 14,390,754 shares underlying the Series D Warrants currently held by
the selling securityholders. Pursuant to our filing of this registration statement, we are in compliance with such filing obligation
under the 2015 Registration Rights Agreement. Our failure to satisfy certain deadlines with respect to this registration statement,
including with respect to the effectiveness hereof within five (5) business days after the SEC notifies us that no review of the
registration statement will be made or that the SEC has no further comments on the registration statement, and certain other requirements
set forth in the 2015 Registration Rights Agreement may require us to pay monetary penalties to the investors in the 2015 Private
Placement Financing. Because the Series D Warrants are subject to certain adjustments and permit, in certain circumstances, the
“cashless” exercise thereof, the number of shares that will actually be issuable upon any exercise thereof may be more
or less than the number of shares being offered by this prospectus. In the event of any such adjustment to the number of shares
issuable upon exercise of the Series D Warrants, the provisions of the 2015 Registration Rights Agreement would obligate us to
register for resale any additional shares of our Common Stock that may then be issuable upon exercise of the Series D Warrants.
Under the 2015 Registration Rights Agreement, subject to exception in certain circumstances, we have agreed to keep this registration
statement effective until the earlier of the date on which all shares of Common Stock to be registered hereunder have been sold,
and the twelve month anniversary of the date this registration statement is declared effective by the SEC. If there is not an effective
registration statement covering the resale of any of the shares issued in or issuable upon exercise of the Series D Warrants issued
in the 2015 Private Placement Financing, then the selling securityholders will be entitled to exercise their Series D Warrants
on a “cashless exercise” or “net exercise” basis during the period when the shares issuable upon exercise
of such Series D Warrants are not so registered.
Transfer Agent
The transfer agent for our Common Stock is Empire Stock Transfer.
Our transfer agent’s address is 1859 Whitney Mesa Drive, Henderson, Nevada 89014.
Anti-Takeover Provisions of Nevada State Law
Some features of the Nevada Revised Statutes (“NRS”),
which are further described below, may have the effect of deterring third parties from making takeover bids for control of us or
may be used to hinder or delay a takeover bid. This would decrease the chance that our stockholders would realize a premium over
market price for their shares of Common Stock as a result of a takeover bid.
Acquisition of Controlling Interest
The NRS contain provisions governing acquisition of a controlling
interest of a Nevada corporation. These provisions provide generally that any person or entity that acquires a certain percentage
of the outstanding voting shares of a Nevada corporation may be denied voting rights with respect to the acquired shares, unless
certain criteria are satisfied. Our amended and restated bylaws provide that these provisions will not apply to us or to any existing
or future stockholder or stockholders.
Combination with Interested Stockholder
The NRS contain provisions governing combinations of a Nevada
corporation that has 200 or more stockholders of record with an “interested stockholder.” These provisions only apply
to a Nevada corporation that, at the time the potential acquirer became an interested stockholder, has a class or series of voting
shares listed on a national securities exchange, or has a class or series of voting shares traded in an “organized market”
and satisfies certain specified public float and stockholder levels. As we do not now meet those requirements, we do not believe
that these provisions are currently applicable to us. However, to the extent they become applicable to us in the future, they may
have the effect of delaying or making it more difficult to affect a change in control of the Company in the future.
A corporation affected by these provisions may not engage in
a combination within two years after the interested stockholder acquires his, her or its shares unless the combination or purchase
is approved by the board of directors before the interested stockholder acquired such shares. Generally, if approval is not obtained,
then after the expiration of the two-year period, the business combination may be consummated with the approval of the board of
directors before the person became an interested stockholder or a majority of the voting power held by disinterested stockholders,
or if the consideration to be received per share by disinterested stockholders is at least equal to the highest of:
| • | the highest price per share paid by the interested stockholder within the three years immediately preceding the date of the
announcement of the combination or within three years immediately before, or in, the transaction in which he, she or it became
an interested stockholder, whichever is higher; |
| • | the market value per share on the date of announcement of the combination or the date the person became an interested stockholder,
whichever is higher; or |
| • | if higher for the holders of preferred stock, the highest liquidation value of the preferred stock, if any. |
Generally, these provisions define an interested stockholder
as a person who is the beneficial owner, directly or indirectly of 10% or more of the voting power of the outstanding voting shares
of a corporation, and define combination to include any merger or consolidation with an interested stockholder, or any sale, lease,
exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions with an interested stockholder
of assets of the corporation:
| • | having an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation; |
| • | having an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation;
or |
| • | representing 10% or more of the earning power or net income of the corporation. |
Liability and Indemnification of Directors and Officers
The NRS empower us to indemnify our directors and officers against
expenses relating to certain actions, suits or proceedings as provided for therein. In order for such indemnification to be available,
the applicable director or officer must not have acted in a manner that constituted a breach of his or her fiduciary duties and
involved intentional misconduct, fraud or a knowing violation of law, or must have acted in good faith and reasonably believed
that his or her conduct was in, or not opposed to, our best interests. In the event of a criminal action, the applicable director
or officer must not have had reasonable cause to believe his or her conduct was unlawful.
We have not entered into separate indemnification agreements
with our directors and officers. Our amended and restated bylaws provide that we shall indemnify any director or officer to the
fullest extent authorized by the laws of the State of Nevada. Our amended and restated bylaws further provide that we shall pay
the expenses incurred by an officer or director (acting in his capacity as such) in defending any action, suit or proceeding in
advance of the final disposition of such action, suit or proceeding, subject to the delivery to us by or on behalf of such director
or officer of an undertaking to repay the amount of such expenses if it shall ultimately be determined that he or she is not entitled
to be indemnified by us as authorized in our bylaws or otherwise.
The NRS further provide that a corporation may purchase and
maintain insurance or make other financial arrangements on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise for any liability asserted against him and liability and expenses
incurred by him in his capacity as a director, officer, employee or agent, or arising out of his status as such, whether or not
the corporation has the authority to indemnify him against such liability and expenses. We have secured a directors’ and
officers’ liability insurance policy. We expect that we will continue to maintain such a policy.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise,
we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of such issue.
MARKET PRICE OF AND
DIVIDENDS ON COMMON STOCK AND RELATED MATTERS
Market Information
Our Common Stock is currently quoted on the OTCQB over-the-counter
quotation system. Our Common Stock began quotation on the OTCBB and the OTCQB on June 27, 2013 and since that date has been primarily
traded on the OTCQB. There was no trading of our Common Stock on the OTCBB, OTCQB or any other over-the-counter market prior to
January 2, 2013. Although our Common Stock is currently quoted on the OTCQB, there is a limited trading market for our Common Stock
and there have been few trades in our Common Stock to date. Because our Common Stock is thinly traded, any reported sale prices
may not be a true market-based valuation of our Common Stock.
The table below sets forth reported high and low closing bid
quotations for our Common Stock for the fiscal quarters indicated as reported on the OTCQB. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| |
High | | |
Low | |
| |
| | |
| |
Fiscal Year Ended September 30, 2013 | |
| | | |
| | |
First Quarter ended December 31, 2012* | |
| - | | |
| - | |
Second Quarter ended March 31, 2013* | |
| - | | |
| - | |
Third Quarter ended June 30, 2013 #^ | |
$ | 6.00 | | |
$ | 0.54 | |
Fourth Quarter ended September 30, 2013 | |
$ | 1.30 | | |
$ | 0.34 | |
| |
| | | |
| | |
Fiscal Year Ending September 30, 2014 | |
| | | |
| | |
First Quarter ended December 31, 2013 | |
$ | 0.32 | | |
$ | 0.16 | |
Second Quarter ended March 31, 2014 | |
$ | 0.44 | | |
$ | 0.29 | |
Third Quarter ended June 30, 2014 | |
$ | 0.34 | | |
$ | 0.20 | |
Fourth Quarter ended September 30, 2014 | |
$ | 0.22 | | |
$ | 0.16 | |
| |
| | | |
| | |
Fiscal Year Ending September 30, 2015 | |
| | | |
| | |
First Quarter ended December 31, 2014 | |
$ | 0.25 | | |
$ | 0.16 | |
Second Quarter ended March 31, 2015 | |
$ | 0.24 | | |
$ | 0.18 | |
Third Quarter ended June 30, 2015 | |
$ | 0.26 | | |
$ | 0.18 | |
* There was no market for our Common Stock during this period.
# There was no market for our Common Stock during portions of
this period.
^ The high closing bid quotation of $6.00 does not give effect
to the May 24, 2013 11-for-1 forward stock split.
Dividends
We have never declared or paid any cash dividends or distributions
on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion
and therefore we do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. In addition, under
the terms of the MLSC Loan Agreement, we must obtain MLSC’s prior consent before declaring or paying any dividends during
the term of the MLSC Loan Agreement.
Holders
As of September 10, 2015, there were approximately 100 holders
of record of our Common Stock.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our consolidated financial statements and notes thereto included elsewhere in this prospectus. This discussion and
analysis contains forward looking statements. We make forward-looking statements, as defined by the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995, and in some cases, you can identify these statements by forward-looking
words such as “if,” “will,” “may,” “might,” “will likely result,”
“should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“project,” “intend,” “goal,” “objective,” “predict,” “potential”
or “continue,” or the negative of these terms and other comparable terminology. These forward-looking statements are
based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may
include projections of our future financial performance based on our growth strategies and anticipated trends in our business and
include risks and uncertainties relating to Arch’s current cash position and its need to raise additional capital in order
to be able to continue to fund its operations; the stockholder dilution that may result from future capital raising efforts and
the exercise or conversion, as applicable of Arch’s outstanding options, warrants and convertible notes; anti-dilution protection
afforded investors in prior financing transactions that may restrict or prohibit Arch’s ability to raise capital on terms
favorable to the Company and its current stockholders; Arch’s limited operating history which may make it difficult to evaluate
Arch’s business and future viability; Arch’s ability to timely commercialize and generate revenues or profits from
our anticipated products; Arch’s ability to achieve the desired regulatory approvals in the United States or elsewhere; Arch’s
ability to retain its managerial personnel and to attract additional personnel; the strength of Arch’s intellectual property,
the intellectual property of others and any asserted claims of infringement; and other risk factors identified under the caption
“Risk Factors” in this prospectus and in the documents Arch has filed, or will file with the SEC. We undertake
no duty to update any of these forward-looking statements after the date of filing of this prospectus to conform such forward-looking
statements to actual results or revised expectations, except as otherwise required by law.
Corporate Overview
Arch Therapeutics, Inc. was incorporated under the laws of the
State of Nevada on September 16, 2009 with the name “Almah, Inc.” to pursue the business of distributing automobile
spare parts online. Effective June 26, 2013, Arch 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”), Arch’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 Arch. Prior to the completion of
the Merger, Arch was a “shell company” under applicable rules of the SEC and had no or nominal assets or operations.
As part of the acquisition, Almah management resigned and was replaced with ABS management. Upon its acquisition of ABS, Arch abandoned
its prior business plan and changed its operations to the business of a life science medical device company.
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 assets,
liabilities, accumulated deficit and the historical operations that are reflected in the Company’s unaudited interim consolidated
financial statements are those of ABS. All share information has been restated to reflect the effects of the Merger. The Company’s
financial information was 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.
Business Overview
We are a life science medical device company in the development
stage with limited operations to date. We aim to develop products that make surgery and interventional care faster and safer by
using a novel approach to stop bleeding (referenced as “hemostatic” or “hemostasis”), control leaking (referenced
as “sealant” or “sealing”), and provide other advantages during surgery and trauma care. Our core technology
is based on a self-assembling peptide that creates a physical, mechanical barrier, which could be applied to seal organs or wounds
that are leaking blood and other fluids. We believe our technology could support an innovative platform of potential products in
the field of stasis and barrier applications. Our lead product candidate, AC5 Surgical Hemostatic Device™ (which we sometimes
refer to as “AC5™ ”), is designed to achieve hemostasis in minimally invasive and open
surgical procedures, and we hope to develop other hemostatic or sealant product candidates in the future based on our self-assembling
peptide technology platform. Our plan and business model is to develop products that apply that core technology to use with human
bodily fluids and connective tissues.
AC5 is designed to be a biocompatible synthetic peptide comprising
naturally occurring amino acids. When applied to a wound, AC5 intercalates into the interstices of the connective tissue where
it self-assembles into a physical, mechanical structure that provides a barrier to leaking substances, such as blood. AC5 is designed
for direct application as a liquid, which we believe will make it user-friendly and able to conform to irregular wound geometry.
Additionally, AC5 is not sticky or glue-like, which we believe will enhance its utility in the setting of minimally invasive and
laparoscopic surgeries. Further, AC5 is transparent, which should make it easier for surgeons or other healthcare providers to
maintain a clear field of vision during a surgical procedure and prophylactically stop bleeding as it starts, which we call Crystal
Clear Surgery™.
We have devoted much of our operations to date to the development
of our core technology, including selecting our lead product composition, conducting initial safety and other related tests, generating
scale-up, reproducibility and manufacturing and formulation methods, and developing and protecting the intellectual property rights
underlying our technology platform. Formulation optimization is an important part of peptide development. AC5 formulation optimization,
which is done with extensive collaboration among our team and partners, is focused on optimizing traditional product parameters
to target specifications covering performance, physical appearance, stability, and handling characteristics, among others. Arch
intends to monitor formulation optimization closely, as success or failure in setting and realizing appropriate specifications
may directly impact our anticipated clinical trial and subsequent commercialization timeline.
Our long-term business plan includes the following goals:
| · | conducting successful biocompatibility studies and, subsequently, clinical trials on AC5; |
| · | expanding, maintaining and protecting of our intellectual property portfolio; |
| · | developing appropriate third party relationships to manufacture, distribute, market and otherwise commercialize AC5; |
| · | obtaining regulatory approval or certification of AC5 in the EU, the U.S., and other jurisdictions as we may determine; |
| · | developing academic, scientific and institutional relationships to collaborate on product research and development; and |
| · | developing additional product candidates in the hemostatic, sealant, and/or other fields. |
In furtherance of our long-term business goals, we
expect to continue to focus on the following activities during the next twelve months:
| · | seek additional funding to support the milestones described above and our operations generally; |
| · | work with our large scale manufacturing partners to continue to scale up production of product compliant with current good
manufacturing practices (“cGMP”), which activities will be ongoing as we seek to advance toward, enter into,
and, if successful, subsequently increase commercialization activities; |
| · | complete clinical trial protocols and Clinical Investigational Plans with principal investigators for AC5 and submit application
to Ethics Committee and required authoritative agencies for initiation of our initial clinical trials; |
| · | commence and complete a human clinical trial(s) for AC5, the timeframe for which is dependent upon successful completion of
certain manufacturing, regulatory, and biocompatibility activities; |
| · | continue to expand and enhance our financial and operational reporting and controls; |
| · | expand and enhance our intellectual property portfolio by filing new patent applications, obtaining allowances on currently
filed patent applications, and 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; and |
| · | assess our self-assembling peptide platform in order to identify and select product candidates for advancement into development. |
With respect to our goals relating to AC5, we currently project
requiring at least $3,000,000 - $5,000,000 of additional expenditures to complete the clinical and regulatory milestones to obtain
necessary regulatory approval in Europe. We further expect that obtaining regulatory approvals in the U.S., including conducting
additional required clinical trials, would require at least an additional $7,000,000 - $9,000,000 in capital. In addition, we further
expect to require additional funds for corporate and development programs. These 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.
Merger with ABS and Related Activities
As noted earlier in this document, on June 26, 2013, the Company
completed the Merger with ABS, pursuant to which ABS became a wholly owned subsidiary of the Company. In contemplation of the Merger,
effective May 24, 2013, the Company increased its authorized common stock, par value $0.001 per share (“Common Stock”),
from 75,000,000 shares to 300,000,000 shares and effected a forward stock split, by way of a stock dividend, of its issued and
outstanding shares of Common Stock at a ratio of 11 shares to each one issued and outstanding share. Also in contemplation of the
Merger, effective June 5, 2013, the Company changed its name from Almah, Inc. to Arch Therapeutics, Inc. and changed the ticker
symbol under which its Common Stock trades on the OTC Bulletin Board from “AACH” to “ARTH”.
Liquidity
We are in the development stage and have generated no operating
revenues to date and do not expect to do so in the foreseeable future due to the early stage nature of our current product candidates.
We currently do not have any products that have obtained marketing approval in any jurisdiction. We have net losses for the three
months ended June 30, 2015, of $1,395,245 and net income of $410,759 for the three months ended June 30, 2014. The loss for the
three months ended June 30, 2015 can be attributed to general and administrative costs and increased research and development expenses
associated with pre-clinical development expenses and manufacturing and quality management system consulting and advisory related
expenses. Net income for the three months ended June 30, 2014, includes a decrease on the fair value on derivative liabilities
related to our outstanding warrants of $1,584,818. For the nine months ended June 30, 2015, we have a net loss of $1,850,066 versus
a net loss of $8,777,837 in the comparable period in the prior year. The loss for the nine months ended June 30, 2014 is primarily
attributable to the $7,541,693 expense we recorded upon the issuance of the 2014 Warrants associated with the 2014 Private Placement
Financing. The loss for the nine months ended June 30, 2015 is primarily attributable to general and administrative costs and increased
research and development expenses partially offset by adjustments to the derivative liabilities. We devote a significant amount
of our efforts towards fundraising and product research. Cash used in operating activities increased $247,258 during the nine months
ended June 30, 2015 to $2,626,756, compared to $2,379,498 during the nine months ended June 30, 2014. The increase was primarily
due to an increase in general and administrative expense primarily attributable to increased intellectual property costs and research
and development expenses incurred in connection with activities to develop our primary product candidate.
Recent Developments
The Company entered into an agreement to amend certain provisions
of the Series A, Series B and Series C Warrants (collectively, the “2014 Warrants”) issued by the Company in
February 2014 (the “December 2014 Amendment”) that it issued in connection with the securities purchase agreement
that it entered into on January 31, 2014 (the “Securities Purchase Agreement”). Under the terms of the December
2014 Amendment, which became effective December 1, 2014, the 2014 Warrants were amended to (i) reduce the exercise price of the
Series B Warrants from $0.35 to $0.20, (ii) reduce the exercise price of the Series C Warrants from $0.40 to $0.20, and (iii) clarify
that each Series of 2014 Warrants may be amended without having to amend all three series of 2014 Warrants. The number of shares
of the Company’s Common Stock that may be purchased from the Company upon exercise of each 2014 Warrant remained unchanged.
Prior to their expiration on January 3, 2015, certain holders
of the Warrants exercised portions of their Series B Warrants, resulting in an aggregate issuance of 4,000,000 shares of the Company’s
Common Stock and gross proceeds to the Company from that exercise of $800,000.
On March 13, 2015, the Company issued unsecured 8% Convertible
Notes (the “Notes”) in the aggregate principal amount of $750,000 in a private placement. The principal and
all accrued and unpaid interest on the Notes shall mature and become payable on March 13, 2016, and the Notes (and all interest
accrued thereunder) are currently convertible into Common Stock, par value $0.001 per shares of the Company, at a conversion price
of $0.20 per share, resulting in up to an additional 4,050,000 shares of Common Stock becoming issuable under these Notes if they
are held to maturity and the accrued interest thereunder is converted, along with the outstanding principal, into shares of Common
Stock at the current conversion price.
The Company’s issuance of the Notes triggered the anti-dilution
provisions of the Series A Warrants and, as a result, the exercise price of the Series A Warrants was reduced to $0.20 per share
and the aggregate number of shares issuable under the Series A Warrants increased by 5,700,000 shares from 11,400,000 shares to
17,100,000 shares. In addition, pursuant to separate amendments entered into between the Company and Cranshire Capital Master Fund,
Ltd. (“Cranshire”) on March 13, 2015, and May 30, 2015, respectively the expiration date of the Series C Warrants
was extended to June 2, 2015, and July 2, 2015, respectively.
During the quarter ended June 30, 2015, certain holders of the
Series C Warrants exercised a portion of their warrants for an aggregate issuance of 2,255,000 shares of the Company’s Common
Stock resulting in gross proceeds to the Company of $451,000.
On June 22, 2015, the Company entered into the Amendment to
Series A Warrants and Series C Warrants to Purchase Common Stock (the “June 2015 Amendment”) with Cranshire
to (i) delete the full ratchet anti-dilution provisions set forth in the Series A Warrants and Series C Warrants and (ii) extend
the expiration date of the Series C Warrants from to 5:00 p.m., New York time, on July 2, 2015 to 5:00 p.m., New York time, on
July 2, 2016. In consideration of Cranshire’s entrance into the June 2015 Amendment (and for no additional consideration),
the Company agreed to issue to the holders of the 2014 Warrants up to 570,000 shares of Company’s Common Stock subject to
the delivery by each such holder of an investor certificate to the Company (such shares of Common Stock, the “Inducement
Shares”).
Beginning June 22, 2015 and through June 30, 2015, Arch Therapeutics,
Inc. (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 at a purchase price
of $0.22 per Unit (the “2015 Private Placement Financing”). Each Unit consisted of a share of the Company’s
Common Stock 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 “Warrants,” and the shares issuable
upon exercise of the Series D Warrants, collectively, the “2015 Warrant Shares”). The aggregate gross proceeds
raised by the Company in the 2015 Private Placement Financing totaled approximately $3,200,000.
As part of 2015 Private Placement Financing, the Company conducted
an initial closing (the “Initial Closing”) pursuant to which it sold, and 19 of the 2015 Investors (the “Initial
Investors”) purchased 13,936,367 Units at an aggregate purchase price of $3,066,000. On July 2, 2015, the Company conducted
a second closing (the “Second Closing” and together with the Initial Closing, the “Closings”)
pursuant to which it sold, and 1 of the 2015 Investors purchased 454,387 Units at an aggregate purchase price of $100,000.
On June 1, 2015, the Company executed a collaboration agreement
with CÚRAM Centre for Research in Medical Devices, a new center of excellence for research based in Galway, Ireland that
aims to radically improve health outcomes for patients by developing and collaborating on the development of “smart”
medical devices. As part of the collaboration agreement, Arch and CÚRAM intend to deploy resources in Ireland to advance
Arch’s technology, ranging from early stage research to late stage development. Under Arch oversight and guidance, personnel
from Arch and CÚRAM will work closely together on diverse pipeline projects, including new potential indications and products
as well as human clinical trial planning. In addition to receiving infrastructure support, for each €1 up to an annual maximum
of €250,000 that Arch contributes to its own R&D activities within CÚRAM, CÚRAM will contribute €2
up to an annual maximum of €500,000 to those same activities, made possible by its grant funding from Science Foundation Ireland
(SFI).
Results of Operations
The following discussion of our results of operations should
be read together with the unaudited interim consolidated financial statements included in this report. The period to period comparisons
of our interim results of operations that follow are not necessarily indicative of future results.
Three Months Ended June 30, 2015 Compared to Three Months
Ended June 30, 2014
| |
June 30, | | |
June 30, | | |
Increase | |
| |
2015 | | |
2014 | | |
(Decrease) | |
| |
($) | | |
($) | | |
($) | |
Revenue | |
| - | | |
| - | | |
| - | |
Operating Expenses | |
| | | |
| | | |
| | |
General and administrative | |
| 813,122 | | |
| 825,951 | | |
| (12,829 | ) |
Research and development | |
| 525,107 | | |
| 320,345 | | |
| 204,762 | |
Loss from operations | |
| (1,338,229 | ) | |
| (1,146,296 | ) | |
| (191,933 | ) |
Other income (expense) | |
| (57,016 | ) | |
| 1,557,055 | | |
| (1,614,071 | ) |
Net income (loss) | |
| (1,395,245 | ) | |
| 410,759 | | |
| (1,806,004 | ) |
Revenue
We did not generate revenue in either of the three months ended
June 30, 2015 and 2014.
General and Administrative Expense
General and administrative expenses during the three months
ended June 30, 2015 were $813,122, a decrease of $12,829 compared to $825,951 for the three months ended June 30, 2014. The decrease
in general and administrative expense is primarily attributable to additional expenses being allocated to research and development
offset by an increase in legal and patent expenses.
Research and Development Expense
Research and development expense during the three months ended
June 30, 2015 was $525,107, an increase of $204,762 compared to $320,345 for the three months ended June 30, 2014. The increase
in research and development expense is primarily attributed to an increase in expenses associated with pre-clinical development
expenses and manufacturing and quality management system consulting and advisory related expenses. Research and development expenses
are expected to increase as a result of our plans to commence clinical studies as resources permit. The Company anticipates that
the first clinical trial will commence during the fourth quarter of calendar 2015.
Other Income (Expense)
Other expense during the three months ended June 30, 2015 was
$57,016 a decrease of $1,614,071 compared to other income of $1,557,055 for the three months ended June 30, 2014. This decrease
resulted from a change in adjustments to derivative liabilities of $1,507,508 during fiscal 2015 as compared to fiscal 2014. Other
income during the three months ended June 30, 2014 was primarily related to the recording of the value of the derivative liability.
Nine Months Ended June 30, 2015 Compared to Nine Months Ended
June 30, 2014
| |
June 30, | | |
June 30, | | |
Increase | |
| |
2015 | | |
2014 | | |
(Decrease) | |
| |
($) | | |
($) | | |
($) | |
Revenue | |
| - | | |
| - | | |
| - | |
Operating Expenses | |
| | | |
| | | |
| | |
General and administrative | |
| 2,536,654 | | |
| 2,271,443 | | |
| 234,789 | |
Research and development | |
| 1,327,337 | | |
| 951,101 | | |
| 376,236 | |
Loss from operations | |
| (3,863,991 | ) | |
| (3,222,544 | ) | |
| (641,447 | ) |
Other income (expense) | |
| 2,013,925 | | |
| (5,555,293 | ) | |
| (7,569,218 | ) |
Net loss | |
| (1,850,066 | ) | |
| (8,777,837 | ) | |
| (6,927,771 | ) |
Revenue
We did not generate revenue in either of the nine months ended
June 30, 2015 and 2014.
General and Administrative Expense
General and administrative expenses during the nine months ended
June 30, 2015 were $2,536,654, an increase of $234,789 compared to $2,271,443 for the nine months ended June 30, 2014. The increase
in general and administrative expense is primarily attributable to increased legal costs related to patents, and stock-based compensation
expenses incurred in connection with attracting and retaining key employees. General and administrative expenses are generally
expected to increase as a result of the full year impact of new hires and stock based compensation.
Research and Development Expense
Research and development expense during the nine months ended
June 30, 2015 was $1,327,337, an increase of $376,236 compared to $951,101 for the nine months ended June 30, 2014. The increase
in research and development expense is primarily attributed to an increase in expenses associated with pre-clinical development
expenses and manufacturing and quality management system consulting and advisory related expenses. Research and development expenses
are expected to increase as a result of our plans to commence clinical studies as resources permit. The Company anticipates that
the first clinical trial will commence during the fourth quarter of calendar 2015.
Other Income (Expense)
Other income during the nine months ended June 30, 2015 was
$2,013,925 an increase of $7,569,218 compared to other expense of $5,555,293 for the nine months ended June 30, 2014. The increase
in other income (expense) during the nine months ended June 30, 2015 resulted from a change in adjustments to derivative liabilities
of $7,698,572 during fiscal 2015 as compared to fiscal 2014. Other expenses during the nine months ended June 30, 2014 were primarily
related to the recording of the value of the derivative liability.
Year Ended September 30, 2014 Compared to Year Ended September
30, 2013
| |
September 30, | | |
September 30, | | |
Increase | |
| |
2014 | | |
2013 | | |
(Decrease) | |
Revenue | |
$ | - | | |
$ | - | | |
$ | - | |
Operating Expenses | |
| | | |
| | | |
| | |
General and Administrative | |
| 3,134,285 | | |
| 1,526,075 | | |
| 1,608,210 | |
Research and Development | |
| 1,477,479 | | |
| 218,901 | | |
| 1,258,578 | |
Loss from Operations | |
| 4,611,764 | | |
| 1,744,976 | | |
| 2,866,788 | |
Other Expense | |
| 3,531,059 | | |
| 108,815 | | |
| 3,422,244 | |
Net Loss | |
$ | 8,142,823 | | |
$ | 1,853,791 | | |
$ | 6,289,032 | |
Revenue
We did not generate any revenue in either of the years ended
September 30, 2014 or 2013.
General and Administrative Expense
General and administrative expenses during the year ended September
30, 2014 were $3,134,285, an increase of $1,608,210 compared to $1,526,075 for the year ended September 30, 2013. The increase
in general and administrative expense is primarily attributable to increased legal and accounting fees, investor relations expenses,
personnel costs and stock-based compensation expenses incurred in connection with attracting and retaining key employees. General
and administrative expenses are generally expected to increase as a result of our plans to ramp up operations as resources permit
and requirements to comply with public company reporting and control obligations.
Research and Development Expense
Research and development expenses during the year ended September
30, 2014 were $1,477,479, an increase of $1,258,578 compared to $218,901 for the year ended September 30, 2013. The increase in
research and development expense is primarily attributed to increased pre-clinical development, additional headcount during the
period including the appointment of our Vice President of Research and Development Engineering & Quality Systems as well as
outside consultants. These events were possible due to the financings received during the period. Research and development expenses
are expected to increase as a result of our plans to pursue additional preclinical and clinical studies as resources permit and
otherwise relating to development of our primary product candidate. The Company anticipates commencing a clinical trial for its
leading product candidate, the AC5 Surgical Hemostat Device™, during the first half of 2015.
Other Income (Expense)
Other expense during the year ended September 30, 2014 was $3,531,059,
an increase of $3,422,244 compared to total other expense of $108,815 for the year ended September 30, 2013. The increase in other
expense was a result of the loss on the fair value of derivatives liabilities in excess of proceeds on the issuance of warrants
of $7,541,693, partially offset by a gain in the adjustment to fair market value of the derivative liabilities of $4,121,693. Other
expenses during the year ended September 30, 2013 were primarily related to interest on our outstanding debt.
Liquidity and Capital Resources
To date, we have not generated revenues from the sale of any
products and have principally raised capital through borrowings and the issuance of convertible debt and units consisting of Common
Stock and warrants to fund our operations. At June 30, 2015, inclusive of the funds received upon the Initial Closing of the 2015
Private Placement Financing, we had cash and cash equivalents of $3,273,764 and positive working capital of $1,425,966.
On December 1, 2014, we agreed to amend certain provisions of
the 2014 Warrants (the “December 2014 Amendment”). Under the terms of the December 2014 Amendment, the 2014 Warrants
were amended to (i) reduce the exercise price 2014 of our Series B Warrants from $0.35 to $0.20, (ii) reduce the exercise price
of our Series C Warrants from $0.40 to $0.20, and (iii) clarify that each Series of 2014 Warrants may be amended without having
to amend all three series of 2014 Warrants. The number of shares of our Common Stock which may be purchased from the Company upon
exercise of the 2014 Warrants remained unchanged.
On March 13, 2015, the Company issued Notes in the aggregate
principal amount of $750,000. The Company’s issuance of the Notes triggered the anti-dilution provisions of the Series A
Warrants and, as a result, the exercise price of the Series A Warrants was reduced to $0.20 per share and the aggregate number
of shares issuable under the Series A Warrants increased by 5,700,000 shares from 11,400,000 shares to 17,100,000 shares. In addition,
pursuant to separate amendments entered into between the Company and Cranshire on March 13, 2015 and May 30, 2015, respectively
the expiration date of the Series C Warrants was extended to June 2, 2015 and July 2, 2015, respectively.
On June 22, 2015, the Company entered into the June 2015 Amendment
with Cranshire to (i) delete the full ratchet anti-dilution provisions set forth in the Series A Warrants and Series C Warrants
and (ii) extend the expiration date of the Series C Warrants from to 5:00 p.m., New York time, on July 2, 2015 to 5:00 p.m., New
York time, on July 2, 2016. In consideration of Cranshire’s entrance into the Amendment (and for no additional consideration),
the Company agreed to issue to the holders of the 2014 Warrants up to 570,000 Inducement Shares, subject to the delivery by each
such holder of an investor certificate to the Company.
As of June 30, 2015, 4,000,000 Series B Warrants had been exercised
for an aggregate of 4,000,000 shares of our Common Stock, resulting in gross proceeds to the Company of $800,000. In addition,
2,255,000 Series C Warrants had been exercised for an aggregate of 2,255,000 shares of our Common Stock, resulting in gross proceeds
to the Company of $451,000.
Cash Used in Operating Activities
Working Capital
At June 30, 2015, we had total current assets of $3,317,855
(including cash and cash equivalents of $3,273,764) and working capital of $1,425,966. Our working capital as of June 30, 2015
and September 30, 2014 is summarized as follows:
| |
June 30, | | |
September 30, | |
| |
2015 | | |
2014 | |
Total Current Assets | |
$ | 3,317,855 | | |
$ | 876,990 | |
Total Current Liabilities | |
| 1,891,889 | | |
| 2,723,667 | |
Working Capital | |
$ | 1,425,966 | | |
$ | (1,846,677 | ) |
Total current assets as of June 30, 2015 were $3,317,855, an
increase of $2,440,865 compared to $876,990 as of September 30, 2014. The increase in current assets is primarily attributable
to an $800,000 in gross proceeds received from the exercise of our Series B Warrants, $750,000 proceeds received from our Notes,
$451,000 proceeds received from the exercise of our Series C Warrants and $3,066,000 proceeds received from the 2015 Private Placement
Financing. This was partially offset by an increase in general and administrative expense resulting from intellectual property
costs and research and development expenses incurred in connection with activities to develop our primary product candidate. Our
total current assets as of June 30, 2015 and September 30, 2014 were comprised primarily of cash and cash equivalents, prepaid
expenses and other current assets.
Total current liabilities as of June 30, 2015 were $1,891,889,
a decrease of $831,778 compared to $2,723,667 as of September 30, 2014. The decrease is primarily due to the decrease in the current
derivative liabilities partially offset by the timing of payments in accounts payable. Our total current liabilities as of June
30, 2015 and September 30, 2014 were comprised primarily of the current portion of the derivative liability, the Notes, accounts
payable and accrued expenses.
Cash Flow
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | |
Cash Used in Operating Activities | |
$ | (2,626,756 | ) | |
$ | (2,379,498 | ) |
Cash Used in Investing Activities | |
| - | | |
| - | |
Cash Provided by Financing Activities | |
| 5,067,000 | | |
| 3,624,703 | |
Net increase in cash and cash equivalents | |
$ | 2,440,244 | | |
$ | 1,245,205 | |
Cash Used in Operating Activities
Cash used in operating activities increased $247,258 during
the nine months ended June 30, 2015 to $2,626,756, compared to $2,379,498 during the nine months ended June 30, 2014. The increase
was primarily due to an increase in general and administrative expense primarily attributable to increased intellectual property
costs and research and development expenses incurred in connection with activities to develop our primary product candidate.
Cash Used in Investing Activities
There was no cash used in investing activities during the nine
months ended June 30, 2015 and 2014, respectively.
Cash Provided by Financing Activities
Cash provided by financing activities increased $1,442,297 to
$5,067,000 during the nine months ended June 30, 2015, compared to $3,624,703 during the nine months ended June 30, 2014. For the
nine months ended June 30, 2015, the cash provided by financing resulted from the $800,000 in proceeds received by us from the
exercise of Series B Warrants to purchase 4,000,000 shares of our Common Stock, proceeds received of $451,000 from the exercise
of the Series C Warrants to purchase 2,255,000 shares of our Common Stock, proceeds received of $750,000 from the issuance of the
8% Convertible Note and proceeds received of $3,066,000 from 2015 Private Placement Financing to purchase 13,936,363 shares of
our Common Stock and Series D Warrants exercisable for an equivalent number of shares. For the nine months ended June 30, 2014,
cash provided by financing activities resulted from the $1,000,000 funding obtained under the MLSC Loan Agreement and $2,624,703
from the issuance of Common Stock and 2014 Warrants.
Cash Requirements
We anticipate that our operating and other expenses will increase
significantly as we continue to implement our business plan and pursue our operational goals. We estimate that our cash requirements
for our fiscal year ending September 30, 2015 will be approximately $4,000,000. 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 September 10, 2015, we
believe that we will have sufficient cash to meet our anticipated requirements through May 2016. We will require additional financing
to fund our planned future operations, including the continuation of our ongoing research and development efforts, seeking to license
or acquire new assets, and researching and developing any potential patents, the related compounds and any further intellectual
property that we may acquire. In addition, our estimates of the amount of cash necessary to operate our business may prove to be
wrong and we could spend our available financial resources much faster than we currently expect. Further, our estimates regarding
our use of cash could change if we encounter unanticipated difficulties or other issues arise, in which case our current funds
may not be sufficient to operate our business for the period we expect.
We do not presently have, nor do we expect in the near future
to have, revenue to fund our business from our operations, and will need to obtain all of our necessary funding from external sources
for the foreseeable future. We do not have any commitments for future capital. Significant additional financing will be required
to fund our planned operations in the near term and in future periods, including research and development activities relating to
our principal product candidate, seeking regulatory approval of that or any other product candidate we may choose to develop, commercializing
any product candidate for which we are able to obtain regulatory approval or certification, seeking to license or acquire new assets
or businesses, and maintaining our intellectual property rights and pursuing rights to new technologies. We may not be able to
obtain additional financing on commercially reasonable or acceptable terms when needed, or at all. We are bound by certain terms
and obligations that may limit or otherwise impact our ability to raise additional funding in the near-term, including restrictive
covenants in the MLSC Loan Agreement that limit our ability to incur certain types of additional indebtedness. These restrictions
and provisions could make it more challenging for us to raise capital through the incurrence of debt or through equity issuances.
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 investments.
As previously noted, since inception we have funded our
operations primarily through equity and debt financings and we expect to 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.
Additionally, the terms of securities we may issue in future capital-raising transactions may be more favorable for our new
investors, and in particular 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, which would be in addition to those currently imposed by the MLSC Loan Agreement. 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 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.
Going Concern
We have not earned operating revenues from sales of products
or services, and have recurring losses from operations. The continuation of our business as a going concern is dependent upon raising
additional capital and eventually attaining and maintaining profitable operations. As of June 30, 2015, there is substantial doubt
about the Company’s ability to continue as a going concern. The unaudited interim consolidated financial statements included
in this prospectus do not include any adjustments that might be necessary should operations discontinue.
Critical Accounting Policies and Significant Judgments and
Estimates
Pursuant to certain disclosure guidance issued by the SEC, the
SEC defines “critical accounting policies” as those that require the application of management’s most difficult,
subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods. Our critical accounting policies that we anticipate will require the application
of our most difficult, subjective or complex judgments are as follows:
Basis of Presentation
The consolidated financial statements presented with this prospectus
include the accounts of Arch Therapeutics, Inc. and its wholly owned subsidiary, Arch Biosurgery, Inc. a life science medical device
company. All intercompany accounts and transactions have been eliminated in consolidation.
The Company is in the development stage and is devoting substantially
all of its efforts to developing technologies, raising capital, establishing customer and vendor relationships, and recruiting
new employees.
Income Taxes
In accordance with FASB ASC 740, Income Taxes, we recognize
deferred tax assets and liabilities for the expected future tax consequences or events that have been included in our financial
statements and/or tax returns. Deferred tax assets and liabilities are based upon the differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and for loss and credit carryforwards using enacted tax rates
expected to be in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
We provide reserves for potential payments of tax to various
tax authorities related to uncertain tax positions when management determines that it is probable that a loss will be incurred
related to these matters and the amount of the loss is reasonably determinable. We have no reserves related to uncertain tax positions
as of June 30, 2015 and September 30, 2014.
Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation in
accordance with the ASC 718, Compensation-Stock Compensation (“ASC 718”) that requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial
statements based on their fair values. The Company accounts for non-employee stock-based compensation in accordance with the guidance
of ASC 505, Equity (“ASC 505”), which requires that companies recognize compensation expense
based on the estimated fair value of options granted to non-employees over their vesting period, which is generally the period
during which services are rendered by such non-employees. ASC 505 requires the Company to re-measure the fair value of stock options
issued to non-employees at each reporting period during the vesting period or until services are complete.
In accordance with ASC 718, the Company has elected to use the
Black-Scholes option pricing model to determine the fair value of options granted and recognizes the compensation cost of share-based
awards on a straight-line basis over the vesting period of the award.
The determination of the fair value of share-based payment awards
utilizing the Black-Scholes model is affected by the fair value of the Common Stock and a number of other assumptions, including
expected volatility, expected life, risk-free interest rate and expected dividends. The Company does not have a history of market
prices of the Common Stock, and as such volatility is estimated in accordance with ASC 718-10-S99 Staff Accounting Bulletin (“SAB”)
No. 107, Share-Based Payment (“SAB No. 107”), using historical volatilities of similar public entities.
The life term for awards, therefore, uses the simplified method for all “plain vanilla” options, as defined in SAB
No. 107 and the contractual term for all other employee and non-employee awards. The risk-free interest rate assumption is based
on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on history and the expectation
of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Stock-based compensation expense, when recognized in the consolidated financial statements,
is based on awards that are ultimately expected to vest.
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
ASC 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.
Recent Accounting Guidance
Accounting Standards Update (ASU) 2015-03 “Interest –
Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs” was issued by the FASB in April
2015. The purpose of this amendment requires that debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts 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, 2015. Early application is permitted. The Company does not believe that this guidance will have a
material impact on its consolidated results of operations, financial position or disclosures.
ASU 2015-02, “Consolidation (Topic 810) – Amendments
to the Consolidation Analysis”, was issued by the FASB in February 2015. The purpose of this amendment is to change the analysis
that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. 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, 2015. Early application is permitted. The Company does not believe that this guidance will have a
material impact on its consolidated results of operations or financial position or disclosures.
ASU 2014-16, “Derivatives and Hedging (Topic 815)”
(“ASU 2014-16”) was issued by the FASB in November 2014. The primary purpose of the ASU is to determine whether the
host contract in a Hybrid Financial Instrument issued in the form of a share is more akin to debt or equity. ASU 2014-16 is effective
for public entities for the fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results
of operations or financial position or disclosures.
ASU 2014-15, “Presentation of Financial Statements-Going
Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to ‘Continue as a Going Concern”
(“ASU 2014-15”) was issued by the FASB in August 2014. The primary purpose of the ASU is to provide guidance in GAAP
about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue
as a going concern and to provide related footnote disclosures. The amendments should reduce diversity in the timing and content
of footnote disclosure. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for the annual periods
and interim periods thereafter. Early adoption is permitted. We are a development stage company and do not currently generate revenue.
The Company is currently assessing the impact of this guidance, but does not believe that it will have a material impact on its
consolidated results of operations, financial position or disclosures.
ASU 2014-12, “Compensation-Stock Compensation (Topic 718)
– Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
the Requisite Service Period” (“ASU 2014-12”) was issued by the FASB in June 2014. ASU 2014-12 requires that
compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved
and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.
ASU 2014-12 is effective for public business entities for annual periods and interim periods within the annual periods beginning
after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of this guidance, but does
not believe that it will have a material impact on its consolidated results of operations, financial position or disclosures.
ASU 2014-09, “Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”) was issued by the FASB in May 2014. The primary purpose of the ASU is to develop a common revenue
standard for revenue recognition between the FASB and the International Accounting Standards Board (IASB). The ASU removes inconsistencies
and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, and improves comparability
of revenue recognition practices across entities, industries, jurisdictions and capital markets, among other items. We are a development
stage company and do not currently generate revenue. ASU 2014-09 is effective for public business entities for annual periods beginning
after December 15, 2017 (as modified by ASU 2015-14).
ASU No. 2014-08, “Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), was issued by the FASB in April 2014. This
update changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations.
ASU 2014-08 requires that an entity report as a discontinued operation only a disposal that represents a strategic shift in operations
that has a major effect on its operations and financial results. ASU 2014-08 is effective for public business entities for annual
periods, and interim periods within those annual periods, beginning on or after December 15, 2014. Early adoption is permitted,
but only for a disposal (or classification as held for sale) that has not been reported in financial statements previously issued
or made available for issuance. The ASU must be applied prospectively. The Company does not believe this guidance will have a material
impact on its consolidated results of operations or financial position.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to stockholders.
OUR 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 prospectus.
Corporate Overview
We were incorporated under the laws of State of Nevada on September
16, 2009 as Almah, Inc. On May 10, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”)
with Arch Biosurgery, Inc. (“ABS”) and Arch Acquisition Corporation, our wholly owned subsidiary formed for
the purpose of the transaction, pursuant to which Arch Acquisition Corporation merged with and into ABS and ABS thereby became
our wholly owned subsidiary (the “Merger”). The Merger closed on June 26, 2013. In contemplation of the
Merger, effective May 24, 2013, we effected a forward stock split, by way of a stock dividend, of our issued and outstanding shares
of Common Stock at a ratio of 11 shares to each one issued and outstanding share, and effective June 5, 2013, we changed our name
from Almah, Inc. to Arch Therapeutics, Inc.
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., and on June 26, 2013, ABS changed its name from Arch Therapeutics, Inc. to Arch Biosurgery, Inc.
Prior to the completion of the Merger, the Company was a “shell
company” under applicable rules of the SEC, and had no or nominal assets or operations. Upon the closing of the Merger, we
abandoned our prior business plan and are pursuing a business as a life science medical device company as our sole business.
Our Current Business
Our Company is in the development stage, has generated no operating
revenues to date, and is devoting substantially all of its operational efforts toward product research and development. We aim
to develop products that make surgery and interventional care faster and safer by using a novel approach to stop bleeding (referenced
as “hemostatic” or “hemostasis”), control leaking (referenced as “sealant”
or “sealing”), and provide other advantages during surgery and trauma care. Our core technology is based on
a self-assembling peptide that creates a physical, mechanical barrier, which could be applied to seal organs or wounds that are
leaking blood and other fluids. We believe our technology could support an innovative platform of potential products in the field
of stasis and barrier applications. Our plan and business model is to develop products that apply that core technology for use
with bodily fluids and tissues.
To date, the Company has principally raised capital through
borrowings and the issuance of convertible debt and units consisting of Common Stock and warrants. The Company expects to incur
substantial expenses for the foreseeable future relating to the research, development, clinical trials, and commercialization of
its potential products. The Company believes that its current cash and cash equivalents on hand will only be sufficient to meet
its anticipated cash requirements through May 2016. The Company will be required to raise additional capital, obtain alternative
means of financial support, or both, during May 2016 in order to continue to fund operations. 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.
Our Core Technology
Our primary product, AC5 Surgical Hemostatic Device™ (which
we sometimes refer to as “AC5”or “AC5™”, “AC5 Surgical Hemostat”
or “AC5 Surgical Hemostat™”), relies on our self-assembling peptide technology and is designed to
achieve hemostasis in minimally invasive and open surgical procedures. We intend to develop other product candidates based on our
technology platform for use in a range of indications. AC5 is a synthetic peptide comprising L amino acids, commonly referred to
as naturally occurring amino acids. When applied to a wound, AC5 intercalates into the interstices of the connective tissue where
it self-assembles into a physical, mechanical nanoscale structure that provides a barrier to leaking substances, such as blood.
We believe that the results of early data from preclinical tests have shown quick and effective hemostasis with the use of AC5
relative to that reported with other types of hemostatic agents, and that time to hemostasis is comparable among test subjects
regardless of whether such test subject had or had not been treated with therapeutic doses of anticoagulant or antiplatelet medications,
commonly called “blood thinners”. Based on testing to date, we believe that AC5 is biocompatible. AC5 is designed for
application as a liquid, which we believe will make it user-friendly and able to conform to irregular wound geometry. Additionally,
AC5 does not possess sticky or glue-like handling characteristics, which we believe will enhance its utility in several settings
including, minimally invasive surgical procedures. Further, in certain settings, AC5 lends itself to a concept that we call Crystal
Clear Surgery™; the transparency and physical properties of AC5 enable a surgeon to operate through it in order to maintain
a clearer field of vision and prophylactically stop or lessen bleeding as it starts.
We have devoted substantially all of our operations to date
to the research and development of our core technology, including selecting our initial product composition, conducting initial
safety and other related tests, generating scale-up, reproducibility and manufacturing and formulation methods, and developing
and protecting the intellectual property rights underlying our technology platform. Manufacturing method and formulation optimization
are important parts of peptide development. Manufacturing and formulation optimization for our product candidates, including AC5,
has been and continues to be done with extensive collaboration among our team and partners. The processes are focused on optimizing
traditional product parameters to target specifications covering performance, biocompatibility, physical appearance, stability,
and handling characteristics, among others. We and our partners intend to monitor manufacturing and formulation methods closely,
as success or failure in both setting and realizing appropriate specifications may directly impact the anticipated clinical trial
and subsequent commercialization timelines for AC5.
Preclinical Development
We are advancing through our planned preclinical program for
AC5. We are focused on scale-up of selected manufacturing methods and formulation optimization while preparing for our first-in-human
clinical trial. In parallel, we are conducting certain preclinical in vivo and in vitro tests, while additional preclinical
testing will occur after completion of the manufacturing scale-up and formulation optimization steps. Self-assembling peptide manufacturing
and formulation optimization are challenging, and any delays could negatively impact our anticipated clinical trial and subsequent
commercialization timeline. In order to market and sell AC5 and other Arch planned products, successful human clinical trials,
additional testing, and regulatory approvals and certifications will be required. A co-founding inventor of certain of our
technology, Dr. Rutledge Ellis-Behnke, performed a significant portion of the early preclinical animal experimentation conducted
on our technology. Some of the most significant findings from Dr. Ellis-Behnke’s studies have been published. Additionally,
through collaboration with the National University of Ireland system, preclinical bench-top and animal studies have been performed
in Dublin and Cork, Ireland. As a continuation of our commitment to our product development we recently entered into a collaboration
agreement with National University of Ireland Galway (“NUIG”) in Galway, Ireland on May 28, 2015 (the “Project
Agreement”). Pursuant to the Project Agreement, NUIG will provide, via the
CÚRAM Centre for Research in Medical Devices (“CÚRAM”), a new major national research center headquartered
at NUIG that was established in January 2015 as part of a six-year grant from the Irish government,
personnel, infrastructure support and grant funding in connection with a research program intended to facilitate the continued
development of AC5 (the “Project”). Under the terms of the Project
Agreement, which has a term that will end upon the earlier of the completion of the Project or the sixth anniversary of the execution
date of the Project Agreement, we may contribute up to a maximum of two hundred and fifty thousand euro (€250,000) to the
Project per year, and NUIG will match such funds at a 2:1 ratio using funds allocated to NUIG by Science Foundation Ireland’s
(“SFI”) Research Centres Programme. In addition, while NUIG will
initially retain ownership of all intellectual property developed in connection with the Project (collectively, “Project
IP”), any such Project IP that was either based on or derived from our existing
intellectual property (“Derivative IP”) will be assigned back to
us for a nominal fee. For any Project IP that does not constitute Derivative IP (“Non-Derivative IP”),
we will have a right of first negotiation to negotiate an exclusive license to such Non-Derivative IP on customary terms for agreements
of that nature, subject to a grant-back to NUIG for research and academic purposes. We have also engaged, on a fee for service
basis, several private third party facilities in the United States and Europe to perform certain preclinical bench-top and animal
studies, which are often conducted with assistance from our scientific team, and we continue to engage third parties for such services
as needed and as appropriate.
In the preclinical animal tests conducted to date, AC5 has demonstrated
rapid average time to hemostasis (“TTH”) when applied to a range of animal tissues. Certain studies have tested
TTH when using AC5 during surgical procedures compared to TTH when using a control substance, a saline control substance, a control
peptide, and a cautery control substance during those same procedures. The results of those tests have shown a TTH of approximately
10 – 30 seconds when AC5 was applied, compared to a TTH ranging from 80 to significantly more than 300 seconds when various
control substances were applied, depending on the nature of the control substance and procedure performed. In several studies comparing
AC5 to popular commercially available branded hemostatic agents (absorbable cellulose, flowable gelatin with and without thrombin,
and fibrin) applied to stop the bleeding from full thickness penetrating wounds surgically created in rat livers, AC5 achieved
hemostasis in significantly less than 30 seconds, whereas the control products took from 50% to over 400% longer than AC5 to achieve
hemostasis.
Additionally, the preclinical tests that have been conducted
to date provide evidence that AC5 can stop bleeding in models of liver bleeding in animals that had been treated with therapeutic
amounts of anticoagulant and antiplatelet medications, commonly called “blood thinners.” In one preclinical study,
an independent third-party research group obtained positive data assessing the use of AC5 in animals that had been treated with
therapeutic doses of the antiplatelet medications Plavix® (clopidogrel) and aspirin, alone and in combination. The results
of the study were consistent with data obtained from two prior preclinical studies, in which AC5 quickly stopped bleeding from
surgical wounds created in rats following treatment with clinically relevant doses of the anticoagulant medication heparin. In
these studies, the average TTH after AC5 was applied to bleeding liver wounds of animals that had been medicated with anticoagulants
was comparable to the average TTH as measured in their non-anticoagulated counterparts. Similar results were obtained in independent
third-party studies assessing the use of AC5 in patients on the anticoagulant heparin and in patients on the anti-platelet medication,
ticagrelor (Brilinta® in the US, Brilique in Europe®.)
Finally, in the preclinical tests conducted to date, AC5 has
also demonstrated biocompatibility and normal healing of tissue treated with the product. Further, animals whose liver, spleen,
femoral artery, eye or brain was treated with AC5 have shown no ill effects. We believe that the peptide degrades into the naturally
occurring amino acids from which it was originally synthesized, which are molecules that already exist in large quantities in the
human body.
Our current and planned near-term activities are focused on
manufacturing scale-up, formulation optimization, and other preclinical activities, and planning for clinical trial testing of
AC5, which we anticipate will commence during the fourth quarter of calendar year 2015.
Development and Commercialization Strategy
Our present business model is to operate with a relatively small
internal team of key personnel and engage third party service providers to conduct larger scale research, development and manufacturing
activities. Our internal team collectively has a broad range of expertise and experience working with and managing third party
vendors. This general approach enables us to use the services of third party entities, which are expert, in various aspects of
our operations, while preserving capital and efficiencies by avoiding certain internal scale-up costs and resource duplication.
Research and Development; Manufacturing
Use of Third Party Relationships
To date, we have engaged third party laboratory facilities run
by experts in Europe and the U.S. to perform preclinical research and development activities. Those engagements have assisted in
our development of our primary product candidate, as well as our generation of appropriate analytical methods, scale-up, and other
procedures for use as a “blueprint” for third party manufacturers to produce the product on a larger scale for purposes
of further preclinical and clinical testing and ultimately, if required approvals are obtained, commercialization.
We have initiated the transition to traditional contract manufacturing
and related organizations. We have commenced relationships and work with manufacturers operating with the current good manufacturing
practices (“cGMP”) required by applicable regulatory agencies in order to scale up and produce formulation material
to be used for final preclinical testing and clinical trials.
Manufacturing Methods
We believe that the manufacturing methods used for a product,
including the type and source of ingredients and the burden of waste byproduct elimination, are important determinants of its opportunity
for profitability. Industry participants are keenly aware of the downsides of technologies that rely on expensive biotechnology
techniques and facilities for manufacture, onerous and expensive programs to eliminate complex materials, or ingredients that are
sourced from the complicated process of human or other animal plasma separation, since those products typically are expensive,
burdensome to produce, and at greater risk for failing regulatory oversight.
The manufacturing methods that we intend to be utilized to produce
AC5 and other potential future product candidates rely on synthetic organic chemistry, a detailed, complex and difficult process
to manage. Although use of those methods requires that we engage a manufacturer that can employ certain expertise with the technology,
skill and know-how involved with those methods, the required manufacturing equipment to use those methods is widely available.
Furthermore, improvements in relevant synthetic manufacturing techniques over the past decade have reduced their complexity and
cost, while increasing large-scale cGMP capacity. Moreover, our planned product candidates, including AC5, will be synthesized
from naturally occurring ingredients that are not sourced from humans or other animals, but do exist in humans in their natural
state. That type of ingredient may be more likely to be categorized as “generally recognized as safe”, or “GRAS”,
by the U.S. Food and Drug Administration (“FDA”).
Regulatory
Medical Device Classification
In February of 2015, we announced that The British Standards
Institution (“BSI”), a Notified Body (which is a private commercial entity designated by the national government
of a European Union (“EU”) member state as being competent to make independent judgments about whether a medical
device complies with applicable regulatory requirements) in the EU, confirmed that AC5 fulfills the definition of a medical device
within the EU and will be classified as such in consideration for CE mark designation. The FDA and other regulatory authorities
or related bodies finally determine the classification of AC5, and we anticipate that they will rule similarly to BSI. We believe
that our primary product candidate meets the criteria for a medical device. Generally, a product is a medical device if it requires
neither metabolic nor chemical activity to achieve the desired effect. Furthermore, a medical device can achieve its desired effects
without requiring a body (animal/human), whereas a drug or a biologic requires a body in order to operate. The AC5 mechanism of
assembly into a barrier can occur outside of a body and is accordingly consistent with the medical device definition.
Medical devices in the EU and the U.S. are classified along
a spectrum. Class III status, which is the higher-level classification for devices compared to Classes II and I, involves additional
procedures and regulatory scrutiny of the product candidate to obtain approvals. AC5 could be regulated as either a Class III or
a Class II medical device in these jurisdictions, depending upon the application, subject to the process for obtaining a CE mark
in the EU and the premarketing authorization process in the U.S.
Biocompatibility Tests and Clinical Trials
Before initiating any human clinical trials, we will need to
complete the biocompatibility assessment of AC5. Standard required tests to assess biocompatibility, as set forth in ISO 10993
issued by the International Organization for Standardization, include:
| • | in vitro blood compatibility; |
| • | in vitro Ames assay (mutagenic activity); |
| • | irritation/intracutaneous reactivity; |
| • | sensitization (allergenic reaction); |
| • | implantation (performed on devices that contact the body’s interior); |
| • | pyrogenicity (causing fever or inflammation); |
| • | in vitro chromosome aberration assay (structural chromosome changes). |
We are currently engaged in biocompatibility studies for AC5.
Following the successful completion of biocompatibility tests for AC5, we expect to focus on conducting required human clinical
trials. We currently plan to conduct the first-in-human clinical trial of AC5 in Europe. Assuming successful results of the trial,
we expect that we will then pursue a CE mark, the required European approval to market and commercialize a medical device such
as AC5, prior to pursuing approval by the U.S. FDA.
We expect that we will pursue approvals for use of AC5 as a
hemostatic agent in surgical and dermatological settings, and we may also seek to obtain approvals for additional potential indications
for use of the product, which we may pursue either opportunistically or once initial regulatory approval for the product is obtained.
Commercialization
Our long-term commercialization plan for at least some of our
product candidates could entail entering into one or more collaboration agreements or strategic partnerships. Based on our current
general approach and strategy of utilizing the expertise and resources of third party service providers and maintaining a relatively
small internal team, we currently expect that we may pursue some degree of strategic collaborations or partnerships with third
parties, which could include licensing arrangements, distribution and supply partnerships, engagement of external regulatory experts
and/or marketing and sales teams, among other types of potential relationships. We presently believe that certain relationships
could improve our ability to obtain regulatory approval for our product candidates and attain market acceptance for and profitable
sales of those product candidates, and that our current and planned activities and milestones relating to AC5 are well-aligned
with the needs of the market and potential partners and collaborators that may wish to enter or expand their presence in our target
markets.
We envision the potential future customers in the marketplace
for AC5 and any other hemostatic or sealant agent we may pursue will include surgeons and other doctors, government agencies such
as the Department of Defense, hospital and operating room management and ambulance and other trauma specialists.
Plan of Operations
Our long-term business plan includes the following goals:
| • | conducting successful biocompatibility studies and, subsequently, clinical trials on AC5; |
| • | expanding and maintaining protection of our intellectual property portfolio; |
| • | developing appropriate third party relationships to manufacture, distribute, market and otherwise commercialize AC5; |
| • | obtaining regulatory approval or certification of AC5 in the EU, the U.S., and other jurisdictions as we may determine; |
| • | developing academic scientific and institutional relationships to collaborate on product research and development; and |
| • | developing additional product candidates in the hemostatic, sealant, and/or other fields. |
In furtherance of our long-term business goals, we expect to
continue to focus on the following activities during the next twelve months:
| • | seek additional funding to support the milestones described previously and our operations generally; |
| • | work with our large scale manufacturing partners to scale up production of product compliant with cGMP, which activities will
be ongoing as we seek to advance toward, enter into, and, if successful, subsequently increase commercialization activities; |
| • | complete the clinical trial protocol and Clinical Investigational Plan with principal investigators for AC5 and submit application
to Ethics Committee and required authoritative agencies for our initial clinical trial; |
| • | commence and complete a human clinical trial for AC5, the timeframe for which is dependent upon successful completion of certain
manufacturing, regulatory, and biocompatibility activities; |
| • | continue to expand and enhance our financial and operational reporting and controls; |
| • | expand and enhance our intellectual property portfolio by filing new patent applications, obtaining allowances on currently
filed patent applications, and 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; and |
| • | assess our self-assembling peptide platform in order to identify and select product candidates for advancement into development. |
With respect to our goals relating to AC5, we currently project
requiring at least $3,000,000 - $5,000,000 of additional expenditures to complete the clinical and regulatory milestones to obtain
necessary regulatory approval in Europe. We further expect that obtaining regulatory approvals in the U.S., including conducting
additional required clinical trials, would require at least an additional $7,000,000 - $9,000,000 in capital. In addition, we further
expect to require additional funds for corporate and development programs. These 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 the date of this filing, believe that we will have sufficient cash to meet our anticipated requirements through May 2016.
We could spend our financial resources much faster than we expect, in which case our current funds may not be sufficient to operate
our business for the entire duration of that period.
We have no commitments for any future capital. As indicated
above, we will require significant additional financing to fund our planned operations, including further research and development
relating to AC5, seeking regulatory approval of that or any other product we may choose to develop, commercializing any product
for which we are able to obtain regulatory approval or certification, seeking to license or acquire new assets or business, and
maintaining our intellectual property rights, pursuing new technologies and for financing the investor relations and incremental
administrative costs associated with being a public corporation. We do not presently have, nor do we expect in the near future
to have, revenue to fund our business from operations, and we will need to obtain all of our necessary funding from external sources
for the foreseeable future. We may not be able to obtain additional financing on commercially reasonable or acceptable terms when
needed, or at all. If we cannot raise the money that we need in order to continue to develop our business, we will be forced to
delay, scale back or eliminate some or all of our proposed operations. If any of these were to occur, there is a substantial risk
that our business would fail and our stockholders could lose all of their investment.
Since inception, we have funded our operations primarily through
borrowings and the issuance of convertible debt and units consisting of Common Stock and warrants, and we expect to continue to
seek to do so in the future. If we obtain additional financing by issuing equity securities, our existing stockholders’ ownership
will be diluted. The terms of securities we may issue in future capital-raising transactions may be more favorable for our new
investors. Further, newly issued securities may include preferences, superior voting rights and the issuance of warrants or other
derivative securities, which may have additional dilutive effects. If we obtain additional financing by incurring debt, we may
become subject to significant limitations and restrictions on our operations pursuant to the terms of any loan or credit agreement
governing the debt. Further, obtaining any loan, assuming a loan would be available when needed on acceptable terms, would increase
our liabilities and future cash commitments. We may also seek funding from additional collaboration or licensing arrangements in
the future, which may require that we relinquish potentially valuable rights to our product candidates or proprietary technologies
or grant licenses on terms that are not favorable to us. Moreover, regardless of the manner in which we seek to raise capital,
we may incur substantial costs in those pursuits, including investment-banking fees, legal fees, accounting fees, printing and
distribution expenses and other related costs.
Industry and Competition
According to a 2012 report produced by MedMarket Diligence,
LLC, approximately 114 million surgical and procedure-based wounds occur annually worldwide, including 36 million from surgery
in the U.S. Since the early days of modern minimally invasive surgery in the 1990s, the percent of surgeries performed minimally
invasively has increased significantly such that it is now widespread and common. Minimally invasive surgery is often called laparoscopic
surgery, although there are additional types. Minimally invasive surgical procedures often present the surgeon with fewer margins
for potential error and less capacity to deal with certain risks, such as excessive bleeding, without converting the surgery to
a traditional open procedure. We believe that the performance and safety of both minimally invasive and traditional surgeries and
other procedures could benefit from newer hemostatic agents and sealants, because surgical and trauma patients are at significant
risk for morbidity and mortality from bleeding and/or leaking body fluid.
Additional trends that support a demand for hemostatic and sealant
products include the following:
| • | overall procedure volume growth; |
| • | ambulatory same day surgery volume growth; |
| • | minimally invasive surgery procedure volume growth; |
| • | efforts to reduce operating room time; and |
| • | increased prevalence of anticoagulant use, which predispose patients to bleeding. |
As a result of this demand, use of hemostatic agents and sealants
is increasing. According to MedMarket Diligence, the market for these products achieved approximately $3.4 billion in worldwide
sales in 2010 and is projected to reach $5.5 billion in 2015 and surpass $6.5 billion in 2017. Over two-thirds of those sales are
for hemostats. Further, the projected growth rate and incremental demand for sealants may be even higher than that for hemostats
due to a general lack of available products and potentially larger unmet need.
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 the comparable to those of their earlier-generation
counterparts, as revolutionary advances in underlying technologies have been elusive.
In the course of developing AC5, we engaged commercial strategy
and marketing consultants to understand the needs of potential customers and to assess product feature preferences. As we expected,
better efficacy and reliability were identified as product features important to those customers, and we discovered that other
product features are important to achieving broad market acceptance. Surgeons, operating room managers, sales representatives for
currently available hemostatic products, and hospital decision-makers identified the following as desirable characteristics of
a hemostatic agent, which we carefully considered in developing AC5 and which we believe are well satisfied by our primary product
candidate:
| • | easily handled and applied; |
| • | promotes a clear field of vision and does not obstruct view; |
| • | non-viscous and flowable; |
| • | non-sticky (to tissue or equipment); |
| • | indifferent to status of coagulation cascade or “blood thinning” drugs; |
| • | contains neither blood nor tissue components from either humans or other animals. |
We hope that AC5 will meet these particular market demands,
and we anticipate its use in minimally invasive or laparoscopic surgery as well as open surgery. While open surgery represents
the more established market for hemostatic agents, the number of surgeries performed by minimally invasive techniques, including
laparoscopic surgery, has been growing over the past two decades and is significant. Less invasive laparoscopic procedures produce
shorter recovery times, faster discharges, less scarring, less pain and less need for pain medications. Many of the hemostasis
products currently available do not possess certain features and handling characteristics required for use in a laparoscopic setting.
For instance, many available products are difficult to use laparoscopically because they tend to be sticky, powdery, fabric-based
or are otherwise difficult to control and/or insert into the small tubes used during many laparoscopic procedures. We believe that
the novel features and differentiating characteristics of AC5 will make it more suitable for laparoscopic surgeries than many or
most presently available alternatives.
Further, available data indicates that there may be increased
pressure to perform more complex surgeries at reduced costs, including conducting operations in less expensive outpatient settings.
Although accurate current statistics are difficult to obtain, a National Health Statistics Report from 2006 and updated in 2009
indicates that outpatient surgery volume is increasing by approximately 5% annually, and a 2009 report covering U.S. surgical procedures
suggests that inpatient surgery volume is declining 1% per year. We believe that a motivating factor of this trend may be the increased
costs associated with hospital inpatient procedures performed in operating rooms, which, according to MedMarket Diligence, have
been estimated to cost between $2,000 and $10,000 per hour. These costs likely motivate increased operating room throughput and
increased volume of procedures performed in outpatient settings. Both of those trends highlight the need for highly effective hemostatic
agents and sealants that can decrease operating room time for inpatient procedures and help to increase the safety of performing
more types of procedures in less expensive outpatient settings.
Participants in the hemostatic and sealant market currently
includes large companies, such as Johnson & Johnson and its affiliated companies, Covidien plc and Baxter Healthcare Corporation,
as well as various smaller companies such as The Medicines Company and a range of wound care companies.
Commercially available products in the hemostasis field with
which we would expect AC5 to compete if it obtains required regulatory approvals can cost between $50 and $500 per procedure, with
the higher value added products generally priced at the upper end of that range. Production costs of many of those products are
significant, as they may require biotechnology or plasma separation technologies to manufacture, and they may require ingredients
or other materials that are expensive to obtain. We believe that, assuming receipt of required regulatory approvals, AC5 will be
well positioned to compete against currently available products as a result of its broad applicability in various types of surgical
settings and its features that address drawbacks seen in many available hemostatic agents. Furthermore, our planned use of a manufacturing
method that we expect will be relatively simple and cost-effective compared to methods used to manufacture many currently available
hemostatic products could enable any future sales to be made at competitive price points within the market range.
Potential Disadvantages of AC5 Compared to the Competition
Some potential disadvantages of AC5 compared to the hemostatic
agents currently on the market with which we would expect AC5 to compete if it obtains required regulatory approvals are as follows:
| • | The favorable handling characteristics of AC5 are the result of its non-sticky and non-glue-like nature. However, if a surgeon
or healthcare provider requires a product to adhere tissues together, or provide similar glue-like action, then AC5 in its current
form would not achieve that effect. |
| • | While we project that AC5 will be relatively economical to manufacture at scale, it may not be able to compete from a price
perspective with inexpensive means to stop bleeding, such as application of pressure or use of bandages or other inexpensive hemostatic
agents. |
| • | We have not completed preclinical and clinical human trials required to commercialize AC5, whereas the competition has done
so where required for their marketed products. Accordingly, the safety and efficacy of AC5 still remains to be demonstrated to
and accepted by required regulatory agencies prior to commercialization. |
Research and Development Expenditures
Our research and development expenses to date have primarily
included costs to develop our core technology and AC5. Research and development expense during the nine months ended June 30, 2015
was $1,327,337, an increase of $376,236 compared to $951,101 for the nine months ended June 30, 2014. During the year ended September
30, 2014, we incurred $1,477,479 in research and development expenses, as compared to $218,901 incurred during the year ended September
30, 2013. We expect our research and development activities and expenses to increase significantly as we execute on our business
plan and pursue clinical trials.
Regulation by the FDA and Similar Foreign Agencies
Our research, development and clinical programs, as well as
our manufacturing and marketing operations that may be performed by us or third party service providers on our behalf, are subject
to extensive regulation in the U.S. and other countries. Most notably, we believe that AC5 will be subject to regulation as a medical
device under the U.S. Food Drug and Cosmetic Act (the “FDCA”) as implemented and enforced by the FDA and equivalent
regulations enforced by foreign agencies in any other countries in which we desire to pursue commercialization. The FDA and its
foreign counterparts generally govern the following activities that we do or will perform or that will be performed on our behalf,
as well as potentially additional activities, to ensure that products we may manufacture, promote and distribute domestically or
export internationally are safe and effective for their intended uses:
| • | product design, preclinical and clinical development and manufacture; |
| • | product premarket clearance and approval; |
| • | product safety, testing, labeling and storage; |
| • | record keeping procedures; |
| • | product marketing, sales and distribution; and |
| • | post-marketing surveillance, complaint handling, medical device reporting, reporting of deaths, serious injuries or device
malfunctions and repair or recall of products. |
Pre-Marketing Regulation by the U.S. FDA
Medical Device Classification
As described previously, we expect that AC5 will be classified
as a medical device because its primary desired activity does not depend on metabolic or chemical activity in a body. The FDA classifies
medical devices into one of the following three classes on the basis of the amount of risk associated with the medical device and
the controls deemed necessary to reasonably ensure their safety and effectiveness:
| • | 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; |
| • | Class II, requiring general controls and special controls, which may include performance standards and post-market surveillance;
or |
| • | Class III, requiring general controls and approval of a premarket approval application (“PMA”), which may
include post-market approval conditions and post-market surveillance. |
Class III devices are those that are deemed by the FDA to pose
the greatest risks, such as life-sustaining, life-supporting or implantable devices, or that have a new intended use or use advanced
technology that is not substantially equivalent to that of a legally marketed device. As a result of the intended use of AC5 and
the novel technology on which is it based, we anticipate that the FDA will classify it as a Class III medical device.
As described previously, AC5 fulfills the definition of a medical
device in Europe. We anticipate that the FDA will rule similarly. We further anticipate that AC5 could be regulated as either a
Class III or a Class II medical device in these jurisdictions, depending upon the application.
PMA Approval Process
A PMA must be submitted to the FDA if a device cannot be cleared
through another approval process or is not otherwise exempt from the FDA’s premarket clearance and approval requirements.
A PMA is required for most Class III medical devices. A PMA must generally be supported by extensive data, including without limitation
technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety
and efficacy of the device for its intended use. During the review period, the FDA will typically request additional information
or clarification of the information previously provided. Also, an advisory panel of 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 panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection
of the manufacturing facility or facilities involved with producing the device to ensure compliance with the cGMP regulations.
Upon approval of a PMA, the FDA may require that certain conditions of approval, such as conducting a post-market approval clinical
trial, be met.
The PMA approval process can be lengthy and expensive and requires
an applicant to demonstrate the safety and efficacy of the device based, in part, on data obtained from clinical trials. The PMA
process is estimated to take from one to three years or longer, from the time the PMA application is submitted to the FDA until
an approval is obtained.
Further, if post-approval modifications are made that affect
the safety or efficacy of the device, 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 expect that we will need to obtain PMA approval in order
to sell AC5 in the U.S., but the FDA will ultimately determine whether a PMA is the appropriate approval to be obtained. We have
not submitted to the FDA any PMA covering AC5 or commenced the required clinical trials. If we are able to conduct successful preclinical
studies and submit a PMA, the FDA may not grant PMA approval of AC5 for the desired indications of use, on a timely basis, or at
all. Our inability to achieve regulatory approval for AC5 in the U.S., a large market for hemostatic products, would materially
adversely affect our ability to grow our business.
Clinical Trials
Obtaining PMA approval requires the completion of human clinical
trials that produce successful results demonstrating the safety and efficacy of the product. Clinical trials for a Class III medical
device typically require an application for an investigational device exemption (“IDE”), which would need to
be approved in advance by the FDA for a specified number of patients and study sites. Human clinical trials are subject to extensive
monitoring, recordkeeping and reporting requirements, and must be conducted under the oversight of an institutional review board
(“IRB”) for the relevant clinical trial sites and comply with applicable FDA regulations, including those relating
to good clinical practices (“GCP”).
Prior to conducting a clinical trial, we also would be required
to enroll a sufficient number of patients to conduct the trial and obtain each patient’s informed consent in a form and substance
that complies with both FDA requirements and state and federal privacy and human subject protection regulations. Many factors could
lead to delays or inefficiencies in conducting clinical trials, some of which are discussed under the heading “Risk Factors”
in this prospectus. Further, we, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a
belief that the risks to the subjects of the trial outweigh the anticipated benefits. Even if a trial is completed, the results
of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to
obtain FDA clearance or approval to market the product in the U.S.
We have not commenced any human clinical trials. We have commenced
certain biocompatibility studies, described previously under the heading “Development and Commercialization Strategy—Regulatory—Biocompatibility
Tests and Clinical Trials”, that are typically completed prior to commencing clinical trials. We will require significant
additional funding and preparation before we are able to initiate the first clinical trial for AC5 in the U.S. and in order to
complete all required trials to obtain marketing approval in the U.S.
Pre-Marketing Regulation in the EU
Medical Device Classification
Similar to the U.S., the EU recognizes different classes of
medical devices. The EU recognizes Class I, Class IIa, Class IIb or Class III medical devices, with the classification determination
depending on the amount of potential risk to the patient associated with use of the medical device. Classification involves rules
found in the EU’s Medical Device Directive. Key questions of relevance include the degree of the device’s contact with
the patient, invasiveness, active nature, and indications for use. The medical device classes recognized in the EU are as follows:
| • | Class I, which are considered low risk devices, such as wheelchairs and stethoscopes, and require pre-market notification prior
to placing the devices onto the EU market; |
| • | Class IIa, which are considered low-medium risk devices and require certification by a Notified Body; |
| • | Class IIb, which are considered medium-high risk devices and require certification by a Notified Body; and |
| • | Class III, which are considered high-risk devices and require certification by a Notified Body. |
In February of 2015, we announced that the BSI confirmed that
AC5 fulfills the definition of a medical device within the EU and will be classified as such in consideration for CE mark designation.
We anticipate that AC5 could be regulated as either a Class III or a Class II medical device in these jurisdictions, depending
upon the application.
CE Mark Approval Process
The EU has adopted numerous directives and
standards regulating the design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices. 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.
Under applicable EU medical device directives,
a CE mark is a symbol placed on a product that declares the product’s compliance with the essential requirements of applicable
EU health, safety and environmental protection legislation. In order to receive a CE mark for a product candidate, the company
producing the product candidate must select a country in which to apply. Each country in the EU has one competent authority (“CA”)
that implements the national regulations by interpreting the EU directives. CAs also designate and regulate Notified Bodies. An
assessment by a Notified Body in the selected country within the EU is required in order to commercially distribute the device.
In addition, compliance with ISO 13485 issued by the International Organization for Standardization, among other standards, establishes
the presumption of conformity with the essential requirements for CE marking. Certification to the ISO 13485 standard demonstrates
the presence of a quality management system that can be used by a manufacturer for design and development, production, installation
and servicing of medical devices and the design, development and provision of related services.
Devices that comply with the requirements
of the laws of the selected member state applying the applicable EU directive are entitled to bear a CE mark and can be distributed
throughout the member states of the EU, as well as in other countries that have mutual recognition agreements with the EU or have
adopted the EU’s regulatory standards.
We have identified several potential countries
through which we may pursue a CE mark for AC5.
Clinical Trials
As with U.S. Class III and certain Class II medical device approvals,
EU Class III and certain Class II medical device approvals require the successful completion of human clinical trials. However,
there are several key differences between the jurisdictions with respect to the approvals and processes. Obtaining a CE mark is
not equivalent to obtaining FDA approval, in that a CE mark confirms the safety, but not the effectiveness, of a product. Furthermore,
a CE mark affixed to a product serves as a declaration by the responsible party that the product conforms to applicable provisions
and that relevant conformity assessment procedures have been completed with respect to the product. Accordingly, we anticipate
that the required EU clinical trial(s) for AC5 will be smaller, faster, and less expensive than what we expect would be required
for AC5 to obtain equivalent approvals in the U.S.
Post-Approval Regulation
After a medical device obtains approval from the applicable
regulatory agency and is launched in the market, numerous post-approval regulatory requirements would apply. Many of those requirements
are similar in the U.S. and in member states of the EU, and include:
| • | product listing and establishment registration; |
| • | 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; |
| • | labeling and other advertising regulations, including prohibitions against the promotion of products for uncleared, unapproved
or off-label use or indication; |
| • | approval of product modifications that affect the safety or effectiveness of any of our devices that may achieve approval; |
| • | post-approval restrictions or conditions, including post-approval study commitments; |
| • | post-market surveillance regulations, which apply, when necessary, to protect the public health or to provide additional safety
and effectiveness data for the device; |
| • | the recall authority of the applicable government agency and regulations pertaining to voluntary recalls; and |
| • | 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. |
Failure by us or by our third-party manufacturers and other
suppliers to comply with applicable regulatory requirements could result in enforcement action by various regulatory authorities,
which may result in monetary fines, the imposition of operating restrictions, product recalls, criminal prosecution or other sanctions.
Regulation by Other Foreign Agencies
International sales of medical devices outside the EU may be
subject to government regulations in each country in which the device is marketed and sold, which vary substantially from country
to country. The time required to obtain approval by a non-EU foreign country may be longer or shorter than that required for FDA
or CE mark clearance or approval, and the requirements may substantially differ.
Other Governmental Regulations and Environmental Matters
We are or may become subject to various laws and regulations
regarding laboratory practices and the use of animals in testing, as well as environmental laws and regulations governing, among
other things, any use and disposal by us of hazardous or potentially hazardous substances in connection with our research. At this
time, costs attributable to environmental compliance are not material. In each of these areas, applicable U.S. and foreign government
agencies have broad regulatory and enforcement powers, including, among other things, the ability to levy fines and civil penalties,
suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have a
material adverse effect on our business. Additionally, if we are able to successfully obtain approvals for and commercialize our
product candidates, then the Company and our products may become subject to various federal, state and local laws targeting fraud,
abuse, privacy and security in the healthcare industry.
Intellectual Property
We are focused on the development of self-assembling compositions,
particularly self-assembling peptide compositions, and methods of making and using such compositions in medical and non-medical
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
damages 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.
Our patent portfolio, which covers self-assembling peptides
and methods of use thereof, includes 14 applications, one of which has been allowed and 13 of which are pending in a
total of five jurisdictions. We have also entered into a license agreement with MIT pursuant to which we have been granted exclusive
rights under one portfolio of patents and non-exclusive rights under another portfolio of patents. The portfolio exclusively
licensed from MIT includes seven patents that have been either allowed, issued or granted and 15 applications that are
pending in a total of 10 jurisdictions. The portfolio non-exclusively licensed from MIT includes a number of PCT applications
which have now entered the national and regional phases outside of the US, including 7 issued patents in three jurisdictions
that expire between 2016 and 2027 (absent patent term extension), and three pending patent applications in four jurisdictions.
Because a portion of our patent portfolio has been 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. In
addition, one of our licensed MIT European patents has been opposed in an administrative hearing.
Our license agreement with MIT imposes certain diligence, capital
raising, and other obligations on us, including obligations to raise certain amounts of capital by specific dates. Additionally,
we are responsible for all patent prosecution and maintenance fees under that agreement. Our breach of any material terms of our
license agreement with MIT could permit the counterparty to terminate the agreement, which could result in our loss of some or
all of our rights to use certain intellectual property that is material to our business and our lead product candidate. Our loss
of any of the rights granted to us under our license agreement with MIT could materially harm our product development efforts and
could cause our business to fail.
We also were granted a non-exclusive sub-license of a patent
assigned to MIT and in turn licensed by MIT to the sub-licensing third party. This patent expired in 2014. This sub-license was
a fully-paid and royalty-free license and did not provide any outbound license grant to any ABS owned or exclusively licensed intellectual
property. We presently do not anticipate any material impact on our business or operations resulting from the expiration of this
patent in 2014.
Our trademarks include AC5 Surgical Hemostatic Device™,
AC5 Surgical Hemostat™, AC5™, Crystal Clear Surgery™, NanoDrape™ and NanoBioBarrier™.
Employees
We presently have three full-time employees and two part-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.
Properties
We do not own any real property. In October 2013, we entered
into a one and one-half year operating sublease agreement pursuant to which we leased the office space of our relocated headquarters
in Wellesley, Massachusetts for a base annual rent equal to $5,031 per month. In April 2015, we moved our corporate offices to
a property in Framingham, Massachusetts. We entered into a month-to-month lease property rental agreement, pursuant to which we
are obligated to pay monthly rent of $2,000, with a minimum six month commitment. We believe our present offices are suitable for
our current and planned near-term operations.
Legal Proceedings
In the ordinary course of business, we may become a party to
legal proceedings involving various matters. We are unaware of any such legal proceedings presently pending to which we or our
subsidiary is a party or of which any of our property is the subject that management deems to be, individually or in the aggregate,
material to our financial condition or results of operations.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below is certain information regarding our current
directors and executive officers:
Name |
|
Position |
|
Age |
|
Director/Officer Since |
Dr. Avtar Dhillon |
|
Chairman of the Board of Directors |
|
54 |
|
April 2013 |
James R. Sulat |
|
Director |
|
65 |
|
August 2015 |
Dr. Terrence W. Norchi |
|
President, Chief Executive Officer and Director |
|
50 |
|
April 2013 |
Richard E. Davis |
|
Chief Financial Officer |
|
57 |
|
July 2014 |
Business Experience
The following is a brief account of the education and business
experience of our current directors and executive officers during at least the past five years, indicating their principal occupation
during the period, and the name and principal business of the organization by which they were employed:
Dr. Avtar Dhillon. Dr. Dhillon has served as the
Chairman of our Board of Directors since April 2013 and has been on the Board of Directors of ABS since May 2011. Previously, Dr.
Dhillon was the President and Chief Executive Officer of Inovio Pharmaceuticals, Inc. (formerly Inovio Biomedical Corporation)
(NYSE Euronext: INO) from October 2001 to June 2009, as President and Chairman of Inovio from June 2009 until October 2009, as
Executive Chairman until August 2011, and as Chairman from September 2011. During his tenure at Inovio, Dr. Dhillon led the successful
turnaround of the company through a restructuring, acquisition of technology from several European and North American companies,
and a merger with VGX Pharmaceuticals to develop a vertically integrated DNA vaccine development company with one of the strongest
development pipelines in the industry. Dr. Dhillon led multiple successful financings for Inovio and concluded several licensing
deals that included global giants, Merck and Wyeth (now Pfizer). Prior to joining Inovio, Dr. Dhillon was vice president of MDS
Capital Corp. (now Lumira Capital Corp.), one of North America’s leading healthcare venture capital organizations. In July
1989, Dr. Dhillon started a medical clinic and subsequently practiced family medicine for over 12 years. Dr. Dhillon has been instrumental
in successfully turning around struggling companies and influential as an active member in the biotech community. From March 1997
to July 1998, Dr. Dhillon was a consultant to Cardiome Pharma Corp. (NASDAQ: CRME), where he lead a turnaround based on three pivotal
financings, establishing a clinical development strategy, and procuring a new management team. In his role as a founder and board
member of companies, Dr. Dhillon has been involved in several early stage healthcare focused companies listed on U.S. or Canadian
stock exchanges, which have successfully matured through advances in their development pipeline and subsequent M&A transactions.
Most recently, he was a founding board member (May 2003) of Protox Therapeutics, Inc. (TSX-V: SHS) (now Sophiris Bio Inc.), a publicly
traded specialty pharmaceutical company. Dr. Dhillon maintained his board position until the execution of a financing of up to
$35 million with Warburg Pincus in November 2010. Dr. Dhillon currently sits on the Board of Directors of BC Advantage Funds, a
Venture Capital Corporation in British Columbia, and since March 2012 has been the Chairman of the Board of Directors of Stevia
First Corp. (OTCQB: STVF), an agricultural biotechnology company engaged in the cultivation and harvest of stevia leaf and the
development of stevia products. Since March 2011, Dr. Dhillon has also served as the Chairman of the Board of Directors of OncoSec
Medical, Inc. (OTCQB: ONCS), a company developing its advanced-stage ImmunoPulse DNA-based immunotherapy to treat solid tumor and
metastatic cancers. Dr. Dhillon adds value to our Board of Directors with his extensive experience as a member of boards of directors
and senior management of other public companies and with his experience in company building, financing, and licensing with large
industry partners.
James R. Sulat.
Mr. Sulat served as Chief Executive Officer and Chief Financial
Officer of Maxygen Inc., a biopharmaceutical company focused on developing improved versions of protein drugs, from October 2009
to June 2013. Prior to this, he was Chief Executive Officer, Chief Financial Officer and a member of the Board of Directors at
Memory Pharmaceuticals Corp., which developed innovative drug candidates for the treatment of debilitating central nervous system
disorders, from 2005 to 2008. He previously served in senior executive roles for R.R. Donnelley & Sons, Co., Chiron Corporation,
Stanford Health Services, Inc., and Esprit de Corp, Inc. He currently serves as Chairman of the Board of Directors of Momenta Pharmaceuticals,
Inc., a biotechnology company focused on the analysis, characterization and design of complex pharmaceutical products. He has additionally
served on numerous boards including Valneva SE, AMAG Pharmaceuticals, Inc., diaDexus, Inc., and General Surgical Innovations, Inc.
Mr. Sulat received a BS in Administrative Sciences from Yale University and an MBA and MS in Health Services Administration from
Stanford University. Mr. Sulat brings to our Board of Directors extensive experience with public and financial accounting matters,
experience as a chief executive officer and chief financial officer, and experience serving on other boards of directors in the
biopharmaceutical industry.
Dr. Terrence W. Norchi. Terrence W. Norchi, MD,
our co-founder, serves as our President and Chief Executive Officer, and he is a director on our Board of Directors. Dr. Norchi
also served as our Interim Chief Financial Officer through June 26, 2013. Dr. Norchi has served in similar positions since co-founding
ABS, our predecessor company in 2006. Prior to ABS, Dr. Norchi was a portfolio manager of one of the world’s largest healthcare
mutual funds and a pharmaceutical analyst at Putnam Investments from April 2002 to September 2004. Prior to that, he served as
the senior global biotech and international pharmaceutical equity analyst at Citigroup Asset Management, and as a sell-side analyst
covering non-U.S. pharmaceutical equities at Sanford C. Bernstein in New York City. Dr. Norchi earned an M.B.A. from the Massachusetts
Institute of Technology, Sloan School of Management in 1996. Dr. Norchi earned an M.D. degree in 1990 from Northeast Ohio Medical
University and completed his internal medicine residency in 1994 at Baystate Medical Center, Tufts University School of Medicine,
where he was selected to serve as the Chief Medical Resident. Dr. Norchi brings to our Board of Directors and management team invaluable
experience and knowledge of our core technology and proposed product candidates as a result of his first-hand experience with the
development of that technology, having ushered it from the research laboratory to its current stage of development. His investing
experience as a former public company analyst and a portfolio manager provides further insights and value as the company advances
toward commercialization. Dr. Norchi serves on the Board of Overseers of the Boston Museum of Science. He also serves on the Board
of Overseers of Newton-Wellesley Hospital, a member of Partners HealthCare, a network founded by Massachusetts General Hospital
and Brigham and Women’s Hospital.
Richard E. Davis. Mr.
Davis brings a proven and successful record of more than 25 years of progressive and diversified business, financial and operational
leadership within both publicly traded and privately held, domestic and multinational companies. From July 2001 through July 2014,
he has been an advisor to small and mid-size companies assisting them in their strategizing, accounting, financial reporting, and
investor and banking needs. From February 2001 until June 2011, he was President, Chief Operating Officer and Chief Financial Officer
at NMT Medical, Inc., a NASDAQ-traded medical device company. Mr. Davis also served on its Board of Directors. In this role he
developed and executed strategic and operational plans that resulted in revenue growth of 35 percent, 13 consecutive quarters of
profitability, increased stock price and analyst coverage from five major investment firms; directed the stabilization of a French
subsidiary and led successful efforts in raising $6 million from institutional investors to fund ongoing FDA-approved clinical
trials. Prior to that, he was Vice President and Chief Financial Officer at Q-Peak, Inc., where he oversaw all financial and administrative
functions. Earlier, he worked in a variety of senior level positions at the Coleman Company, The TJX Companies, Inc. and Wang Laboratories.
He holds a Master of Business Administration degree with a Finance concentration from Babson College and a Bachelor of Business
Administration degree from the University of Massachusetts Amherst.
Term of Office of Directors
Our directors are elected at each annual meeting of stockholders
and serve until the next annual meeting of stockholders or until their successor has been duly elected and qualified, or until
their earlier death, resignation or removal.
Family Relationships
No family relationships exist between any of our current or
former directors or executive officers.
Involvement in Certain Legal Proceedings
No director, executive officer or control person of the Company
has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.
Audit Committee
Our Board of Directors has not established a separate standing
audit committee within the meaning of Section 3(a)(58)(A) of the Exchange Act. Instead, the entire Board of Directors presently
acts as the audit committee within the meaning of that section and will continue to do so upon the appointment of any new directors
until such time as a separate standing audit committee has been established. Our Board of Directors has determined that Mr. Sulat
is an “audit committee financial expert” as defined by applicable SEC rules.
EXECUTIVE
COMPENSATION
The following table summarizes all compensation recorded by
us in each of the fiscal years ended September 30, 2014 and September 30, 2013 for (i) our principal executive officer; (ii) our
two next most highly compensated executive officers whose total compensation exceeded $100,000 during our last completed fiscal
year; and (iii) certain of our other executive officers, whose compensation is voluntarily provided.
Summary Compensation Table
Name | |
Fiscal Year | | |
Salary ($) | | |
Bonus $ | | |
Option Awards ($) (4) | | |
All other Compensation ($) | | |
Total ($) | |
Dr. Terrence W. Norchi | |
| 2014 | | |
| 308,333 | | |
| 82,500 | | |
| 56,412 | | |
| — | | |
| 447,245 | |
President and Chief Executive Officer (1) | |
| 2013 | | |
| 171,923 | | |
| — | | |
| — | | |
| — | | |
| 171,923 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
William M. Cotter, | |
| 2014 | | |
| 218,333 | | |
| 35,000 | | |
| 260,777 | | |
| — | | |
| 514,110 | |
Chief Operating Officer (2) | |
| 2013 | | |
| 43,750 | | |
| — | | |
| 159,204 | | |
| — | | |
| 202,954 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Richard E. Davis | |
| 2014 | | |
| 87,199 | | |
| — | | |
| 29,019 | | |
| — | | |
| 116,218 | |
Chief Financial Officer (3) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Alan Barber | |
| 2014 | | |
| 63,967 | | |
| 28,000 | | |
| 79,925 | | |
| — | | |
| 171,892 | |
Former Chief Financial Officer (3) | |
| 2013 | | |
| 53,015 | | |
| — | | |
| 13,806 | | |
| — | | |
| 66,821 | |
| (1) | Dr. Norchi was the President and Chief Executive Officer of ABS since its inception in 2006, and was appointed as our President,
Chief Executive Officer and Interim Chief Financial Officer on April 23, 2013. Dr. Norchi resigned as our Interim Chief Financial
Officer on June 26, 2013. Salary amounts reflected include $100,000 earned by Dr. Norchi in connection with his services for ABS
during the fiscal years ended September 30, 2013, and $71,923 earned by Dr. Norchi in connection with his service as an executive
officer of the Company during the fiscal year ended September 30, 2013. |
| (2) | Mr. Cotter was appointed as our Chief Operating Officer on July 2, 2013. Salary amounts reflected include amounts earned by
Mr. Cotter in connection with his service as an executive officer of the Company during the fiscal years ended September 30, 2014
and 2013. Mr. Cotter resigned as both an employee of the Company and as its Chief Operating Officer on June 15, 2015. |
| (3) | Effective July 7, 2014, Mr. Barber resigned as both an employee of the Company and as its Chief Financial Officer and Mr. Davis
was appointed as the Company’s Chief Financial Officer. Salary amounts reflected include $45,833 earned by Mr. Davis in connection
with his service as an executive officer of the Company during the fiscal year ended September 30, 2014 and $41,366 for consulting
services provided prior to his appointment as Chief Financial Officer. |
| (4) | The values listed represent the fair value of the option grants that was recognized during the fiscal years ended September
30, 2014 and 2013 under ASC Topic 718, which is calculated as of the grant date using a Black-Scholes option-pricing model. For
information on the valuation assumptions with respect to option grants made during the fiscal years ended September 30, 2014 and
2013, refer to Note 9 “Stock-Based Compensation” in our consolidated financial statements for the fiscal years ended
September 30, 2014 and 2013, included in this filing. |
Employment Agreements with Named Executive Officers
Terrence W. Norchi
On June 25, 2013, we entered into an executive employment agreement
with Dr. Terrence W. Norchi, our President and Chief Executive Officer and a member of our Board of Directors, which became effective
as of June 26, 2013. Dr. Norchi’s employment agreement continues until terminated by Dr. Norchi, or us and provided for an
initial annual base salary of $275,000 and eligibility to receive an annual cash bonus in an amount up to 30% of Dr. Norchi’s
then-current annual base salary. Annual bonuses are awarded at the sole discretion of our Board of Directors. If Dr. Norchi’s
employment is terminated by us (unless such termination is “For Cause” (as defined in his employment agreement)), or
by Dr. Norchi for “Good Reason” (as defined in his employment agreement), then Dr. Norchi, upon signing a release in
favor of the Company, will be entitled to severance in an amount equal to 12 months of Dr. Norchi’s then-current annual base
salary, payable in the form of salary continuation, plus, if Dr. Norchi elects and subject to certain other conditions, payment
of Dr. Norchi’s premiums to continue his group health coverage under COBRA until the earlier of (i) 12 months following the
date of such termination; or (ii) the date Dr. Norchi becomes covered under another employer’s health plan. In addition,
Dr. Norchi’s employment agreement provides that, in the event of a change of control of the Company, termination by Dr. Norchi
for Good Reason, termination by the Company for any reason other than For Cause, or termination as a result of Dr. Norchi’s
death, all unvested shares under outstanding equity grants to Dr. Norchi, if any, shall automatically accelerate and become fully
vested. On March 13, 2014, Mr. Norchi’s employment agreement was amended to increase his annual base salary by $50,000 to
$325,000, retroactively effective as of February 1, 2014, and increase his cash bonus eligibility from 30% of his annual base salary
to 35% of his annual base salary.
Dr. Norchi’s employment agreement provides the following
definitions of “For Cause” and “Good Reason”: (a) “For Cause” is (i) the commission by the
executive of a crime involving dishonesty, breach of trust, or physical harm to any person, (ii) executive’s engagement by
the executive in conduct that is in bad faith and materially injurious to the Company, (iii) commission by the executive of a material
breach of the employment agreement which is not cured within 20 days after the executive receives written notice of such breach,
(iv) willful refusal by the executive to implement or follow a lawful policy or directive of the Company, which breach is not cured
by the executive within 20 days after receiving written notice from the Company, (v) or executive’s engagement in misfeasance
or malfeasance demonstrated by a pattern of failure to perform job duties diligently and professionally (other than any such failure
resulting from Executive’s incapacity due to physical or mental illness); and (b) “Good Reason” is, without the
executive’s written consent, (1) a material reduction in executive’s annual base salary, except for reductions that
are comparable to reductions generally applicable to similarly-situated executives of the Company, (2) the relocation of executive
to a facility or location that is more than 50 miles from his primary place of employment and such relocation results in an increase
in executive’s one-way driving distance by more than 50 miles, or (3) a material and adverse change in executive’s
authority, duties, or responsibilities with the Company or a material and adverse change in executive’s reporting relationship
within the Company.
In connection with our entry into the executive employment agreement
with Dr. Norchi, effective on June 26, 2013, Dr. Norchi’s former employment agreement with ABS was terminated pursuant to
a termination agreement and release between Dr. Norchi and ABS.
William M. Cotter
On July 2, 2013, we entered into an executive employment agreement
with Mr. Cotter, our Chief Operating Officer. The agreement continues until terminated by us or by Mr. Cotter. Pursuant to the
terms of Mr. Cotter’s employment agreement, Mr. Cotter was entitled to an initial annual base salary of $175,000 and was
eligible to receive an annual cash bonus in an amount of up to 20% of Mr. Cotter’s then-current annual base salary. Annual
bonuses are awarded at the sole discretion of our Board of Directors. If Mr. Cotter’s employment is terminated by us (unless
such termination is “For Cause” (as defined in his employment agreement)), or by Mr. Cotter for “Good Reason”
(as defined in his employment agreement), then Mr. Cotter, upon signing a release in favor of the Company, would be entitled to
severance in an amount equal to six months of Mr. Cotter’s then-current annual base salary payable in the form of salary
continuation, plus monthly reimbursement of up to $1,200 for Mr. Cotter’s health, dental and vision benefits coverage premiums
until the earlier of (i) 12 months following the date of such termination, or (ii) the date Mr. Cotter becomes covered under another
employer’s health plan. In addition, in the event of a change of control of the Company, termination by Mr. Cotter for Good
Reason, or termination as a result of Mr. Cotter’s death or disability, the agreement provides that all unvested shares under
outstanding equity grants to Mr. Cotter, if any, shall accelerate and become fully vested. On March 13, 2014, Mr. Cotter’s
employment agreement was amended to increase his annual base salary by $65,000 to $240,000, retroactively effective as of February
1, 2014, and increase his cash bonus eligibility from 20% of his annual base salary to 25% of his annual base salary.
The agreement provides the following definitions of “For
Cause” and “Good Reason”: (a) “For Cause” is (i) the commission by the executive of a crime involving
dishonesty, breach of trust, or physical harm to any person, (ii) executive’s engagement by the executive in conduct that
is in bad faith and materially injurious to the Company, (iii) commission by the executive of a material breach of the employment
agreement which is not cured within 20 days after the executive receives written notice of such breach, (iv) willful refusal by
the executive to implement or follow a lawful policy or directive of the Company, which breach is not cured by the executive within
20 days after receiving written notice from the Company, (v) or executive’s engagement in misfeasance or malfeasance demonstrated
by a pattern of failure to perform job duties diligently and professionally; and (b) “Good Reason” is, without the
executive’s written consent, (1) a material reduction in the executive’s annual base salary (except for reductions
that are comparable to reductions generally applicable to similarly-situated executives of the Company), (2) a relocation of the
executive to a facility or location that is more than 50 miles from his primary place of employment and results in an increase
in one-way driving distance by more than 50 miles (provided that any such relocation shall not constitute Good Reason if the executive
is permitted to perform his duties remotely from or near his home for two weeks per month), or (3) a material and adverse change
in the executive’s authority, duties, or responsibilities with the Company or reporting relationship within the Company.
On June 15, 2015, the Company and Mr. Cotter entered into a
Separation Agreement (the “Separation Agreement”) pursuant to which Mr. Cotter resigned as an employee and as
the Company’s Chief Operating Officer, agreed to the termination of his executive employment agreement, as amended, and agreed
to provide certain advisory services to the Company. Under the terms of the Separation Agreement, which also contains customary
post-employment covenants, the Company has agreed to (i) pay Mr. Cotter $60,000 (less applicable withholding and customary payroll
deductions), which shall be payable over three months in accordance with the Company’s pay policies; and (ii) provide Mr.
Cotter healthcare reimbursements for a three-month period at an amount of up to $2,500 per month.
Richard E. Davis
On July 7, 2014, we entered into an executive employment agreement
with Mr. Davis, our Chief Financial Officer and Treasurer. The agreement continues until terminated by us or by Mr. Davis. Pursuant
to the terms of the agreement, Mr. Davis is entitled to an initial annual base salary of $200,000 and is eligible to receive an
annual cash bonus in an amount of up to 25% of Mr. Davis’ then-current annual base salary. Annual bonuses are awarded at
the sole discretion of our Board of Directors. If Mr. Davis’ employment is terminated by us at any time after August 7, 2014
(unless such termination is “For Cause” (as defined in his employment agreement)), or by Mr. Davis for “Good
Reason” (as defined in his employment agreement), then Mr. Davis, upon signing a release in favor of the Company, would be
entitled to severance in an amount equal to six months of Mr. Davis’ then-current annual base salary, payable in the form
of salary continuation, plus, if Mr. Davis elects and subject to certain other conditions, payment of Mr. Davis’ premiums
to continue his group health coverage under COBRA until the earlier of (i) 12 months following the date of such termination; or
(ii) the date Mr. Davis becomes covered under another employer’s health plan. In addition, Mr. Davis’ employment agreement
provides that, in the event of a change of control of the Company or his employment is terminated by the Company for any reason
other than For Cause, all unvested shares under outstanding equity grants to Mr. Davis, if any, shall automatically accelerate
and become fully vested. On July 27, 2015, Mr. Davis’s employment agreement was amended to increase his annual base salary
by $50,000 to $250,000, retroactively effective as of July 1, 2015.
The agreement provides the following definitions of “For
Cause” and “Good Reason”: (a) “For Cause” is (i) the commission by the executive of a crime involving
dishonesty, breach of trust, or physical harm to any person, (ii) executive’s engagement by the executive in conduct that
is in bad faith and materially injurious to the Company, (iii) commission by the executive of a material breach of the employment
agreement which is not cured within 20 days after the executive receives written notice of such breach, (iv) willful refusal by
the executive to implement or follow a lawful policy or directive of the Company, which breach is not cured by the executive within
20 days after receiving written notice from the Company, (v) or executive’s engagement in misfeasance or malfeasance demonstrated
by a pattern of failure to perform job duties diligently and professionally; and (b) “Good Reason” is, without the
executive’s written consent, (1) a reduction in the executive’s annual base salary comparable to reductions generally
applicable to similarly-situated executives of the Company if such reduction occurs during the first 365 days of employment and
is greater than 15%, (2) a relocation of the executive to a facility or location that is more than 50 miles from his primary place
of employment and results in an increase in one-way driving distance by more than 50 miles (provided that any such relocation shall
not constitute Good Reason if the executive is permitted to perform his duties remotely from or near his home for two weeks per
month), or (3) a material and adverse change in the executive’s authority, duties, or responsibilities with the Company or
reporting relationship within the Company.
Outstanding Equity Awards At Fiscal Year-End
The following table summarizes the aggregate number of option
awards held by our named executive officers at September 30, 2014:
Name | |
Number of Securities Underlying Unexercised Options (#) Exercisable | | |
Number of Securities Underlying Unexercised Options (#) Unexercisable | | |
Option Exercise Price ($) | | |
Option Expiration Date |
Dr. Terrence W. Norchi | |
| 125,000 | | |
| 375,000 | (1) | |
| 0.35 | | |
03/22/2024 |
Name | |
Number of Securities Underlying Unexercised Options (#) Exercisable | | |
Number of Securities Underlying Unexercised Options (#) Unexercisable | | |
Option Exercise Price ($) | | |
Option Expiration Date |
William M. Cotter | |
| 433,334 | | |
| 366,666 | (2) | |
| 0.37 | | |
06/18/2023 |
| |
| 125,000 | | |
| 125,000 | (3) | |
| 0.40 | | |
09/09/2023 |
| |
| 87,500 | | |
| 262,500 | (4) | |
| 0.35 | | |
03/22/2024 |
| |
| | | |
| | | |
| | | |
|
Richard E. Davis | |
| 125,000 | | |
| 375,000 | (5) | |
| 0.22 | | |
07/06/2024 |
| (1) | Represents an option to purchase 500,000 shares of Common Stock with a grant date of March 23, 2014. The vesting period of
the shares underlying the option commenced on the date of grant, with 25% of the shares vested immediately on the date of grant,
25% of the shares shall vest 12 months following the date of grant and 1/24th of the remaining shares shall vest on each of
the monthly anniversaries of the grant date, commencing April 23, 2015. |
| (2) | Represents an option to purchase 800,000 shares of Common Stock with a grant date of June 18, 2013 in anticipation of his employment.
The option vests over a three-year period as follows: 25% of the shares subject to the option vested on July 1, 2013, 25% of the
shares subject to the option vest 12 months after July 1, 2013, and 1/24th of the remaining unvested shares vest monthly thereafter,
with all shares underlying the option subject to automatic acceleration of vesting upon a corporate transaction or change in control
(as such terms are defined under the Plan). To the extent vested, the option may only be exercised during the 2017 calendar year,
unless we undergo a corporate transaction or change in control or Mr. Cotter separates from service with us in a calendar year
earlier than 2017, in which case the option must be exercised during such earlier calendar year. Mr. Cotter resigned as both an
employee of the Company and as its Chief Operating Officer on June 15, 2015, and therefore the option, to the extent vested as
of June 15, 2015, must be exercised, if at all, during the 2015 calendar year. |
| (3) | Represents an option to purchase 250,000 shares of Common Stock granted on September 9, 2013. The vesting period of the shares
underlying the option commenced on the date of grant, with 25% of the shares vested immediately on the date of grant, 25% of the
shares to vest 12 months following the date of grant, and the remaining 50% of the shares to vest thereafter in 24 equal installments
on each monthly anniversary of the date of grant. |
| (4) | Represents an option to purchase 350,000 shares of Common Stock with a grant date of March 23, 2014. The vesting period of
the shares underlying the option commenced on the date of grant, with 25% of the shares vested immediately on the date of grant,
25% of the shares shall vest 12 months following the date of grant, and the remaining 50% of the shares to vest thereafter in 24
equal installments on each monthly anniversary of the date of grant. |
| (5) | Represents an option to purchase 500,000 shares of Common Stock with a grant date of July 7, 2014. The vesting period of the
shares underlying the option commenced on the date of grant, with 25% of the shares vested immediately on the date of grant and
the remaining shares to vest in 24 equal installments commencing on the first anniversary on the date of grant. |
Compensation of Directors
On March 23, 2014, our Board of Directors adopted a director
compensation policy for non-employee directors. That policy provides that effective the first calendar quarter of 2014, the person
serving as the Chairman of our Board of Directors receives an aggregate annual cash fee of $190,000 for that chairperson role,
and all other non-employee directors receive an annual cash fee of $50,000. Prior to the adoption of the revised director compensation
policy, the person serving as the Chairman of our Board of Directors received an aggregate annual cash fee of $110,000 for that
chairperson role, and all other non-employee directors received an annual cash fee of $35,000.
The following table summarizes all compensation paid to our
non-employee directors during the fiscal year ended September 30, 2014:
Director Compensation Table
| |
Fees Earned or Paid In Cash ($) | | |
Stock Awards ($) | | |
Option Awards ($)(1) | | |
All other Compensation ($) | | |
Total ($) | |
Dr. Avtar Dhillon | |
| 170,000 | | |
| — | | |
| 57,742 | | |
| — | | |
| 227,742 | |
Dr. Arthur Rosenthal (2) | |
| 46,250 | | |
| — | | |
| 57,742 | | |
| — | | |
| 103,992 | |
| (1) | The values listed represent the fair value of the option grants that was recognized during the fiscal year ended September
30, 2014 under ASC Topic 718, which is calculated as of the grant date using a Black-Scholes option-pricing model. For information
on the valuation assumptions with respect to option grants made during the fiscal year ended September 30, 2014, refer to Note
9 “Stock-Based Compensation” in our consolidated financial statements for the fiscal year ended September 30, 2014,
included in this filing. |
| (2) | Dr. Rosenthal resigned as a director effective May 28, 2015. |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except for Dr. Terrence Norchi, our President, Chief Executive
Officer, former Interim Chief Financial Officer and a director, and Dr. Dhillon, the Chairman of our Board of Directors, who each
became executive officers and/or directors of our Company shortly following the Company’s and ABS’s entry into a binding
letter of intent regarding the terms of the Merger (the “LOI”), none of the current directors and executive
officers were directors or executive officers of the Company prior to the closing of the Merger, nor did any hold any position
with the Company prior to the closing of the Merger, nor have any been involved in any material proceeding adverse to the Company
or any transactions with the Company or any of its directors, executive officers, affiliates or associates that are required to
be disclosed pursuant to the rules and regulations of the SEC.
Dr. Terrence Norchi and Dr. Avtar
Dhillon were appointed to their officer and director positions with us on April 23, 2013, shortly following the entry into the
LOI between the Company and ABS relating to the Merger. Each of Dr. Avtar Dhillon and Dr. Terrence Norchi also held, and continue
to hold, positions with ABS, with Dr. Norchi serving as the President, Chief Executive Officer and a director of ABS and Dr. Dhillon
serving as a director of ABS. As a result, each of Dr. Norchi and Dr. Dhillon were directors and/or officers of us and of ABS
upon the signing of the Merger Agreement on May 10, 2013. Further, it was a condition to the closing of the Merger that Dr. Norchi
and Dr. Dhillon, or their respective designees, each receive, on or before the closing of the Merger, 10,000,000 shares of our
Common Stock in private transfers from the former holders thereof. As a result of those transfers and other shares of our Common
Stock to which Dr. Norchi and Dr. Dhillon became entitled in exchange for their former shares and convertible notes of ABS, as
of the closing of the Merger, Dr. Norchi and Dr. Dhillon collectively held or otherwise controlled approximately 18,579,449 shares
of our Common Stock, or 25.8% of our shares on a fully diluted basis and approximately 31.7% of our outstanding Common Stock.
As of September 10, 2015, Dr. Norchi and Dr. Dhillon collectively held or otherwise controlled approximately 20,789,449
shares of our Common Stock or securities convertible into our Common Stock, or 13.8% of our shares on a fully diluted basis and
approximately 19.7% of our Common Stock outstanding. The number of shares of our Common Stock received by Dr. Norchi and Dr. Dhillon
in connection with the Merger was negotiated by the parties to the LOI and was determined without input from any independent third
party.
On June 19, 2013, Dr. Terrence Norchi purchased from ABS an
aggregate amount of $15,397 of certain promissory note and warrant positions (the “Repurchased Securities”).
The Repurchased Securities had originally been issued by ABS to third parties in June 2009, were repurchased by ABS from the original
holders on April 30, 2013, and were resold to Dr. Norchi and other third party purchasers effective June 19, 2013. The Repurchased
Securities were first issued by ABS to the original holders thereof in a bridge loan transaction in expectation of potential financings
of ABS’s capital stock. In contemplation of the Merger, any such potential financing of ABS’s capital stock was abandoned
and such Repurchased Securities were amended and restated to provide for (i) the conversion of all amounts owed under the promissory
notes into an aggregate of 1,349,614 shares of the Company’s Common Stock upon the closing of the Merger, calculating to
approximately one share of the Company’s Common Stock for each $0.27 outstanding under the notes, and (ii) the cancellation
of the warrants in full upon the closing of the Merger. Accordingly, Dr. Norchi became entitled to receive 56,103 shares of the
Company’s Common Stock upon the closing of the Merger as a result of his purchase of $15,397 worth of the Repurchased Securities.
Pursuant to the terms of Dr. Norchi’s former employment
agreement with ABS, Dr. Norchi was entitled to receive a cash bonus in the amount of $500,000 and certain warrants to acquire ABS’s
capital stock upon the closing of a capital raise by ABS of at least $1,000,000. Dr. Norchi agreed to defer his right to receive
such cash bonus and warrants at the time they became due and issuable upon ABS’s satisfaction of that capital raise condition.
In connection with the closing of the Merger on June 26, 2013 and the concurrent entry into an executive employment agreement with
the Company, Dr. Norchi and ABS entered into a termination agreement and release pursuant to which Dr. Norchi’s employment
agreement with ABS has been terminated by mutual agreement effective as of the closing of the Merger and Dr. Norchi has agreed
to waive in full any and all right to receive such cash bonus and warrants.
Commencing in February 2009, Dr. Norchi loaned ABS an aggregate
amount of $275,200 in several installments. On January 21, 2010, ABS issued a promissory note to Dr. Norchi in exchange for that
loan in principal amount of $275,200, which promissory note, as amended, bore interest at the rate of 6% per annum through December
31, 2009 and at the rate of 10% per annum thereafter, was due upon demand and was unsecured. On June 24, 2013, ABS paid to Dr.
Norchi all amounts due and owing under such promissory note, which totaled $373,488 as of such date.
James R. Sulat, who was appointed as a member of our Board of
Directors on August 19, 2015, is a co-trustee of the Keyes Sulat Revocable Trust (the “Trust”). Prior to Mr.
Sulat’s appointment to our Board of Directors, both the Trust and Mr. Sulat, in his capacity as a consultant to the Company,
purchased or received securities of the Company, in each case in transactions that were approved by the full Board of Directors
in effect at the time of such transactions. In particular, on June 19, 2013, the Trust purchased from ABS Repurchased Securities
in the aggregate principal amount of $75,000. As noted above, the amounts owed under the Repurchased Securities were converted
into shares of the Company’s Common Stock upon the closing of the Merger, calculating to approximately one share of the Company’s
Common Stock for each $0.27 outstanding under the notes, and warrants issued in connection with the notes were cancelled in full
upon the closing of the Merger. Accordingly, the Trust became entitled to receive 273,277 shares of the Company’s Common
Stock upon the closing of the Merger as a result of its purchase of $75,000 worth of the Repurchased Securities. On June 18, 2013,
Mr. Sulat was awarded a stock option award to purchase 30,000 shares of our Common Stock at an exercise price of $0.37 per share
in consideration for services rendered to us as a consultant, and on August 19, 2015, we awarded Mr. Sulat an additional stock
option award to purchase 200,000 shares of Common Stock at an exercise price of $0.27 per share in connection with his appointment
to our Board of Directors. In addition and as noted elsewhere in this prospectus, in exchange for a payment of $100,000, the Trust
received 454,546 shares of our Common Stock upon the Initial Closing of the 2015 Private Placement Financing on June 30, 2015,
and a Series D Warrant exercisable for the same number of shares at an exercise price of $0.25.
Review, Approval or Ratification of Transactions with Related
Persons
Due to the small size of our Company, at this time we have determined
to rely on our full Board of Directors to review related party transactions and identify and prevent conflicts of interest. Our
Board of Directors reviews a transaction in light of the affiliations of the director, officer, employee or stockholder and the
affiliations of such person’s immediate family. Transactions are presented to our Board of Directors for approval before
they are entered into or, if that is not possible, for ratification after the transaction has occurred. If our Board of Directors
finds that a conflict of interest exists, then it will determine the appropriate remedial action, if any. Our Board of Directors
approves or ratifies a transaction if it determines that the transaction is consistent with the best interests of the Company and
its stockholders. The procedures described above have been approved by resolutions adopted by our Board of Directors.
Director Independence
Our Board of Directors has determined that Dr. Avtar Dhillon
and Mr. James R. Sulat would qualify as “independent” as that term is defined by Nasdaq Listing Rule 5605(a)(2). Further,
although we have not established separately designated audit, nominating or compensation board committees, Dr. Dhillon and Mr.
Sulat would qualify as “independent” under Nasdaq Listing Rules applicable to all such board committees. Dr. Terrence
W. Norchi would not qualify as “independent” under Nasdaq Listing Rules applicable to the Board of Directors generally
or to separately designated board committees because he currently serves as our President and Chief Executive Officer.
Subject to some exceptions, Nasdaq Listing Rule 5605(a)(2) provides
that an independent director is a person other than an executive officer or other employee of the Company or any other individual
having a relationship which, in the opinion of our Board of Directors, would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director. Under Nasdaq Listing Rule 5605(a)(2) and subject to certain exceptions, a director
will not be deemed to be independent if (a) the director is, or at any time during the past three years was, an employee of ours;
(b) the director or a member of the director’s immediate family or a person living with such director (collectively, a “Related
Party”) has received more than $120,000 in compensation from us during any twelve-month period within the preceding three
years, other than compensation for service as a director or as a non-executive employee (in the case of Related Party), benefits
under a tax-qualified retirement plan or non-discretionary compensation; (c) a Related Party is, or in the past three years has
been, an executive officer of ours; (d) the director or a Related Party is an executive officer, partner or controlling shareholder
of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period during our past
three fiscal years, exceeds the greater of 5% of the recipient’s consolidated gross revenues for that year or $200,000 (except
for payments arising solely from investments in our securities or payments under non-discretionary charitable contribution matching
programs); (e) the director or a Related Party is employed as an executive officer of another company where at any time during
the preceding three years one of our executive officers served on the compensation committee of such company; and (f) the director
or a Related Party is a current partner of our independent public accounting firm, or has worked for such firm in any capacity
on our audit at any time during the past three years.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth certain information regarding
the beneficial ownership of our Common Stock by (i) each person who, to our knowledge, beneficially owns more than 5% of
our Common Stock; (ii) each of our directors and named executive officers; and (iii) all of our directors and executive officers
as a group. Unless otherwise indicated in the footnotes to the following table, the address of each person named in the table
is: c/o Arch Therapeutics, Inc., 235 Walnut St., Suite #6, Framingham, Massachusetts 01702. The information set forth in
the table below is based on 105,742,885 shares of our Common Stock outstanding on September 10, 2015. Shares of our Common Stock
subject to options, warrants, or other rights currently exercisable or exercisable within 60 days of September 10, 2015 are deemed
to be beneficially owned and outstanding for computing the share ownership and percentage of the person holding such options,
warrants or other rights, but are not deemed outstanding for computing the percentage of any other person. The following table
is presented after taking into account (a) the 4.9% ownership limitation to which Cranshire Capital Master Fund, Ltd., Intracoastal
Capital, LLC (“Intracoastal”), Anson Investments Master Fund LP (“Anson”) and any other
person holding 2014 Warrants issued in the 2014 Private Placement Financing is subject to as a result of the terms of the 2014
Warrants issued in such financing; (b) the 4.99% ownership limitations (which may be increased to 9.99% at the holder’s
discretion) to which Anson, Intracoastal and Capital Ventures International are subject as a result of the terms of the Convertible
Note issued to such holders in connection with their respective Convertible Notes Subscription Agreement; and (c) the 4.9% ownership
limitation (which may waived at the holder’s discretion, provided that such waiver will not become effective until the 61st
day after delivery of such waiver notice) to which Anson, Intracoastal and Mr. Michael A. Parker are subject to under the
terms of the Series D Warrants issued to them in the 2015 Private Placement Financing. As a result of the foregoing ownership
limitations, the table below does not include any of the investors in the 2015 Private Placement Financing, the Notes Offering
or the 2014 Private Placement Financing other than Mr. Parker. For a further description of the 2015 Warrants , the Convertible
Notes, and the Series D Warrants, please see the disclosure under the heading “Summary—2015 Private Placement Financing”,
“Summary—Notes Offering”, and “Summary—2014 Private Placement Financing”, respectively.
Name of Beneficial Owner | |
Number of Shares Beneficially Owned | | |
Percentage of Shares Beneficially Owned (1) | |
5%+ Stockholders: | |
| | | |
| | |
Twelve Pin Partners (2) | |
| 10,000,000 | | |
| 9.46 | % |
Michael A. Parker (3) | |
| 5,950,952 | | |
| 5.63 | % |
Directors and Executive Officers | |
| | | |
| | |
Avtar Dhillon (4) | |
| 7,782,456 | | |
| 7.32 | % |
Terrence Norchi (5) | |
| 11,945,534 | | |
| 11.24 | % |
James R. Sulat (6) | |
| 1,232,369 | | |
| 1.16 | % |
William Cotter (7) | |
| 944,792 | | |
| 0.89 | % |
Richard E. Davis (8) | |
| 379,167 | | |
| 0.36 | % |
Current Directors and Named Executive Officers as a Group (5 persons) | |
| 22,284,318 | | |
| 20.50 | % |
Shares of our Common Stock subject to options, warrants, or
other rights currently exercisable or exercisable within 60 days of September 10, 2015, are deemed to be beneficially owned and
outstanding for computing the share ownership and percentage of the person holding such options, warrants or other rights, but
are not deemed outstanding for computing the percentage of any other person.
| (1) | Except as otherwise indicated, we believe that each of the beneficial owners of the Common Stock listed previously, based on
information furnished by such owners, has sole investment and voting power with respect to the shares listed as beneficially owned
by such owner, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power with respect to securities. |
| (2) | Dr. Norchi is the sole member of Twelve Pins Partners, LLC and has sole voting and investment control with respect to the shares
it holds. Dr. Norchi disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein. |
| (3) | Excludes 5,000,0000 shares of our Common Stock issuable upon the exercise of the Series D Warrant issued to Mr. Parker upon
the Initial Closing of the 2015 Private Placement Financing as a result of the 4.9% ownership limitation that Mr. Parker is subject
to under the terms of his Series D Warrant. |
| (4) | Includes 622,083 shares subject to options exercisable within 60 days after September 10, 2015. |
| (5) | Represents (a) 10,000,000 shares of our Common Stock held by Twelve Pins Partners, LLC, with respect to which Dr. Norchi holds
sole voting and investment control; (b) 1,419,076 shares issued to Dr. Norchi upon the closing of the Merger in exchange for the
cancellation of shares of Common Stock and convertible notes of ABS owned by him immediately prior to the closing of the Merger;
and (c) 526,458 shares subject to options exercisable within 60 days after September 10, 2015. Dr. Norchi disclaims beneficial ownership
of the securities held by Twelve Pins Partners, LLC except to the extent of his pecuniary interest therein. |
| (6) | Includes (a) 727,823 shares of our Common Stock and a Series D Warrant exercisable for 454,546 shares of our Common Stock held
by Keyes Sulat Revocable Trust; and (b) 50,000 shares subject to options exercisable within 60 days after September 10, 2015. Excludes
30,000 shares subject to an option granted to Mr. Sulat in his capacity as a consultant on June 18, 2013 that can only be exercised
upon the earlier of (i) calendar year 2018, or (ii) a corporate transaction or change of control which also constitutes a “change
in the ownership or effective control, or in the ownership of a substantial portion of the assets” within the meaning of
Section 409A. Mr. Sulat disclaims beneficial ownership of the securities held by Keyes Sulat Revocable Trust except to the extent
of his pecuniary interest therein. |
| (7) | Represents 944,792 shares subject to options exercisable within 60 days after September 10, 2015. |
| (8) | Represents 379,167 shares subject to options exercisable within 60 days after September 10, 2015. |
LEGAL
MATTERS
The validity of the Common Stock being offered hereby has been
passed upon for us by McDonald Carano Wilson LLP, Reno, Nevada.
EXPERTS
Moody, Famiglietti & Andronico, LLP, an independent registered
public accounting firm, has audited our consolidated financial statements for the years ended September 30, 2014 and 2013, as stated
in its report appearing herein, and such audited consolidated financial statements have been so included in reliance upon the report
of such firm given upon its authority as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read or obtain a copy of these reports at the SEC’s public reference room at
100 F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. You may obtain information
on the operation of the public reference room and its copy charges by calling the SEC at 1-800-SEC-0330. The SEC maintains a website,
at http://www.sec.gov, that contains registration statements, reports, proxy information statements and other information regarding
registrants that file electronically with the SEC, including us. Our website address is http://www.archtherapeutics.com. We have
not incorporated by reference into this prospectus the information on our website, and you should not consider it to be a part
of this document.
We have filed with the SEC a registration statement on Form S-1
under the Securities Act with respect to the shares of Common Stock being offered by this prospectus. This prospectus is part of
that registration statement. This prospectus does not contain all of the information set forth in the registration statement or
the exhibits to the registration statement. For further information with respect to us and the shares we are offering pursuant
to this prospectus, you should refer to the registration statement and its exhibits. Statements contained in this prospectus as
to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer to
the copy of that contract or other documents filed as an exhibit to the registration statement. You may read or obtain a copy of
the registration statement at the SEC’s public reference room and website referred to above.
ARCH THERAPEUTICS, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
Index to Consolidated Financial
Statements
Report of Independent Registered Public Accounting Firm |
|
F-2 |
|
|
|
Consolidated Balance Sheets as of September 30, 2014 and 2013 |
|
F-3 |
|
|
|
Consolidated Statements of Operations for the Years Ended September 30, 2014 and 2013 |
|
F-4 |
|
|
|
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the Years Ended September 30, 2014 and 2013 |
|
F-5 |
|
|
|
Consolidated Statements of Cash Flows for the Years Ended September 30, 2014 and 2013 |
|
F-6 |
|
|
|
Notes to Consolidated Financial Statements |
|
F-7 |
|
|
|
Consolidated Balance Sheets as of June 30, 2015 (unaudited) and September 30, 2014 |
|
F-22 |
|
|
|
Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and June 30, 2014 (unaudited) |
|
F-23 |
|
|
|
Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and June 30, 2014 (unaudited) |
|
F-24 |
|
|
|
Notes to Consolidated Financial Statements (unaudited) |
|
F-25 |
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Stockholders and Board of Directors
of Arch Therapeutics, Inc.
Wellesley, Massachusetts
We have audited the accompanying consolidated
balance sheets of Arch Therapeutics, Inc. and subsidiary (the “Company”) as of September 30, 2014 and 2013, and the
related consolidated statements of operations, changes in stockholders’ (deficit) equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Arch Therapeutics, Inc. and subsidiary
as of September 30, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial
statements have been prepared assuming that Arch Therapeutics, Inc. and subsidiary will continue as a going concern. As discussed
in Notes 1 and 2 to the consolidated financial statements, the Company has an accumulated deficit, has suffered significant net
losses and negative cash flows from operations, and has limited working capital that raises substantial doubt about its ability
to continue as a going concern. Management’s plans in regard to these matters are also described in Notes 1 and 2. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Moody, Famiglietti & Andronico, LLP
Tewksbury, MA
December 12, 2014
Arch Therapeutics, Inc. |
Consolidated Balance Sheets |
As of September 30, 2014 and 2013 |
|
| |
September 30,
2014 | | |
September 30,
2013 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 833,520 | | |
$ | 557,319 | |
Promissory note receivable | |
| - | | |
| 1,000,000 | |
Prepaid expenses and other current assets | |
| 43,470 | | |
| 19,629 | |
Total current assets | |
| 876,990 | | |
| 1,576,948 | |
| |
| | | |
| | |
Long-term assets: | |
| | | |
| | |
Property and equipment, net | |
| - | | |
| 322 | |
Other Assets | |
| - | | |
| 10,062 | |
Total long-term assets | |
| - | | |
| 10,384 | |
| |
| | | |
| | |
Total assets | |
$ | 876,990 | | |
$ | 1,587,332 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 175,832 | | |
$ | 314,769 | |
Accrued expenses and other liabilities | |
| 267,835 | | |
| 140,840 | |
Current derivative liabilities | |
| 2,280,000 | | |
| - | |
Total current liabilities | |
| 2,723,667 | | |
| 455,609 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Note payable, Net of Unamortized Discount | |
| 955,766 | | |
| 944,707 | |
Accrued interest, net of current portion | |
| 100,000 | | |
| - | |
Derivative liabilities, net of current portion | |
| 3,990,000 | | |
| - | |
Total long-term liabilities | |
| 5,045,766 | | |
| 944,707 | |
| |
| | | |
| | |
Total liabilities | |
| 7,769,433 | | |
| 1,400,316 | |
| |
| | | |
| | |
Commitments and contingencies( see Note 13) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ (deficit) equity: | |
| | | |
| | |
| |
| | | |
| | |
Common stock, $0.001 par value, 300,000,000 shares authorized, 72,076,487 and 60,145,237
shares issued and outstanding as of September 30, 2014 and September 30, 2013, respectively | |
| 72,051 | | |
| 60,145 | |
Additional paid in capital | |
| 5,810,200 | | |
| 4,758,742 | |
Accumulated Deficit | |
| (12,774,694 | ) | |
| (4,631,871 | ) |
Total stockholders’ (deficit) equity | |
| (6,892,443 | ) | |
| 187,016 | |
| |
| | | |
| | |
Total liabilities and stockholders' (deficit) equity | |
$ | 876,990 | | |
$ | 1,587,332 | |
The accompanying
notes are an integral part of these consolidated financial statements
Arch Therapeutics, Inc. |
Consolidated Statements of Operations |
For the Years Ended September 30, 2014 and 2013 |
|
| |
Fiscal Year Ended
September 30, 2014 | | |
Fiscal Year Ended
September 30, 2013 | |
| |
| | |
| |
Revenues | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Operating expenses: | |
| | | |
| | |
General and administrative expenses | |
| 3,134,285 | | |
| 1,526,075 | |
Research and development expenses | |
| 1,477,479 | | |
| 218,901 | |
Total operating expenses | |
| 4,611,764 | | |
| 1,744,976 | |
| |
| | | |
| | |
Operating loss | |
| (4,611,764 | ) | |
| (1,744,976 | ) |
| |
| | | |
| | |
Other (expense) income: | |
| | | |
| | |
Interest expense | |
| (111,059 | ) | |
| (108,879 | ) |
Loss on issuance of warrants | |
| (7,541,693 | ) | |
| - | |
Adjustment to fair value of derivative | |
| 4,121,693 | | |
| - | |
Other income | |
| - | | |
| 64 | |
Total other expense | |
| (3,531,059 | ) | |
| (108,815 | ) |
| |
| | | |
| | |
Net Loss | |
$ | (8,142,823 | ) | |
$ | (1,853,791 | ) |
| |
| | | |
| | |
| |
| | | |
| | |
Basic earnings per share | |
| | | |
| | |
Net Loss per Share | |
$ | (0.12 | ) | |
$ | (0.09 | ) |
Weighted Common Shares - Basic and Diluted | |
| 67,492,823 | | |
| 21,366,752 | |
The accompanying
notes are an integral part of these consolidated financial statements
Arch Therapeutics, Inc. |
Consolidated Statements of Changes in Stockholders' (Deficit)
Equity |
For the Years Ended September 30, 2014, and 2013 |
|
| |
| | |
| | |
Additional | | |
| | |
Total | |
| |
Common Stock | | |
Paid-in- | | |
Accumulated | | |
Stockholders' | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
(Deficit) Equity | |
| |
| | |
| | |
| | |
| | |
| |
Balance at September 30, 2012 | |
| 5,645,212 | | |
| 5,645 | | |
| - | | |
| (2,778,080 | ) | |
| (2,772,435 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (1,853,791 | ) | |
| (1,853,791 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| - | |
Equity acquired in reverse merger on June 26 | |
| 41,500,000 | | |
| 41,500 | | |
| (41,500 | ) | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock and 2,500,000 warrants to purchase 2,500,000 shares
of common stock on June 26 for $1,250,000 ($0.50 per share) | |
| 2,500,000 | | |
| 2,500 | | |
| 1,247,500 | | |
| - | | |
| 1,250,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Exchange of debt and accrued interest for common stock pursuant to reverse
merger on June 26 | |
| 9,000,025 | | |
| 9,000 | | |
| 2,461,022 | | |
| - | | |
| 2,470,022 | |
| |
| | | |
| | | |
| | | |
| | | |
| - | |
500,000 warrants to purchase 500,000 shares of common stock on July 3 for
$250,000 ($0.50 per share) | |
| 500,000 | | |
| 500 | | |
| 249,500 | | |
| - | | |
| 250,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock and 1,000,000 warrants to purchase 1,000,000 shares
of common stock on August 30 for $500,000 ($0.50 per share) | |
| 1,000,000 | | |
| 1,000 | | |
| 499,000 | | |
| - | | |
| 500,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Grant of one warrant to purchase 145,985 shares of common stock issued with
note payable on September 30 | |
| - | | |
| - | | |
| 55,293 | | |
| - | | |
| 55,293 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock based compensation expense | |
| - | | |
| - | | |
| 287,927 | | |
| - | | |
| 287,927 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at September 30, 2013 | |
| 60,145,237 | | |
| 60,145 | | |
| 4,758,742 | | |
| (4,631,871 | ) | |
| 187,016 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (8,142,823 | ) | |
| (8,142,823 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of restricted stock for services | |
| 275,000 | | |
| 275 | | |
| 94,600 | | |
| - | | |
| 94,875 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Exercise of stock options | |
| 231,250 | | |
| 231 | | |
| 92,269 | | |
| - | | |
| 92,500 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of stock in Private Placement Funding | |
| 11,400,000 | | |
| 11,400 | | |
| (236,697 | ) | |
| - | | |
| (225,297 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock based compensation expense | |
| - | | |
| - | | |
| 1,101,286 | | |
| - | | |
| 1,101,286 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at September 30, 2014 | |
| 72,051,487 | | |
$ | 72,051 | | |
$ | 5,810,200 | | |
$ | (12,774,694 | ) | |
$ | (6,892,443 | ) |
The accompanying notes
are an integral part of these consolidated financial statements
Arch Therapeutics, Inc. |
Consolidated Statements of Cash Flows
|
For the Years Ended September 30, 2014 and 2013 |
|
| |
Fiscal Year Ended
September 30, 2014 | | |
Fiscal Year Ended
September 30, 2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (8,142,823 | ) | |
$ | (1,853,791 | ) |
Adjustments to reconcile net loss to cash used in operating activities: | |
| | | |
| | |
Depreciation expense | |
| 322 | | |
| 586 | |
Other noncash adjustments | |
| 92,500 | | |
| (92 | ) |
Stock-based compensation | |
| 1,101,286 | | |
| 287,927 | |
Noncash interest expense on notes payable | |
| 111,059 | | |
| - | |
Noncash interest expense on convertible notes payable | |
| - | | |
| 82,147 | |
Noncash interest expense on notes payable to related party | |
| - | | |
| 25,599 | |
Repayment of accrued interest to related party | |
| - | | |
| (98,288 | ) |
Non cash expense for issuance of warrants | |
| 3,420,000 | | |
| - | |
Issuance of common stock for services | |
| 94,875 | | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
(Increase) decrease in: | |
| | | |
| | |
Prepaid expenses and other current assets | |
| (13,779 | ) | |
| (16,321 | ) |
Other Assets | |
| - | | |
| (10,062 | ) |
Increase (decrease) in: | |
| | | |
| | |
Accounts payable | |
| (138,937 | ) | |
| 56,343 | |
Accrued expenses and other liabilities | |
| 126,995 | | |
| 91,332 | |
Net cash used in operating activities | |
| (3,348,502 | ) | |
| (1,434,620 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| - | | |
| - | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of common stock and warrants | |
| 2,624,703 | | |
| 2,000,000 | |
Repayment of notes payable to related party | |
| - | | |
| (275,200 | ) |
Proceeds from issuance of convertible notes payable | |
| - | | |
| 250,000 | |
Proceeds from issuance of notes payable | |
| 1,000,000 | | |
| - | |
Net cash provided by financing activities | |
| 3,624,703 | | |
| 1,974,800 | |
| |
| | | |
| | |
Net increase in cash and cash equivalents | |
| 276,201 | | |
| 540,180 | |
| |
| | | |
| | |
Cash and cash equivalents, beginning of period | |
| 557,319 | | |
| 17,139 | |
| |
| | | |
| | |
Cash and cash equivalents, end of period | |
$ | 833,520 | | |
$ | 557,319 | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | - | | |
$ | 98,288 | |
| |
| | | |
| | |
Debt with warrants issued for promissory note receivable | |
$ | - | | |
$ | 1,000,000 | |
| |
| | | |
| | |
Exchange of convertible notes and related accrued interest
for common stock | |
$ | - | | |
$ | 2,470,022 | |
| |
| | | |
| | |
Fully depreciated fixed assets disposed of | |
$ | 2,066 | | |
$ | - | |
The accompanying
notes are an integral part of these consolidated financial statements
Notes to the Consolidated Financial
Statements
| 1. | DESCRIPTION
OF BUSINESS |
Arch Therapeutics, Inc., (together
with its subsidiary, the “Company”) was incorporated under the laws of the State of Nevada on September 16, 2009,
under the name “Almah, Inc.” to pursue the business of distributing automobile spare parts online. Effective June
26, 2013, the Company completed a merger (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 has changed its operations to the business of a life science medical device company. Subsequent to the Merger,
we relocated our principal office to Wellesley, Massachusetts.
For financial reporting purposes,
the Merger represented a “reverse merger” rather than a business combination and 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 Commonwealth of Massachusetts on March 6, 2006 as Clear Nano Solutions, Inc. On April 7, 2008, ABS changed its name to
Arch Therapeutics, Inc. Effective upon the closing of the Merger, ABS changed its name from Arch Therapeutics, Inc. to Arch Biosurgery,
Inc.
The Company has generated no
operating revenues to date, and is devoting substantially all of its efforts toward product research and development. To date,
the Company has principally raised capital through borrowings and the issuance of convertible debt and units consisting of common
stock and warrants.
The Company expects to incur
substantial expenses for the foreseeable future relating to the research, development and commercialization of its potential products.
The Company does not have sufficient cash and cash equivalents to support its current operating plan. The Company will be required
to raise additional capital, obtain alternative means of financial support, or both, in order to continue to fund operations.
However, there can be no assurance that the Company will be successful in securing additional resources when needed on terms acceptable
to the Company, if at all. Therefore, there exists substantial doubt about the Company’s ability to continue as a going
concern. The consolidated financial statements do not include any adjustments related to the recoverability of assets that might
be necessary despite this uncertainty.
| 2. | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES |
The accompanying consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”).
Basis of Accounting
The consolidated financial statements include the
accounts of Arch Therapeutics and its wholly owned subsidiary, Arch Biosurgery, Inc., a life science medical device company. All
intercompany accounts and transactions have been eliminated in consolidation.
The Company is in the development stage and is
devoting substantially all of its efforts to developing technologies, raising capital, establishing customer and vendor
relationships, and recruiting new employees. Due to the fact that we are a development stage company, we have historically
included inception-to-date information, and certain disclosures required under U.S. GAAP in our financial statements. The
amendments in this ASU (2014-10) remove all incremental financial reporting requirements, except for certain required
incremental disclosures from U.S. GAAP for development stage companies. We have elected to early adopt this ASU. The
amendments required in this ASU have been applied retrospectively and all inception to date information has been removed from
our financial statements presented within this Annual Report on Form 10-K. The clarification to Topic 275 was applied
prospectively to all unrecognized tax benefits that existed at the effective date.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of cash and cash equivalents. 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 and cash equivalents.
Property and Equipment
Property and equipment are recorded
at cost and depreciated using the straight-line method over the estimated useful life of the related asset. Upon sale or retirement,
the cost and accumulated depreciation are eliminated from their respective accounts, and the resulting gain or loss is included
in income or loss for the period. Repair and maintenance expenditures are charged to expense as incurred.
Impairment of Long-Lived
Assets
Long-lived assets are reviewed
for impairment when circumstances indicate the carrying value of an asset may not be recoverable in accordance with ASC 360, Property,
Plant and Equipment. For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash
flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made
to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.
Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.
Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value. For the years ended September
30, 2014 and 2013 there has not been any impairment of long-lived assets.
Convertible Debt
The Company records a discount
to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between
the fair value of the underlying preferred stock at the commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized to noncash interest expense using the effective interest
rate method over the term of the related debt to their date of maturity. If a security or instrument becomes convertible only
upon the occurrence of a future event outside the control of the Company, or, is convertible from inception, but contains conversion
terms that change upon the occurrence of a future event, then any contingent beneficial conversion feature is measured and recognized
when the triggering event occurs and contingency has been resolved.
Income Taxes
In accordance with ASC 740, Income
Taxes, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences or events that
have been included in the Company’s consolidated financial statements and/or tax returns. Deferred tax assets and liabilities
are based upon the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities
and for loss and credit carryforwards using enacted tax rates expected to be in effect in the years in which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
The Company provides reserves for potential payments
of tax to various tax authorities related to uncertain tax positions when management determines that it is probable that a loss
will be incurred related to these matters and the amount of the loss is reasonably determinable. The Company has no reserves related
to uncertain tax positions as of September 30, 2014 and 2013.
Research and Development
The Company expenses internal
and external research and development costs, including costs of funded research and development arrangements, in the period incurred.
Accounting for Stock-Based
Compensation
The Company accounts for employee
stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation-Stock Compensation (“FASB ASC
Topic 718”) that requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the consolidated financial statements based on their fair values. The Company accounts for non-employee stock-based
compensation in accordance with the guidance of FASB ASC Topic 505, Equity (“FASB ASC Topic 505”), which
requires that companies recognize compensation expense based on the estimated fair value of options granted to non-employees over
their vesting period, which is generally the period during which services are rendered by such non-employees. FASB ASC Topic 505
requires the Company to re-measure the fair value of stock options issued to non- employee at each reporting period during the
vesting period or until services are complete.
In accordance with FASB ASC Topic
718, the Company has elected to use the Black-Scholes option pricing model to determine the fair value of options granted and
recognizes the compensation cost of share-based awards on a straight-line basis over the vesting period of the award.
The determination of the fair
value of share-based payment awards utilizing the Black-Scholes model is affected by the fair value of the common stock and a
number of other assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The
Company does not have a history of market prices of the common stock, and as such volatility is estimated in accordance with ASC
718-10-S99 Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB No. 107”), using
historical volatilities of similar public entities. The life term for awards and, therefore, uses simplified method for all “plain
vanilla” options, as defined in SAB No. 107 and the contractual term for all other employee and non-employee awards. The
risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield
assumption is based on history and the expectation of paying no dividends. Forfeitures are estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense,
when recognized in the consolidated financial statements, is based on awards that are ultimately expected to vest.
Fair Value Measurements
The Company measures both financial
and nonfinancial assets and liabilities in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures,
except those that are recognized or disclosed in the consolidated financial statements at fair value on a recurring basis. The
standard created a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the
assumptions market participants would use in pricing the asset or liability.
The Company’s financial
instruments include cash and cash equivalents. Because of their short maturity, the carrying amount of cash and cash equivalents
are considered to approximate fair value.
Subsequent Events
The Company evaluated all events
or transactions that occurred through December 10, 2014 the date which these consolidated financial statements were available
to be issued. The Company disclosed material subsequent events in Note 14.
Going Concern Basis of Accounting
The Company does not currently believe its existing
cash resources are sufficient to meet its anticipated needs during the next twelve months. As reflected in the financial statements,
the Company has an accumulated deficit, has suffered significant net losses and negative cash flows from operations, and has limited
working capital. The continuation of our business as a going concern is dependent upon raising additional capital and eventually
attaining and maintaining profitable operations. As of September 30, 2014, there is substantial doubt about our ability to continue
as a going concern. The consolidated financial statements included in this report do not include any adjustments that might be
necessary should operations discontinue. The Company expects to incur substantial expenses for the foreseeable future for the
research, development and commercialization of its potential products. In addition, the Company will require additional financing
in order to seek to license or acquire new assets, research and develop any potential patents and the related compounds, and obtain
any further intellectual property that the Company may seek to acquire. The Company does not have sufficient cash and cash equivalents
to support its current operating plan. The Company will be required to raise additional capital, obtain alternative means of financial
support, or both, in order to continue to fund operations. Therefore, there exists substantial doubt about the Company’s
ability to continue as a going concern. Historically, the Company has funded its operations primarily through equity and debt
financings.
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.
The consolidated financial statements
include the accounts of the Company as of September 30, 2014 and 2013. All significant intercompany balances and transactions
have been eliminated in consolidation.
At September 30, 2014 and 2013,
property and equipment consisted of:
| |
Estimated | |
| | |
| |
| |
Useful Life | |
2014 | | |
2013 | |
| |
| |
| | |
| |
Furniture and fixtures | |
5 years | |
$ | 2,925 | | |
$ | 2,925 | |
| |
| |
| | | |
| | |
Lab equipment | |
5 years | |
| 1,000 | | |
| 3,066 | |
| |
| |
| | | |
| | |
| |
| |
| 3,925 | | |
| 5,991 | |
| |
| |
| | | |
| | |
Less - accumulated depreciation | |
| |
| 3,925 | | |
| 5,669 | |
| |
| |
$ | - | | |
$ | 322 | |
Depreciation expense for the
years ended September 30, 2014 and 2013 was $322 and $586, respectively.
During the year ended September
30, 2014, the Company disposed of certain property and equipment with historical costs of $2,066 and accumulated depreciation
thereon of $2,066.
The principal components of
the Company's net deferred tax assets consisted of the following at September 30:
| |
2014 | | |
2013 | |
Net operating loss carryforwards | |
$ | 2,731,492 | | |
$ | 1,332,955 | |
Capitalized expenditures | |
| 381,872 | | |
| - | |
Research and experimentation credit carryforwards | |
| 63,368 | | |
| 32,559 | |
Stock based compensation | |
| 501,175 | | |
| 115,171 | |
Fixed assets | |
| 1,568 | | |
| 7,492 | |
Accrued expenses | |
| 46,230 | | |
| 35,744 | |
Gross deferred tax assets | |
| 3,725,705 | | |
| 1,523,921 | |
Deferred tax asset valuation allowance | |
| (3,725,705 | ) | |
| (1,523,921 | )) |
| |
| | | |
| | |
Net deferred tax assets | |
$ | - | | |
$ | - | |
As of September 30, 2014 and
2013, the Company had federal net operating loss carryforwards of approximately $6,230,000 and $3,486,000, respectively, which
may be available to offset future taxable income and which would begin to expire in 2026. As of September 30, 2014 and 2013, the
Company had federal research and experimentation credit carryforwards of $44,112 and $32,559, respectively, which may be available
to offset future income tax liabilities and which would begin to expire in 2029.
As of September 30, 2014 and
2013, the Company had state net operating loss carryforwards of approximately $5,271,000 and $2,800,000, respectively, which may
be available to offset future taxable income and which would begin to expire in 2014. As of September 30, 2014 and 2013, the Company
had state research and experimentation credit carryforwards of approximately $19,000 and $10,000, respectively, which may be able
to offset future income tax liabilities and which would begin to expire in 2023.
As the Company has not yet achieved
profitable operations, management believes the tax benefits as of September 30, 2014 and 2013 did not satisfy the realization
criteria set forth in FASB ASC Topic 740, Income Taxes, and therefore has recorded a valuation allowance for the entire deferred
tax asset. The valuation allowance increased in 2014 and 2013 by approximately $2,202,000 and $589,000, respectively. The Company’s
effective income tax rate differed from the federal statutory rate due to state taxes and the Company’s full valuation allowance,
the latter of which reduced the Company’s effective federal income tax rate to zero.
The Company experienced an ownership change as
a result of the Merger described in Note 6, causing a limitation on the annual use of the net operating loss carryforwards, which
are subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section
382 and similar state provisions
| 5. | RELATED
PARTY TRANSACTIONS |
Notes Payable, Related Party
In February 2009, ABS issued
a promissory note (the “Note”) to Terrence Norchi (the “Note Holder”), a shareholder and director of the
Company. During the period from February 2009 through February 2011, aggregate cash proceeds of $275,200 were advanced to the
Company under Note. The Note accrued interest at a rate of 6% per year through December 31, 2009 and 10% per year beginning January
1, 2010. The original maturity date of the Note was August 10, 2010. In connection with the Note, the Company issued warrants
to purchase shares of convertible preferred stock at the purchase price of such stock equal to 20% of the principal balance of
the Note divided by the purchase price.
Upon maturity of the Note on
August 10, 2010, the Note Holder entered into an agreement of forbearance with the Company extending the time to repay the Note
and accrued interest for an unspecified period of time. Under the terms of the agreement, interest continued to accrue at 10%
per year. On June 24, 2013 the Company repaid the full amount of principle and accrued interest and the Note Holder agreed to
cancel all related warrants.
Convertible Notes Payable,
Related Parties
From June 2006 through December
2008, ABS issued convertible notes (“Convertible Notes”) to related parties for aggregate cash proceeds of $105,000.
The notes accrued interest at various rates ranging from 6% to 10% per year and had an original maturity date of two years from
issuance. The Convertible Notes were originally convertible into shares of convertible preferred stock upon the closing of a preferred
equity financing of at least $1,000,000, the number of which was to be determined by dividing the principal and accrued interest
by the purchase price of the convertible preferred stock ("Conversion Price").
In connection with the notes,
ABS issued warrants to purchase additional shares of convertible preferred stock at the conversion price equal to an aggregate
amount of 20% of the principal. At September 30, 2012, $55,000 of the convertible notes with related parties had matured. In January
2013, an additional $50,000 matured bringing the total to $105,000. Each of the holders of the matured notes entered into an agreement
of forbearance with the Company extending the time to repay the matured notes and accrued interest for an unspecified amount of
time. Under the terms of the forbearance agreement, interest continued to accrue at the rate in effect at the time of maturity.
On April 20, 2013, the Convertible
Note Holders and the Company entered into an agreement to cancel the related warrants and exchange the notes (with a total aggregate
principal balance of $1,880,000) and the interest accrued through April 30, 2013 for the Company’s common stock upon the
completion of the Merger on June 26, 2013 as described in Note 6.
Directors Compensation
In November 2010, ABS entered
into an agreement to pay Terrence Norchi, its Chief Executive Officer, a cash bonus of $500,000 upon the raising of capital from
a financing of at least $1,000,000. Additionally, ABS agreed that upon such closing, warrants shall be issued to him allowing
the purchase of the number of shares of convertible preferred stock equal to $100,000 divided by the purchase price per share
of the convertible preferred stock. On June 25, 2013 Terrence Norchi and ABS entered into a Termination Agreement and Release
terminating the agreement for the cash bonus and warrants.
On June 26, 2013, a merger (the
“Merger”) was completed by Arch Acquisition Corporation, a Massachusetts corporation and the Company’s
wholly-owned subsidiary formed for the purpose of the transaction (“Merger Sub”) and ABS, with ABS surviving the Merger
as the Company’s wholly owned subsidiary. Upon the closing of the Merger, all of the issued and outstanding capital stock
and convertible notes of ABS were exchanged for an aggregate of 14,645,237 shares of the Company’s common stock. Also, in
connection with the Merger, the warrants of ABS were cancelled. For financial reporting purposes, the Merger represented a “reverse
merger” rather than a business combination and ABS was deemed to be the accounting acquirer in the transaction. Consequently,
the assets, liabilities, accumulated deficit and the historical operations reflected in the Company’s consolidated financial
statements are those of ABS. All share information has been restated to reflect the effects of the reverse 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 all future filings with the SEC.
| 7. | CONVERTIBLE
NOTES PAYABLE |
From March 2006 through January
2013, the Company issued convertible notes for aggregate cash proceeds of $1,735,000. The notes accrued interest at various rates
ranging from 6% to 10% per year and had an original maturity date of two years from issuance. The notes were originally convertible
into the number of shares of convertible preferred stock upon the closing of a preferred equity financing of at least $1,000,000
by dividing the principal and accrued interest by the purchase price of the convertible preferred stock. In connection with the
notes, the Company issued warrants to purchase additional shares of convertible preferred stock at the conversion price equal
to an aggregate amount ranging from 10% to up to 50% of the principal balance of the note. The warrants had various expiration
dates through January 2015.
On July 5, 2011, the Company
issued a convertible note for cash proceeds of $250,000. The note accrued interest at 6% per year and matured in one year. The
note was convertible into the number of shares of common stock upon the closing of an equity financing of at least $750,000 by
dividing the principal and accrued interest by the purchase price of the stock sold in the equity financing. Upon maturity of
the note on July 5, 2012, the note holder entered into an agreement of forbearance with the Company extending time to repay the
matured note and the accrued interest for an unspecified period of time. Under the terms of the agreement, interest continued
to accrue at 6% per year until the note was paid or converted.
The Company held $1,245,000 of
notes that had matured as of September 30, 2012. An additional $50,000 matured during each of October 2012 and March 2013, bringing
the total to $1,345,000. Each of the holders of the matured notes entered into an agreement of forbearance with the Company extending
the time to repay the matured notes and the accrued interest for an unspecified period of time. Under the terms of the agreement,
interest continued to accrue at the rate in effect at the time of maturity.
On April 20, 2013, the convertible
noteholders and the Company entered into an agreement to cancel the warrants and exchange the notes (with a total aggregate principal
balance of $1,880,000) and the interest accrued through April 30, 2013 for the Company’s common stock upon the completion
of the Merger completed on June 26, 2013 as described in Note 6.
| 8. | PRIVATE
PLACEMENT FINANCING |
On January 30, 2014, the Company
entered into a securities purchase agreement (the “Securities Purchase Agreement”) with nine separate accredited investors
(“Investors”) providing for the issuance and sale by the Company to the Investors, in a private placement, of an aggregate
of 11,400,000 shares of the Company’s common stock (collectively, the “Shares”) at a purchase price of $0.25
per share and three series of warrants, the Series A warrants, the Series B warrants and the Series C warrants, to purchase up
to an aggregate of 34,200,000 shares of the Company’s common stock (collectively, the “Warrants,” and the shares
issuable upon exercise of the Warrants, collectively, the “Warrant Shares”), for aggregate gross proceeds to the Company
of approximately $2,850,000 (the “Private Placement Financing”).
Upon the closing of the Private
Placement Financing on February 4, 2014 (the “Closing Date”), the Company entered into a registration rights agreement
(the “Registration Rights Agreement”) with the Investors, pursuant to which the Company became obligated, subject
to certain conditions, to file with the Securities and Exchange Commission on or before March 21, 2014 one or more registration
statements to register for resale under the Securities Act of 1933, as amended, (i) the Shares and the Warrant Shares, plus (ii)
an additional number of shares of common stock equal to 33% of the total number of Shares and Warrant Shares, to account for adjustments,
if any, to the number of Warrant Shares issuable pursuant to the terms of the Warrants (the securities set forth in this clause
(ii), the “Additional Shares”). Under the terms of the Registration Rights Agreement, the Company is permitted to
reduce the number of shares covered by a registration statement if such reduction is required by the SEC as a condition for permitting
such registration statement to become effective and treated as a resale registration statement (the “Cutback Provisions”).
In response to comments received from the SEC and in accordance with the terms of the Registration Rights Agreement, the Company
reduced the number of shares included in its draft resale registration statement by the number of Additional Shares. The Company’s
failure to satisfy certain other obligations and deadlines set forth in the Registration Rights Agreement may subject the Company
to payment of monetary penalties as discussed below. The resale registration statement was declared effective on July 2, 2014.
As described below, in the event that we fail to comply with certain requirements in the Registration Rights Agreement, we may
be required to pay liquidated damages to the investors.
The Warrants are exercisable
immediately upon issuance. The Series A warrants have an exercise price of $0.30 per share and expire five years from the date
of their issuance. The Series B warrants have an exercise price of $0.35 per share and expire on the earlier of 12 months after
their issuance date and six months after the first date on which the resale of all Registrable Securities (as defined in the Registration
Rights Agreement) is covered by one or more effective registration statements. The Series B warrants will expire on January 2,
2015. The Series C warrants have an exercise price of $0.40 per share and expire on the earlier of 18 months after their issuance
date and nine months after the first date on which the resale of all Registrable Securities (as defined in the Registration Rights
Agreement) is covered by one or more effective registration statements. The Series C warrants will expire on April 2, 2015. The
number of shares of the Company’s common stock into which each of the Warrants is exercisable and the exercise price therefor
are subject to adjustment as set forth in the Warrants, including, without limitation, adjustment to both the exercise price of
the Warrants in the event of certain subsequent issuances and sales of shares of the Company’s common stock (or securities
convertible or exercisable into shares of common stock) at a price per share lower than the then-effective exercise price of the
Warrants, in which case the per share exercise price of the Warrants will be adjusted to equal such lower price per share and
the number of shares issuable upon exercise of the Warrants will be adjusted accordingly so that the aggregate exercise price
upon full exercise of the Warrants immediately before and immediately after such per share exercise price adjustment are equal.
The Warrants are also subject to customary adjustments in the event of stock dividends and splits, subsequent rights offerings
and pro rata distributions to the Company’s common stockholders, and provide that they shall not be exercisable in the event
and to the extent that the exercise thereof would result in the holder of the Warrant or any of its affiliates beneficially owning
more than 4.9% of the Company’s common stock.
The Company may be required
to make certain payments to the investors in the Private Placement Financing under certain circumstances in the future pursuant
to the terms of the Securities Purchase Agreement and the Registration Rights Agreement. These potential future payments include:
(a) potential partial damages for failure to register the common stock issued or issuable upon exercise of Warrants (in a cash
amount equal to 1% of the price paid to the Company by each investor in the Private Placement Financing on the date of and on
each 30-day anniversary of such failure until the cure thereof); (b) amounts payable if the Company and its transfer agent fail
to timely remove certain restrictive legends from certificates representing shares of common stock issued in the Private Placement
Financing or issuable upon exercise of the Warrants; (c) expense reimbursement for the lead investor in the Private Placement
Financing; and (d) payments in respect of claims for which the Company provides indemnification. There is no cap to the potential
consideration. On July 2, 2014, we received from the SEC a Notice of Effectiveness of our Registration Statement related to the
Private Placement which satisfied some of our obligation to register these securities with the SEC.
Derivative Liabilities
The Company accounted for the Warrants relating
to the aforementioned Private Placement in accordance with ASC 815-10, Derivatives and Hedging. Because the Warrants are
not indexed to the Company’s stock and are not classified in stockholders’ equity, they are recorded as liabilities
at fair value. They are marked to market each reporting period through the consolidated statement of operations.
On the closing date, the derivative liabilities
were recorded at fair value of $10,391,693. Given that the fair value of the derivative liabilities exceeded the total proceeds
of the private placement of $2,850,000, no net amounts were available to be allocated to the common stock. The $7,541,693 amount
by which the recorded liabilities exceeded the proceeds was charged to other expense as of the Closing Date.
The value of the derivative liability as of September
30, 2014 was $6,270,000. As of result of a change in the estimated fair market value of the derivative liability we recorded
other income of $4,121,693 for the year ended September 30, 2014, respectively. Such change in the estimated fair value was primarily
due to the fluctuation in the Company’s common stock price.
Fair Value Measurements Using Significant Unobservable Inputs (Level
3) | |
| |
| |
| |
| |
Warrant Derivative Liability | |
Beginning balance at September 30, 2013 | |
$ | — | |
| |
| | |
Issuances | |
| 10,391,693 | |
| |
| | |
Adjustments to estimated fair value | |
| (4,121,693 | ) |
| |
| | |
Ending balance at September 30, 2014 | |
$ | 6,270,000 | |
The derivative liabilities were valued as of February
4, 2014 and September 30, 2014, using Monte Carlo Simulation with the following assumptions:
| |
September 30, 2014 | |
February 04, 2014 |
Closing price per share of common stock | |
$0.18 | |
$0.30 |
Exercise price per share | |
$0.30 - 0.40 | |
$0.30 - 0.40 |
Expected volatility | |
85 - 90% | |
100 - 125% |
Risk-free interest rate | |
0.02 - 1.55% | |
0.12-1.46% |
Dividend yield | |
— | |
— |
Remaining expected term of underlying securities (years) | |
.33 – 4.33 | |
1 - 5 |
Common Stock
At the Closing Date, the Company issued 11,400,000
shares of common stock and recorded the par value of the shares issued of $11,400 (at par value of $0.001 per share) with a corresponding
reduction in additional paid-in capital, given that the fair value of the warrant liability recorded exceeded the total consideration
received as of the Closing Date.
| 9. | 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, 2013, a maximum
number of 7,825,388 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 market value as determined in
good faith by the Board at the time each option is granted. On October 1, 2013, the aggregate number of authorized shares under
the 2013 Plan was increased by 2,405,809 shares to a total of 10,231,197 shares. On October 1, 2014, the aggregate number of authorized
shares under the Plan was further increased by 2,883,059 shares to a total of 13,114,256 shares.
As of September 30, 2014, a total
of 5,304,212 options were issued to employees and directors and 3,565,000 options were issued to consultants. The exercise price
of each option has either been equal to the closing price of a share of our common stock on the date of grant or has been determined
to be in compliance with Internal Revenue Section 409A.
2009 Stock Incentive Plan
During 2009, ABS established
the 2009 Stock Incentive Plan (the “2009 Plan”). Under the 2009 Plan, a maximum number of 707,460 shares of ABS authorized
and available common stock could be issued in the form of stock options and other equity interests. Under the terms of the 2009
Plan, options and other equity interests could be granted to employees, officers, directors, consultants and advisors of the Company.
The exercise price of each stock option issued under the 2009 Plan was required to equal the fair market value of the underlying
shares of common stock as determined in good faith by the administrator of the 2009 Plan at the time each option was granted.
Upon effectiveness of the 2013
Plan and the Merger, the Company ceased making awards under the 2009 Plan, and the right to receive shares of ABS pursuant to
awards previously issued under the 2009 Plan was converted into the right to receive shares of the Company’s common stock.
As of September 30, 2014, 579,026 shares of common stock subject to vesting had been issued under the 2009 Plan to employees,
directors and consultants at fair market value, and an additional 116,973 shares had been issued to consultants not subject to
vesting terms at fair market value.
Share-based awards
During the fiscal year ended September 30, 2014, the
Company granted options to purchase 3,404,212 shares of the Company’s common stock to employees and options to purchase
2,465,000 shares of common stock to consultants under the 2013 Plan. The options have terms ranging from 3 to 10 years, are subject
to vesting terms over periods ranging from 1 year to 3 years and have exercise prices ranging from $0.17 to $0.37.
The Company recognizes compensation expense for stock
option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting
period, with the exception of options granted subject to a consulting agreement, whereby the option vesting period and the service
period are defined pursuant to the terms of the consulting agreement. Share-based compensation expense for awards granted during
the fiscal year ended September 30, 2014, was based on the fair market value at period end or grant date fair value estimated
using the Black-Scholes Option Pricing Model. The following assumptions were used to calculate the fair value of share based compensation
for the fiscal year ended September 30, 2014; expected volatility, 77% - 134%, risk-free interest rate, 0.83% - 2.52%, expected
forfeiture rate, 0.00%, expected dividend yield, 0.00%, expected term, 2.4 to 10 years.
Expected price volatility is the measure by which
the Company’s stock price is expected to fluctuate during the expected term of an option. The Company exited shell company
status on June 26, 2013. In situations where a newly public entity has limited historical data on the price of its publicly traded
shares and no other traded financial instruments, authoritative guidance is provided on estimating this assumption by basing its
expected volatility on the historical, expected, or implied volatility of similar entities whose share option prices are publicly
available. In making the determination as to similarity, the guidance recommends the consideration of industry, stage of life
cycle, size and financial leverage of such other entities. The Company’s expected volatility is derived from the historical
daily change in the market price of its common stock since it exited shell company status, as well as the historical daily changes
in the market price for the peer group as determined by the Company.
For so called “plain vanilla” options
granted to employees, the expected term of the options is based upon the simplified method as defined in ASC 718-10-S99 which
averages an award’s weighted-average vesting period and the contractual term for share options. The Company will continue
to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life in accordance
with ASC Topic 718. The Company’s estimation of the expected term for stock options not subject to the simplified method
is based upon the contractual term of the option award. For the purposes of estimating the fair value of stock option awards,
the risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield. The Company
has never paid any dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable
future.
Stock-based compensation expense recognized in the
Company’s consolidated statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures.
Authoritative guidance requires forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Due to the Company’s minimal stock-based compensation activity, the Company
has not had significant forfeitures of stock options granted to employees, directors and non-employees. Therefore, the Company
has estimated the forfeiture rate of its outstanding stock options as zero, but will continually evaluate its historical data
as a basis for determining expected forfeitures.
Stock compensation plan activity is as
follows:
Common Stock Options
Stock compensation activity under the 2013 Plan for
the year ended September 30, 2014 follows:
| |
Option Shares Outstanding | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual
Term (years) | | |
Aggregate Intrinsic Value ($0’s) | |
Outstanding at October 1, 2013 | |
| 3,000,000 | | |
$ | 0.38 | | |
| | | |
$ | - | |
Awarded | |
| 5,869,212 | | |
| 0.33 | | |
| - | | |
| - | |
Exercised | |
| (231,250 | ) | |
| 0.40 | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| | | |
| - | | |
| - | |
Outstanding at September 30, 2014 | |
| 8,637,962 | | |
$ | 0.34 | | |
| 5.46 | | |
| 2,750 | |
Vested | |
| 4,645,935 | | |
$ | 0.36 | | |
| 4.60 | | |
| 76 | |
Vested and expected to vest at September 30, 2014 | |
| 8,637,962 | | |
$ | 0.34 | | |
| 5.46 | | |
| 2,750 | |
As of September 30, 2014, 1,361,985 shares are available
for future grants under the 2013 Plan. Share-based compensation expense recorded in the Company’s consolidated statement
of operations for the years ended September 30, 2014 and 2013 resulting from stock options awarded to the Company’s employees,
directors and consultants was approximately $1,101,000 and $288,000, respectively. Of this amount during the years ended September
30, 2014 and 2013, $629,000 and $38,000, respectively was recorded to Research and Development expenses, and $472,000 and $250,000,
respectively was recorded in General and Administrative expenses in the Company’s consolidated statement of operations
As of September 30, 2014, there is approximately
$965,000 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 2.03 years.
Restricted Stock
Restricted stock activity under the 2009 Plan and
the 2013 Plan for the years ended September 30, 2014 and 2013 follows:
| |
2014 | | |
2013 | |
Restricted Stock | |
| | | |
| | |
Non Vested at October 1 | |
| - | | |
| 56,844 | |
Awarded | |
| 300,000 | | |
| - | |
Vested | |
| (275,000 | ) | |
| (56,844 | ) |
Forfeited | |
| - | | |
| - | |
Non Vested at September 30 | |
| 25,000 | | |
| - | |
The weighted average restricted stock award date fair
value information for the years ended September 30, 2014 and 2013 follows:
| |
2014 | | |
2013 | |
Non Vested at October 1 | |
$ | - | | |
$ | 0.0024 | |
Awarded | |
| 0.345 | | |
| - | |
Vested | |
| 0.345 | | |
| 0.0024 | |
Forfeited | |
| - | | |
| - | |
Non Vested at September 30 | |
$ | 0.345 | | |
$ | - | |
Non-employee restricted shares
subject to vesting are revalued at each vesting date and at the end of the reporting period, with all changes in fair value recorded
as stock-based compensation expense. For the year ended September 30, 2014 and 2013, compensation expense recorded for the restricted
stock awards was approximately $95,000 and $0, respectively.
During the period from inception
(March 6, 2006) through September 30, 2013, ABS had issued a total of 42 warrants, all of which were attached to various debt
instruments and commitments issued by ABS. The warrants issued were convertible into shares of Series A Preferred Stock, $.01
par value at the conversion price equal to an aggregate amount ranging from 10% to up to 50% of the principal balance of the debt.
Conversion of all warrants was contingent on ABS completing a Series A Preferred Equity Financing, defined as the sale of financing
securities to a third party in which ABS receives gross proceeds from investors of at least $1,000,000, excluding the conversion
of the notes. The warrants were cancelled in connection with the exchange of the debt for common shares pursuant to the Merger
completed on June 26, 2013 described in Note 6.
In contemplation of the Merger,
on April 19, 2013, the Company entered into a financing agreement (the “Financing Agreement”) with Coldstream Summit
Ltd. (“Coldstream”) pursuant to which we agreed to issue and sell, and Coldstream agreed to purchase or assist in
securing the purchase of $2,000,000 worth of units in a private offering within the 12-month period following the closing of the
Merger (the “Coldstream Financing”). Each unit issued in the Coldstream Financing was to be sold at a price of $0.50
per share and was to consist of (i) one share of common stock and (ii) one warrant to purchase one share of common stock at an
exercise price of $0.75 per share and with a term of 12 months. Pursuant to the Coldstream Financing, we issued and sold units
consisting of 4,000,000 shares of common stock and warrants to purchase 4,000,000 shares of common stock for aggregate gross proceeds
of $2,000,000. As of September 30, 2014, all warrants issued in connection with the Coldstream Financing have expired.
On September 30, 2013, the Company
entered into the Life Sciences Accelerator Funding Agreement (the “MLSC Loan Agreement”) with the Massachusetts Life
Sciences Center (“MLSC”), pursuant to which MLSC provided an unsecured subordinated loan in the amount of $1,000,000.
The loan bears interest at a rate of 10% per annum, and will become fully due and payable on the earlier of (i) September 30,
2018, (ii) the occurrence of an event of default under the MLSC Loan Agreement, or (iii) the completion of a sale of substantially
all of our assets, a change-of-control transaction or one or more financing transactions in which we receive net proceeds of $5,000,000
or more in a 12-month period. The MLSC Loan Agreement includes warrants to purchase 145,985 shares of the Company’s common
stock at an exercise price of $0.27 per share. None of the warrants, which expire on September 30, 2023, have been exercised as
of September 30, 2014.
Of the $1,000,000, the Company
allocated $944,707 to the loan and $55,293 to the warrants. The warrant valuation was derived with the Black-Scholes option pricing
model with the following assumptions: risk free rate 2.64%, dividend yield 0.0%, expected life of 10 years, and volatility 114%.
The fair value of the warrant was recorded as an increase to additional paid-in capital. The allocation of funds to the warrants
resulted in a discount on the loan, which will be accreted to interest expense over the life of the loan. For the year ended September
30, 2014, $11,059 of the loan discount has been accreted to interest expense. As of September 30, 2014 the accreted balance of
MLSC Loan was $955,766.
| 13. | COMMITMENTS
AND CONTINGENCIES |
In the ordinary course of business,
the Company enters into various agreements containing standard indemnification provisions. The Company's indemnification obligations
under such provisions are typically in effect from the date of execution of the applicable agreement through the end of the applicable
statute of limitations. The aggregate maximum potential future liability of the Company under such indemnification provisions
is uncertain. As of September 30, 2014 and 2013, no amounts have been accrued related to such indemnification provisions.
From time to time, the Company
may be exposed to litigation in connection with its operations. The Company’s policy is to assess the likelihood of any
adverse judgments or outcomes related to legal matters, as well as ranges of probable losses.
MIT Licensing Agreement
In December, 2007, the Company
entered into a license agreement with MIT pursuant to which the Company acquired an exclusive world-wide license to develop and
commercialize technology related to self-assembling peptide compositions, and methods of making and using such compositions in
medical and non-medical applications, including claims that cover the Company’s proposed products and methods of use thereof.
The license also provides non-exclusive rights to additional intellectual property in the fields that cover the Company’s
proposed products and methods of use thereof, in order to provide freedom to operate. The license provides the Company a right
to sublicense the exclusively licensed intellectual property. The Company has not sublicensed the exclusively licensed intellectual
property to any party for any field.
In exchange for the licenses
granted in the agreement, the Company has paid MIT license maintenance fees and patent prosecution costs. The Company paid license
maintenance fees of $35,000 to MIT in the fiscal year ended September 30, 2014 and $25,000 in the fiscal year ended September
30, 2013. For the years ended September 30, 2014 and 2013, the annual MIT license maintenance fees of $45,000 and $35,000, respectively,
are included in accrued expenses and other liabilities on the Balance Sheet. The license maintenance fees and patent prosecution
costs cover the contract year beginning January 1 thru December 31.
Annual license maintenance obligations
extend through the life of the patents. The following table reflects the Company’s annual license maintenance fee commitments:
Year Ending September 30, | |
| |
2015 | |
$ | 45,000 | |
2016 | |
| 50,000 | |
2017 | |
| 50,000 | |
2018 | |
| 50,000 | |
| |
$ | 195,000 | |
In addition, MIT is entitled
to royalties on applicable future product sales, if any. The annual payments may be applied towards royalties payable to MIT for
that year for product sales.
The Company is obligated to indemnify
MIT and related parties from losses arising from claims relating to the exercise of any rights granted to the Company under the
license, with certain exceptions. The maximum potential amount of future payments the Company could be required to make under
this provision is unlimited. The Company considers there to be a low performance risk as of September 30, 2014.
The agreement expires upon the
expiration or abandonment of all patents that are issued and licensed to the Company by MIT under such agreement. The Company
expects that patents will be issued from presently pending U.S. and foreign patent applications. Any such patent will have a term
of 20 years from the filing date of the underlying application. MIT may terminate the agreement immediately, if the Company ceases
to carry on its business, if any nonpayment by the Company is not cured or the Company commits a material breach that is not cured.
The Company may terminate the agreement for any reason upon six months’ notice to MIT.
Leases
On August 30, 2013, the Company
entered into a sublease agreement for an office facility located at 20 William Street, Suite 270, Wellesley, Massachusetts 02481,
effective October 1, 2013. The Company has leased this office space pursuant to the terms of a sublease agreement (the “Sublease”)
with Stream Global Services, Inc. Pursuant to the terms of the Sublease, the Company has agreed to rent the leased premises, comprising
approximately 2,322 square feet, through March 31, 2015 for an annual base rent equal to $26 per square foot, which is payable
in monthly rental payments amounting to $5,031. In addition, the Sublease requires that the Company pay for certain operating
expenses of the leased premises and a security deposit of $10,062.
The following table reflects the Company’s
future minimum lease payments due under this noncancelable lease agreement as of September 30, 2014:
Year Ending September 30, | |
| |
2015 | |
$ | 30,186 | |
| |
| | |
| |
$ | 30,186 | |
The Company entered into an agreement to
amend certain provisions of the Warrants (the
“Amendment”) that it issued in connection with the Securities Purchase Agreement that it entered into
on January 31, 2014. Under the terms of the Amendment, which became effective December 1, 2014, the Private Placement Warrants
were amended to (i) reduce the exercise price of the Series B Warrants from $0.35 to $0.20, (ii) reduce the exercise price of
the Series C Warrants from $0.40 to $0.20, and (iii) clarify that each Series of Private Placement Warrants may be amended without
having to amend all three series of Private Placement Warrants. The number of shares of the Company’s common stock which
may be purchased from the Company upon exercise of each Private Placement Warrant remained unchanged.
Following the Amendment,
certain holders of the Private Placement Warrants exercised portions of their Series B Warrants, resulting in an aggregate issuance
of 4,000,000 shares of the Company’s common stock (which increased the number of shares of common stock outstanding to 76,076,487),
and gross proceeds to the Company of $800,000.
ARCH THERAPEUTICS, INC.
For the Three and Nine Months Ended June
30, 2015
Arch Therapeutics, Inc. |
Consolidated Balance Sheets |
As of June 30, 2015 (Unaudited) and September 30, 2014 |
|
| |
June 30, 2015 (Unaudited) | | |
September 30, 2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 3,273,764 | | |
$ | 833,520 | |
Prepaid expenses and other current assets | |
| 44,091 | | |
| 43,470 | |
Total current assets | |
| 3,317,855 | | |
| 876,990 | |
| |
| | | |
| | |
Total assets | |
$ | 3,317,855 | | |
$ | 876,990 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 499,682 | | |
$ | 175,832 | |
Accrued expenses and other liabilities | |
| 481,904 | | |
| 267,835 | |
Convertible notes, net of unamortized discount | |
| 498,550 | | |
| - | |
Current derivative liabilities | |
| 411,753 | | |
| 2,280,000 | |
Total current liabilities | |
| 1,891,889 | | |
| 2,723,667 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Note payable, net of unamortized discount | |
| 964,060 | | |
| 955,766 | |
Accrued interest, net of current portion | |
| 182,500 | | |
| 100,000 | |
Derivative liabilities, net of current portion | |
| 6,344,817 | | |
| 3,990,000 | |
Total long-term liabilities | |
| 7,491,377 | | |
| 5,045,766 | |
| |
| | | |
| | |
Total liabilities | |
| 9,383,266 | | |
| 7,769,433 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ deficit: | |
| | | |
| | |
| |
| | | |
| | |
Common stock, $0.001 par value, 300,000,000 shares authorized, 92,702,854 and 72,076,487 shares issued and outstanding as of June 30, 2015 and September 30, 2014, respectively | |
| 92,702 | | |
| 72,051 | |
Common Stock Subscribed $0.001 par value | |
| 454 | | |
| - | |
Additional paid in capital | |
| 8,566,193 | | |
| 5,810,200 | |
Stock Subscription Receivable | |
| (100,000 | ) | |
| - | |
Accumulated deficit | |
| (14,624,760 | ) | |
| (12,774,694 | ) |
Total stockholders’ deficit | |
| (6,065,411 | ) | |
| (6,892,443 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' deficit | |
$ | 3,317,855 | | |
$ | 876,990 | |
The accompanying notes are an integral
part of these consolidated financial statements
Arch Therapeutics, Inc. |
Consolidated Statements of Operations (Unaudited) |
For the Three and Nine Months Ended June 30, 2015 and 2014 |
|
| |
Three Months Ended June 30, 2015 | | |
Three Months Ended June 30, 2014 | | |
Nine Months Ended June 30, 2015 | | |
Nine Months Ended June 30, 2014 | |
| |
| | |
| | |
| | |
| |
Revenues | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
| 813,122 | | |
| 825,951 | | |
| 2,536,654 | | |
| 2,271,443 | |
Research and development expenses | |
| 525,107 | | |
| 320,345 | | |
| 1,327,337 | | |
| 951,101 | |
Total operating expenses | |
| 1,338,229 | | |
| 1,146,296 | | |
| 3,863,991 | | |
| 3,222,544 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (1,338,229 | ) | |
| (1,146,296 | ) | |
| (3,863,991 | ) | |
| (3,222,544 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (134,326 | ) | |
| (27,763 | ) | |
| (212,647 | ) | |
| (83,293 | ) |
Fair value of derivative liabilites in excess of proceeds | |
| - | | |
| - | | |
| - | | |
| (7,541,693 | ) |
Gain on exercise of warrants | |
| 75,321 | | |
| - | | |
| 299,321 | | |
| - | |
Gain/(loss) on warrant derivative modification | |
| 927,373 | | |
| - | | |
| (996,813 | ) | |
| - | |
(Increase)/decrease to fair value of derivative | |
| (925,384 | ) | |
| 1,584,818 | | |
| 2,924,064 | | |
| 2,069,693 | |
Total other income (expense) | |
| (57,016 | ) | |
| 1,557,055 | | |
| 2,013,925 | | |
| (5,555,293 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net (Loss)/income | |
$ | (1,395,245 | ) | |
$ | 410,759 | | |
$ | (1,850,066 | ) | |
$ | (8,777,837 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic earnings per share | |
| | | |
| | | |
| | | |
| | |
Net (loss) income per common share basic | |
$ | (0.02 | ) | |
$ | 0.01 | | |
$ | (0.02 | ) | |
$ | (0.13 | ) |
Weighted common shares - basic | |
| 76,804,674 | | |
| 71,949,564 | | |
| 75,396,047 | | |
| 65,933,378 | |
| |
| | | |
| | | |
| | | |
| | |
Diluted earnings per share | |
| | | |
| | | |
| | | |
| | |
Net (loss) income per common share diluted | |
$ | (0.02 | ) | |
$ | 0.01 | | |
$ | (0.02 | ) | |
$ | (0.13 | ) |
Weighted common shares - diluted | |
| 76,804,674 | | |
| 72,084,748 | | |
| 75,396,047 | | |
| 65,933,378 | |
The accompanying notes are an integral part of these consolidated
financial statements
Arch Therapeutics, Inc. |
Consolidated Statements of Cash Flows (Unaudited) |
For the Nine Months Ended June 30, 2015 and 2014 |
|
| |
Nine Months Ended June 30, 2015 | | |
Nine Months Ended June 30, 2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net Loss | |
$ | (1,850,066 | ) | |
$ | (8,777,837 | ) |
Adjustments to reconcile net loss to cash used in operating activities: | |
| | | |
| | |
Depreciation Expense | |
| - | | |
| 322 | |
Stock-based compensation | |
| 859,627 | | |
| 748,600 | |
Noncash interest expense on notes payable | |
| 212,332 | | |
| 83,295 | |
Issuance of common stock for services | |
| 8,625 | | |
| 77,625 | |
Gain on exercise of warrants | |
| (299,321 | ) | |
| - | |
Loss on warrant derivative modification, net of inducement shares | |
| 996,813 | | |
| - | |
Decrease to fair value of derivative | |
| (2,924,064 | ) | |
| (2,069,693 | ) |
Non cash expense for issuance of warrants | |
| - | | |
| 7,541,693 | |
Other noncash adjustments | |
| - | | |
| 92,500 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
(Increase) decrease in: | |
| | | |
| | |
Prepaid expenses and other current assets | |
| (621 | ) | |
| (2,515 | ) |
Increase (decrease) in: | |
| | | |
| | |
Accounts payable | |
| 323,850 | | |
| (148,758 | ) |
Accrued expenses and other liabilities | |
| 46,069 | | |
| 75,270 | |
Net cash used in operating activities | |
| (2,626,756 | ) | |
| (2,379,498 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from exercise of warrants | |
| 1,251,000 | | |
| - | |
Proceeds from issuance of common stock and warrants | |
| 3,066,000 | | |
| 2,624,703 | |
Proceeds from issuance of convertible notes | |
| 750,000 | | |
| - | |
Proceeds from issuance of notes payable | |
| - | | |
| 1,000,000 | |
Net cash provided by financing activities | |
| 5,067,000 | | |
| 3,624,703 | |
| |
| | | |
| | |
Net incerease in cash and cash equivalents | |
| 2,440,244 | | |
| 1,245,205 | |
| |
| | | |
| | |
Cash and cash equivalents, beginning of period | |
| 833,520 | | |
| 557,319 | |
| |
| | | |
| | |
Cash and cash equivalents, end of period | |
$ | 3,273,764 | | |
$ | 1,802,524 | |
| |
| | | |
| | |
Non-cash financing activities | |
| | | |
| | |
Issuance of Inducement shares | |
$ | 100,050 | | |
$ | - | |
The accompanying notes are an integral part
of these consolidated financial statements
ARCH THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | BASIS OF PRESENTATION
AND DESCRIPTION OF BUSINESS |
Organization and Description of Business
Arch Therapeutics, Inc., (together with its subsidiary, the “Company”)
was incorporated under the laws of the State of Nevada on September 16, 2009, under the name “Almah, Inc.” to pursue
the business of distributing automobile spare parts online. Effective June 26, 2013, the Company completed a merger (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 has changed its operations to the business of a life
science medical device company. Our current 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 Commonwealth of
Massachusetts on March 6, 2006 as Clear Nano Solutions, Inc. On April 7, 2008, ABS changed its name from Clear
Nano Solutions, Inc. to Arch Therapeutics, Inc. Effective upon the closing of the Merger, ABS changed its name from Arch
Therapeutics, Inc. to Arch Biosurgery, Inc.
The Company has generated no operating revenues to date, and is
devoting substantially all of its efforts toward product research and development. To date, the Company has principally raised
capital through borrowings and the issuance of convertible debt and 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. The Company will be
required to raise additional capital, obtain alternative means of financial support, or both prior to or during April 2016 in
order to continue to fund operations. However, there can be no assurance that the Company will be successful in securing
additional resources when needed, on terms acceptable to the Company, if at all. Therefore, there exists substantial doubt
about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any
adjustments related to the recoverability of assets that might be necessary despite this uncertainty.
| 2. | SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES |
The accompanying unaudited interim consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”). The interim consolidated financial statements included herein are unaudited; however, they contain all normal recurring
accruals and adjustments that, in the opinion of management, are necessary to present fairly our results of operations and financial
position for the interim periods.
Although we believe that the disclosures in these unaudited interim
consolidated financial statements are adequate to make the information presented not misleading, certain information normally included
in the footnotes prepared in accordance with US GAAP has been omitted as permitted by the rules and regulations of the Securities
and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the fiscal year ended September 30, 2014, filed with the SEC on December 12, 2014.
For a complete summary of our significant accounting policies, please
refer to Note 2 included in Item 8 of our Form 10-K for the fiscal year ended September 30, 2014. There have been no material changes
to our significant accounting policies during the nine months ended June 30, 2015.
Basis of Accounting
The consolidated financial statements include the accounts of Arch
Therapeutics, Inc. and its wholly owned subsidiary, Arch Biosurgery, Inc., a life science medical device company. All intercompany
accounts and transactions have been eliminated in consolidation.
The Company is in the development stage and is devoting substantially
all of its efforts to developing technologies, raising capital, establishing customer and vendor relationships, and recruiting
new employees.
Use of Estimates
Management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those
estimates.
Recently Issued Accounting Guidance
Accounting Standards Update (ASU)
2015-03 “Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs”
was issued by the FASB in April 2015. The purpose of this amendment requires that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with
debt discounts. 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, 2015. Early application is permitted. The Company does not believe that
this guidance will have a material impact on its consolidated results of operations, financial position or disclosures.
ASU 2015-02, “Consolidation (Topic 810) – Amendments
to the Consolidation Analysis”, was issued by the FASB in February 2015. The purpose of this amendment is to change the analysis
that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. 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, 2015. Early application is permitted. The Company does not believe that this guidance will have a
material impact on its consolidated results of operations or financial position or disclosures.
ASU 2014-16, “Derivatives and Hedging (Topic 815)” was
issued by the FASB in November 2014. The primary purpose of the ASU is to determine whether the host contract in a Hybrid Financial
Instrument issued in the form of a share is more akin to debt or equity. ASU 2014-16 is effective for public entities for the fiscal
years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company
does not believe that this guidance will have a material impact on its consolidated results of operations or financial position
or disclosures.
ASU 2014-15, “Presentation of Financial Statements-Going Concern
(Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to ‘Continue as a Going Concern”
was issued by the FASB in August 2014. The primary purpose of the ASU is to provide guidance in GAAP about management’s responsibility
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. The amendment should reduce diversity in the timing and content of footnote disclosure. ASU 2014-15 is effective
for the annual period ending after December 15, 2016, and for the annual periods and interim periods thereafter. Early adoption
is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations
or financial position or disclosures.
ASU 2014-12, “Compensation-Stock Compensation (Topic 718)
– Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
the Requisite Service Period” was issued by the FASB in June 2014. ASU 2014-12 requires that compensation cost should be
recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation
cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for public
business entities for annual periods and interim periods within the annual periods beginning after December 15, 2015. Early adoption
is permitted. The Company is currently assessing the impact of this guidance, but does not believe that it will have a material
impact on its consolidated results of operations, financial position or disclosures.
ASU 2014-09, “Revenue from Contracts with Customers (Topic
606) was issued by the FASB in May 2014. The primary purpose of the ASU is to develop a common revenue standard for revenue recognition
between the FASB and the International Accounting Standards Board (IASB). The ASU removes inconsistencies and weaknesses in revenue
requirements, provides a more robust framework for addressing revenue issues, and improves comparability of revenue recognition
practices across entities, industries, jurisdictions and capital markets, among other items. We are a development stage company
and do not currently generate revenue. ASU 2014-09 is effective for public business entities for annual periods beginning after
December 15, 2017. While we are a development stage company and do not currently generate revenue, we currently anticipate generating
revenue by the effective date of this ASU and therefore will be subject to this guidance. The Company is currently assessing the
impact of this guidance, but does not believe that it will have a material impact on its consolidated results of operations, financial
position or disclosures.
ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures
of Disposals of Components of an Entity”, was issued by the FASB in April 2014. This update changes the criteria for reporting
discontinued operations and requires additional disclosures about discontinued operations. ASU 2014-08 requires that an entity
report as a discontinued operation only a disposal that represents a strategic shift in operations that has a major effect on its
operations and financial results. ASU 2014-08 is effective for public business entities for annual periods, and interim periods
within those annual periods, beginning on or after December 15, 2014. Early adoption is permitted, but only for a disposal (or
classification as held for sale) that has not been reported in financial statements previously issued or made available for issuance.
The ASU must be applied prospectively. The Company does not believe this guidance will have a material impact on its consolidated
results of operations or financial position.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash in bank deposit 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 and cash equivalents.
Property and Equipment
Property and equipment are recorded at cost and depreciated using
the straight-line method over the estimated useful life of the related asset. Upon sale or retirement, the cost and accumulated
depreciation are eliminated from their respective accounts, and the resulting gain or loss is included in income or loss for the
period. Repair and maintenance expenditures are charged to expense as incurred.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when circumstances
indicate the carrying value of an asset may not be recoverable in accordance with ASC 360, Property, Plant and Equipment.
For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the
asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down
to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined
based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed
of are carried at the lower of carrying value or estimated net realizable value. For the three and nine month periods ended June
30, 2015 and 2014 there were no impairments of long-lived assets.
Convertible Debt
The Company records a discount to convertible notes for the
intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the
underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the
note. Debt discounts under these arrangements are amortized to noncash interest expense using the effective interest rate
method over the term of the related debt to their date of maturity. If a security or instrument becomes convertible only upon
the occurrence of a future event outside the control of the Company, or, is convertible from inception, but contains
conversion terms that change upon the occurrence of a future event, then any contingent beneficial conversion feature is
measured and recognized when the triggering event occurs and contingency has been resolved.
Income Taxes
In accordance with ASC 740, Income Taxes, the Company recognizes
deferred tax assets and liabilities for the expected future tax consequences or events that have been included in the Company’s
consolidated financial statements and/or tax returns. Deferred tax assets and liabilities are based upon the differences between
the financial statement carrying amounts and the tax bases of existing assets and liabilities and for loss and credit carryforwards
using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not
be realized.
The Company provides reserves for potential payments of tax to various
tax authorities related to uncertain tax positions when management determines that it is probable that a loss will be incurred
related to these matters and the amount of the loss is reasonably determinable. The Company has no reserves related to uncertain
tax positions as of June 30, 2015 and September 30, 2014.
Research and Development
The Company expenses internal and external
research and development costs, including costs of funded research and development arrangements, in the period incurred.
Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with the guidance of ASC 718, Compensation-Stock Compensation, that requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the consolidated financial statements based on their fair values. The Company
accounts for non-employee stock-based compensation in accordance with the guidance of ASC 505, Equity, which requires that
companies recognize compensation expense based on the estimated fair value of options granted to non-employees over their vesting
period, which is generally the period during which services are rendered by such non-employees. ASC 505 requires the Company to
remeasure the fair value of stock options issued to non-employees at each reporting period during the vesting period or until services
are complete.
In accordance with ASC 718, the Company has elected to use the Black-Scholes
option pricing model to determine the fair value of options granted and recognizes the compensation cost of share-based awards
on a straight-line basis over the vesting period of the award.
The determination of the fair value of share-based payment
awards utilizing the Black-Scholes model is affected by the fair value of the common stock and a number of other assumptions,
including expected volatility, expected life, risk-free interest rate and expected dividends. The Company has a limited
history of market prices of the common stock, and as such volatility is estimated in accordance with ASC 718-10-S99 Staff
Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB No. 107”), using historical
volatilities of similar public entities. The Company uses a simplified method for all “plain vanilla” options, as
defined in SAB No. 107 and the contractual term for all other employee and non-employee awards to estimate the expected life.
The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The
dividend yield assumption is based on history and the expectation of paying no dividends. Forfeitures are estimated at the
time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based
compensation expense, when recognized in the consolidated financial statements, is based on awards that are ultimately
expected to vest.
Fair Value Measurements
The Company measures both financial and nonfinancial assets and
liabilities in accordance with ASC 820, Fair Value Measurements and Disclosures, excluding 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 expectations about the assumptions market participants would use in pricing
the asset or liability.
The Company’s financial instruments include cash and cash
equivalents. Because of their short maturity, the carrying amount of cash and cash equivalents are considered to approximate fair
value.
Subsequent Events
The Company evaluated all events or transactions
that occurred through August 7, 2015 the date which these unaudited interim consolidated financial statements were available to
be issued. The Company disclosed material subsequent events in Note 9 of these financial statements.
Going Concern Basis of Accounting
The Company does not currently believe its existing cash resources
are sufficient to meet its anticipated needs during the next twelve months. As reflected in the financial statements, the Company
has an accumulated deficit, has suffered significant net losses and negative cash flows from operations, and has limited working
capital. The continuation of our business as a going concern is dependent upon raising additional capital and eventually attaining
and maintaining profitable operations. As of June 30, 2015, there is substantial doubt about our ability to continue as a going
concern. The unaudited interim consolidated financial statements included in this report do not include any adjustments that might
be necessary should operations discontinue. The Company expects to incur substantial expenses for the foreseeable future for the
research, development and commercialization of its potential products. In addition, the Company will require additional financing
in order to seek to license or acquire new assets, research and develop any potential patents and the related compounds, and obtain
any further intellectual property that the Company may seek to acquire. The Company does not have sufficient cash and cash equivalents
to support its current operating plan. The Company will be required to raise additional capital, obtain alternative means of financial
support, or both, in order to continue to fund operations. Therefore, there exists substantial doubt about the Company’s
ability to continue as a going concern. Historically, the Company has funded its operations primarily through equity and debt financings.
| 3. | 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, 2014, a maximum number of 10,231,197
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 market value as determined in good faith by the Board at the time each option
is granted. On October 1, 2014, the aggregate number of authorized shares under the Plan was further increased by 2,883,059 shares
to a total of 13,114,256 shares.
As of June 30, 2015, a total of 7,254,212 options had been issued
to employees and directors and 4,602,500 options had been issued to consultants. The exercise price of each option has either been
equal to the closing price of a share of our common stock on the date of grant or has been determined to be in compliance with
Internal Revenue Section 409A.
Share-based awards
During the nine months ended June 30, 2015, the Company granted
options to employees and directors to purchase 1,950,000 and to consultants to purchase 1,037,500 shares of common stock under
the 2013 Plan. The options have terms ranging from 1 to 10 years, are subject to vesting terms over periods ranging up to 3 years
and have exercise prices ranging from $0.17 to $0.22.
During the three months ended June 30, 2015, the Company did not
grant any options to employees and directors or to consultants to purchase shares of common stock under the 2013 Plan.
The Company recognizes compensation expense for stock option awards
on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period, with
the exception of options granted subject to a consulting agreement, whereby the option vesting period and the service period are
defined pursuant to the terms of the consulting agreement. Share-based compensation expense for awards granted during the nine
months ended June 30, 2015 was based on the fair market value at period end or grant date fair value estimated using the Black-Scholes
Option Pricing Model. The following assumptions were used to calculate the fair value of share based compensation for the three
and nine months ended June 30, 2015; expected volatility, 76.6% - 119.4%, risk-free interest rate, 0.25% - 2.40%, expected forfeiture
rate, 0.00%, expected dividend yield, 0.00%, expected term, 1 to 10 years.
Expected price volatility is the measure by which the Company’s
stock price is expected to fluctuate during the expected term of an option. The Company exited shell company status on June 26,
2013. In situations where a newly public entity has limited historical data on the price of its publicly traded shares and no other
traded financial instruments, authoritative guidance is provided on estimating this assumption by basing its expected volatility
on the historical, expected, or implied volatility of similar entities whose share option prices are publicly available. In making
the determination as to similarity, the guidance recommends the consideration of industry, stage of life cycle, size and financial
leverage of such other entities. The Company’s expected volatility is derived from the historical daily change in the market
price of its common stock since it exited shell company status, as well as the historical daily change in the market price for
the peer group as determined by the Company.
For so called “plain vanilla” options granted to employees,
the expected term of the options is based upon the simplified method as defined in ASC 718-10-S99 which averages an award’s
weighted-average vesting period and the contractual term for share options. The Company will continue to use the simplified method
until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with ASC Topic 718.
The Company’s estimation of the expected term for stock options not subject to the simplified method is based upon the contractual
term of the option award. For the purposes of estimating the fair value of stock option awards, the risk-free interest rate used
in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield. The Company has never paid any dividends on its
common stock and does not anticipate paying dividends on its common stock in the foreseeable future.
Stock-based compensation expense recognized in the Company’s
consolidated statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. Authoritative
guidance requires forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Historically, the Company has not had significant forfeitures of stock options granted
to employees, directors and non-employees. Therefore, the Company has estimated the forfeiture rate of its outstanding stock options
as zero, but will continually evaluate its historical data as a basis for determining expected forfeitures.
Stock compensation plan activity is as follows:
Common Stock Options
Stock compensation activity under the 2013 Plan for the nine months
ended June 30, 2015 follows:
| |
Option Shares Outstanding | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (years) | | |
Aggregate Intrinsic Value ($0’s) | |
Outstanding at September 30, 2014 | |
| 8,637,962 | | |
$ | 0.34 | | |
| - | | |
$ | - | |
Awarded | |
| 2,987,500 | | |
| 0.19 | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited | |
| (515,625 | ) | |
$ | 0.35 | | |
| - | | |
| - | |
Outstanding at June 30, 2015 | |
| 11,109,837 | | |
$ | 0.31 | | |
| 5.36 | | |
| 292,860 | |
Vested | |
| 8,051,432 | | |
$ | 0.32 | | |
| 4.74 | | |
| 160,901 | |
Vested and expected to vest at June 30, 2015 | |
| 11,109,837 | | |
$ | 0.31 | | |
| 5.36 | | |
| 292,860 | |
As of June 30, 2015, 1,257,544 shares
are available for future grants under the 2013 Plan. Share-based compensation expense recorded in the Company’s unaudited
interim consolidated statement of operations for the three months ended June 30, 2015 and 2014 resulting from stock options awarded
to the Company’s employees, directors and consultants was approximately $250,000 and $245,000, respectively. Of this amount
during the three months ended June 30, 2015 and 2014, $122,342 and $112,304 respectively was recorded to Research and Development
expenses, and $128,013 and $132,941, respectively was recorded in general and administrative expenses in the Company’s unaudited
interim consolidated statement of operations. Share-based compensation expense recorded in the Company’s consolidated statement
of operations for the nine months ended June 30, 2015 and 2014 resulting from stock options awarded to the Company’s employees,
directors and consultants was approximately $859,626 and $748,600 respectively. Of this amount during the nine months ended June
30, 2015 and 2014, $396,668 and $461,312, respectively, was recorded to Research and Development expenses, and $462,958 and $287,287,
respectively, was recorded in General and Administrative expenses in the Company’s unaudited interim consolidated statement
of operations
As of June 30, 2015, there is approximately $549,278 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 1.72 years.
Beginning March 11, 2015 and through March 13, 2015, the
Company entered into a series of substantially similar subscription agreements (each a “Subscription Agreement”)
with each of Anson Investments Master Fund, Ltd., Equitec Specialists, LLC and Capital Ventures International (collectively,
the “Note Investors”) pursuant to which the Company issued unsecured 8% Convertible Notes (the
“Notes”, and such transaction, the “Notes Offering”) to the Note Investors in the aggregate principal
amount of $750,000. On the Closing of the Notes Offering on March 13, 2015 (the “Closing Date”), each Note
Investor was issued a Note in the principal amount of $250,000. The Company did not engage any
underwriter or placement agent in connection with the Notes Offering.
The Notes become due and payable on March 13, 2016 (the “Stated
Maturity Date”) and may not be prepaid. The Notes bear interest on the unpaid principal balance at a rate equal to eight
percent (8.0%) (computed on the basis of the actual number of days elapsed in a 360-day year) per annum until either (a) converted
into shares of the Company’s common stock, $0.001 par value per share (“Common Stock”) or (b) the outstanding
principal and accrued interest on the Notes is paid in full by the Company. Interest on the Notes becomes due and payable upon
their conversion or the Stated Maturity Date and may become due and payable upon the occurrence of an event of default under the
Notes. The Notes contain customary events of default, which include, among other things, (i) the Company’s failure to pay
other indebtedness of $100,000 or more within the specified cure period for such breach; (iii) the acceleration of the stated maturity
of such indebtedness; (iii) the insolvency of the Company; and (iv) the receipt of final, non-appealable judgments in the aggregate
amount of $100,000 or more.
At any time prior to the Stated Maturity Date, the holders of the
Notes have the right to convert some or all of such Notes into the number of shares of Common Stock determined by dividing (a)
the aggregate sum of the (i) principal amount of the Note to be converted, and (ii) amount of any accrued but unpaid interest with
respect to such portion of the Note to be converted; and (b) the conversion price then in effect (the shares of Common Stock issuable
upon such conversion, the “Conversion Shares”). The initial conversion price is $0.20 per share, and it may be (A)
reduced to any amount and for any period of time deemed appropriate by the Board of Directors of the Company, or (B) reduced or
increased proportionately as a result of stock splits, stock dividends, recapitalizations, reorganizations, and similar transactions.
A holder shall not have the right to convert any portion of a Note, if after giving effect to such conversion, the holder, together
with its affiliates collectively, would beneficially own more than 4.99% or 9.99% (at the holder’s discretion) of the shares
of Common Stock outstanding immediately after giving effect to such conversion.
The issuance and sale of the Notes and Conversion Shares (collectively,
the “Securities”) has not been, and will not upon issuance be, registered under the Securities Act of 1933, as amended
(the “Securities Act”), and the Securities may not be offered or sold in the United States absent registration under
or exemption from the Securities Act and any applicable state securities laws. The Securities were issued and sold in reliance
upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated
under the Securities Act, based on the following facts: each of the Note Investors has represented that it is (and on the date
of any conversion or sale of the Notes and/or Conversion Shares will be) an accredited investor as defined in Rule 501(a) promulgated
under the Securities Act, that it is acquiring the Securities for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof in violation of applicable securities laws and that it has sufficient
investment experience to evaluate the risks of the investment; the Company used no advertising or general solicitation in connection
with the issuance and sale of the Securities to the Note Investors; the Securities were issued as restricted securities.
Derivative Liabilities
The Company accounted for the conversion feature embedded within
the Notes in accordance with ASC 815-10, Derivatives and Hedging. Because the options to convert into common
stock are not indexed to the Company’s stock and are not classified within stockholders’ equity, the options to convert
are recorded as liabilities at fair value. They are marked to market each reporting period through the consolidated statement of
operations.
On the closing date, the derivative liability
was recorded at fair value of $354,988 with the remaining proceeds of $395,012 allocated to the Notes. The allocation
of funds to the derivative liability resulted in a discount on the loan, which is accreted to interest expense over the life of
the loan. For the three and nine months ended June 30, 2015, $88,747 and $103,538 respectively of the loan discount has been accreted
to interest expense. As of June 30, 2015 the accreted balance of the Notes was $498,550.
The value of the derivative liability as of June 30, 2015 was $411,753. As
a result of a change in the estimated fair market value of the derivative liability we recorded other expense of $149,622 and $56,765
for the three and nine months ended June 30, 2015, respectively.
Fair Value Measurements Using Significant Unobservable
Inputs
(Level 3) |
|
|
|
|
|
Convertible Debt Derivative Liability |
|
Beginning balance at September 30, 2014 |
|
$ |
- |
|
|
|
|
|
|
Issuances |
|
|
354,988 |
|
|
|
|
|
|
Adjustments to estimated fair value |
|
|
56,765 |
|
|
|
|
|
|
Ending balance at June 30, 2015 |
|
$ |
411,753 |
|
The derivative liability was valued as of March 15, 2015 and June
30, 2015 using Monte Carlo Simulations with the following assumptions:
| |
March 15, 2015 | | |
June 30, 2015 | |
Stated interest rate | |
| 8.0 | % | |
| 8.0 | % |
Exercise price per share | |
$ | 0.20 | | |
$ | 0.20 | |
Expected volatility | |
| 90.0 | % | |
| 70.0 | % |
Risk-free interest rate | |
| 0.24 | % | |
| 0.18 | % |
Credit adjusted discount rate | |
| 20.0 | % | |
| 19.0 | % |
Remaining expected term of underlying securities (years) | |
| 1.00 | | |
| .75 | |
On September 30, 2013, the Company entered into the Life Sciences
Accelerator Funding Agreement (the “MLSC Loan Agreement”) with the Massachusetts Life Sciences Center (“MLSC”),
pursuant to which MLSC provided an unsecured subordinated loan in the amount of $1,000,000. The loan bears interest at a rate of
10% per annum, and will become fully due and payable on the earlier of (i) September 30, 2018, (ii) the occurrence of an event
of default under the MLSC Loan Agreement, or (iii) the completion of a sale of substantially all of our assets, a change-of-control
transaction or one or more financing transactions in which we receive from third parties other than our then existing shareholders
net proceeds of $5,000,000 or more in a 12-month period. The MLSC Loan Agreement includes warrants to purchase 145,985 shares of
the Company’s Common Stock at an exercise price of $0.27 per share. None of the warrants, which expire on September 30, 2023,
have been exercised as of June 30, 2015.
Of the $1,000,000, the Company allocated $944,707 to the loan and
$55,293 to the warrants. The warrant valuation was derived with the Black-Scholes option pricing model with the following assumptions:
risk free rate 2.64%, dividend yield 0.0%, expected life of 10 years, and volatility 114%. The fair value of the warrants was recorded
as an increase to additional paid-in capital. The allocation of funds to the warrants resulted in a discount on the loan, which
is accreted to interest expense over the life of the loan. For each of the three and nine months ended June 30, 2015 and 2014,
$2,765 and $8,294, respectively of the loan discount have been accreted to interest expense. As of June 30, 2015 and September 30,
2014 the accreted balance of the MLSC Loan was $964,060 and $955,766, respectively.
| 6. | PRIVATE PLACEMENT FINANCING |
On January 30, 2014, the Company entered into a Securities
Purchase Agreement (the “Securities Purchase Agreement”) with nine separate accredited investors (“2014
Investors”) providing for the issuance and sale by the Company to the 2014 Investors, in a private placement, of an
aggregate of 11,400,000 shares of Common Stock (collectively, the “2014 Shares”) at a purchase price of $0.25 per
share and three series of warrants, the Series A warrants, the Series B warrants and the Series C warrants, to purchase up to
an aggregate of 34,200,000 shares of the Company’s Common Stock (collectively, the “2014 Warrants,” and the
shares issuable upon exercise of the 2014 Warrants, collectively, the “2014 Warrant Shares”), for aggregate gross
proceeds to the Company of approximately $2,850,000 (the “2014 Private Placement Financing”).
Upon the closing of the 2014 Private Placement Financing on
February 4, 2014 (the “Closing Date”), the Company entered into a registration rights agreement (the “2014
Registration Rights Agreement”) with the 2014 Investors, pursuant to which the Company became obligated, subject to
certain conditions, to file with the Securities and Exchange Commission (“SEC”) on or before March 21, 2014 one
or more registration statements to register for resale under the Securities Act of 1933, as amended, (i) the 2014 Shares and
the 2014 Warrant Shares, plus (ii) an additional number of shares of Common Stock equal to 33% of the total number of 2014
Shares and 2014 Warrant Shares, to account for adjustments, if any, to the number of 2014 Warrant Shares issuable pursuant to
the terms of the 2014 Warrants (the securities set forth in this clause (ii), the “Additional Shares”). Under the
terms of the 2014 Registration Rights Agreement, the Company is permitted to reduce the number of shares covered by a
registration statement if such reduction is required by the SEC as a condition for permitting such registration statement to
become effective and treated as a resale registration statement (the “Cutback Provisions”). In response to
comments received from the SEC and in accordance with the terms of the 2014 Registration Rights Agreement, the Company
reduced the number of shares included in its draft resale registration statement by the number of Additional Shares. The
Company’s failure to satisfy certain other obligations and deadlines set forth in the 2014 Registration Rights
Agreement may subject the Company to payment of monetary penalties as discussed below. The resale registration statement was
declared effective on July 2, 2014. As described below, in the event that we fail to comply with certain requirements in the
2014 Registration Rights Agreement, we may be required to pay liquidated damages to the investors.
The 2014 Warrants were exercisable immediately upon
issuance. The Series A warrants had an initial exercise price of $0.30 per share and expire five years from the date of their
issuance. The Series B warrants had an initial exercise price of $0.35 per share and expire on the earlier of 12 months after
their issuance date and six months after the first date on which the resale of all Registrable Securities (as defined in the
2014 Registration Rights Agreement) is covered by one or more effective registration statements. The Series B warrants
expired on January 2, 2015. The Series C warrants had an initial exercise price of $0.40 per share and an initial expiration
on the earlier of 18 months after their issuance date and nine months after the first date on which the resale of all
Registrable Securities (as defined in the 2014 Registration Rights Agreement) is covered by one or more effective
registration statements. The Series C warrants were set to expire on April 2, 2015 and, as described below, were amended to
expire on July 2, 2016. The number of shares of the Company’s Common Stock into which each of the 2014 Warrants is
exercisable and the exercise price therefore were subject to adjustment as set forth in the 2014 Warrants, including, without
limitation, adjustment to both the exercise price of the 2014 Warrants in the event of certain subsequent issuances and sales
of shares of the Company’s Common Stock (or securities convertible or exercisable into shares of Common Stock) at a
price per share lower than the then-effective exercise price of the 2014 Warrants, in which case the per share exercise price
of the 2014 Warrants would be adjusted to equal such lower price per share and the number of shares issuable upon exercise
of the 2014 Warrants would be adjusted accordingly so that the aggregate exercise price upon full exercise of the 2014
Warrants immediately before and immediately after such per share exercise price adjustment were equal. The 2014 Warrants are
also subject to customary adjustments in the event of stock dividends and splits, subsequent rights offerings and pro rata
distributions to the Company’s common stockholders, and provide that they shall not be exercisable in the event and to
the extent that the exercise thereof would result in the holder of the Warrant or any of its affiliates beneficially would
then own more than 4.9% of the Company’s Common Stock. The 2014 Warrants also provide that they shall not
be exercisable in the event and to the extent that the exercise thereof would result in the holder of the Warrant or any of
its affiliates beneficially owning more than 4.9% of our Common Stock.
The Company may be required to make certain payments to the
2014 Investors under certain circumstances in the future pursuant to the terms of the
Securities Purchase Agreement and the 2014 Registration Rights Agreement. These potential future payments include:
(a) potential partial damages for failure to register the Common Stock issued or issuable upon exercise of 2014 Warrants (in
a cash amount equal to 1% of the price paid to the Company by each investor in the 2014 Private Placement Financing on the
date of and on each 30-day anniversary of such failure until the cure thereof; (b) amounts payable if the Company and its
transfer agent fail to timely remove certain restrictive legends from certificates representing shares of Common Stock issued
in the 2014 Private Placement Financing or issuable upon exercise of the 2014 Warrants; (c) expense reimbursement for the
lead investor in the 2014 Private Placement Financing; and (d) payments in respect of claims for which the Company provides
indemnification. There is no cap to the potential consideration. On July 2, 2014, we received from the SEC a Notice of
Effectiveness of our Registration Statement related to the 2014 Private Placement Financing which satisfied some of our
obligation to register these securities with the SEC.
On December 1, 2014, the Company agreed to amend certain
provisions of the 2014 Warrants (the “December 2014 Amendment”). Under the terms of the December 2014 Amendment,
the affected 2014 Warrants were amended to (i) reduce the exercise price of the Series B Warrants from $0.35 to $0.20, (ii)
reduce the exercise price of the Series C Warrants from $0.40 to $0.20, and (iii) clarify that each series of 2014 Warrants
may be amended individually, without having to amend all three series of 2014 Warrants. The number of shares of the
Company’s Common Stock, which may be purchased from the Company upon exercise of each 2014 Warrant, remained unchanged.
In conjunction with the December 2014 Amendment, the Company recognized a loss on the modification of 2014 Warrants in the
amount of $1,300,170, which was determined using Monte Carlo Simulation.
As of December 2, 2014, Series B Warrants had been exercised for
an aggregate issuance of 4,000,000 shares of the Company’s Common Stock resulting in gross proceeds to the Company of $800,000.
In conjunction with the exercise of the Series B Warrants, their corresponding fair value at the exercise dates of $224,000 were
extinguished from the derivative liabilities balance.
On March 13, 2015, the Company issued unsecured 8%
Convertible Notes in the aggregate principal amount of $750,000. The Company’s issuance of the Notes triggered the anti
dilution provisions of the Series A Warrants and, as a result, the exercise price of the Series A Warrants was reduced to
$0.20 per share and the aggregate number of shares issuable under the Series A Warrants increased by 5,700,000 shares from
11,400,000 shares to 17,100,000 shares. In addition, on March 13, 2015 and May 30, 2015, respectively the expiration date of
the Series C Warrants was extended to June 2, 2015 and July 2, 2015, respectively. In conjunction with these amendments, the Company
recognized a loss on the modification of warrants in the amount of $624,016, which was determined using Monte Carlo
Simulation.
During the quarter ended June 30, 2015, Series C Warrants had been
exercised for an aggregate issuance of 2,255,000 shares of the Company’s Common Stock resulting in gross proceeds to the
Company of $451,000. In conjunction with the exercise of the Series C Warrants, their corresponding fair value at the exercise
dates of $75,321 were extinguished from the derivative liabilities balance.
On June 22, 2015 the Company entered into the Amendment to
the Series A Warrants and Series C Warrants to purchase Common Stock (the “June 2015 Amendment”), with
Cranshire Capital Master Fund, Ltd. (“Cranshire”), to (i) delete the full ratchet anti-dilution provisions set
forth in the Series A Warrants and Series C Warrants; and (ii) extend the expiration date of the Series C Warrants from to
5:00 p.m., New York time, on July 2, 2015 to 5:00 p.m., New York time, on July 2, 2016. In consideration of Cranshire’s
entrance into the June 2015 Amendment (and for no additional consideration), the Company agreed to issue to the holders of
the 2014 Warrants up to 570,000 shares of Company’s Common Stock subject to the delivery by each such holder of an
investor certificate to the Company (such shares of Common Stock, the “Inducement Shares”). In conjunction with
the modifications to the Series A and Series C Warrants in the June 2015 Amendment, the corresponding fair values at the
modification date, net of Inducement Shares totaling $927,373 were extinguished from the derivative liabilities balance.
For the period ended June 30, 2015, 435,000 Inducement
Shares had been issued of the potential 570,000 and an additional 125,000 shares were
issued during July 2015 for a total of 560,000.
Derivative Liabilities
The Company accounted for the 2014 Warrants relating to
the aforementioned 2014 Private Placement Financing in accordance with ASC 815-10, Derivatives and Hedging. Because
the 2014 Warrants are not indexed to the Company’s stock and are not classified within stockholders’ equity, they
are recorded as liabilities at fair value. They are marked to market each reporting period through the consolidated statement
of operations.
On February 4, 2014, the initial closing date of the 2014
Private Placement Financing, the derivative liabilities were recorded at fair value of $10,391,693. Given that the fair value
of the derivative liabilities exceeded the total proceeds of the 2014 Private Placement Financing of $2,850,000, no net
amounts were available to be allocated to the Common Stock. The $7,541,693 amount by which the recorded liabilities exceeded
the proceeds was charged to other expense as of February 4, 2014 closing date.
The value of the derivative liability as of June 30, 2015 and
September 30, 2014 was $3,886,613 and $6,270,000, respectively. As a result of a change in the estimated fair market
value of the derivative liability we recorded other expense of $925,384 for the three months ended June 30, 2015 and other
income of $2,980,829 for nine months ended June 30, 2015 and other income of $1,584,818 and $2,069,693 for the three and nine
months ended June 30, 2014, respectively. In addition, during the three months ended June 30, 2015, we recorded a gain on
modification of warrants, net of Inducement Shares in the amount of $927,373 and a loss of $896,763 for the nine
months ended June 30, 2015. Lastly, we recognized a gain on the exercise of warrants in the amount of $75,321, and
$299,321, respectively for the three and nine months ended June 30, 2015 as described above. For the three months ended June
30, 2015, the change in the estimated fair value was primarily due to the elimination of the anti-dilution provisions of the
Series A Warrants and Series C Warrants and extending the expiration date of the Series C Warrants to July 2, 2016. For the
nine months ended June 30, 2015, the change in the estimated fair value was primarily due to the reduction of the exercise
prices of the 2014 Warrants, the exercise of 4,000,000 shares of the Series B Warrants and the exercise of 2,255,000 shares
of the Series C Warrants for an aggregate of 6,255,000 shares of the Company’s Common Stock.
Fair Value Measurements Using Significant Unobservable
Inputs
(Level 3) |
|
|
|
|
|
Warrant Derivative Liability |
|
Beginning balance at September 30, 2014 |
|
$ |
6,270,000 |
|
|
|
|
|
|
Modification of warrants, net of Inducement Shares |
|
|
896,763 |
|
|
|
|
|
|
Exercises of warrants |
|
|
(299,321 |
) |
|
|
|
|
|
Adjustments to estimated fair value |
|
|
(2,980,829 |
) |
|
|
|
|
|
Ending balance at June 30, 2015 |
|
$ |
3,886,613 |
|
The derivative liabilities were valued as of September 30, 2014,
December 1, 2014, March 15, 2015, June 22, 2015, and June 30, 2015 using Monte Carlo Simulation or Black Schole, as appropriate,
with the following assumptions:
| |
September 30,
2014 | | |
December 1, 2014 | | |
March 15,
2015 | | |
June 22, 2015 | | |
June 30, 2015 | |
Closing price per share of Common Stock | |
$ | 0.18 | | |
$ | 0.25 | | |
$ | 0.21 | | |
$ | 0.23 | | |
$ | 0.26 | |
Exercise price per share | |
$ | 0.30 - 0.40 | | |
$ | 0.20 - $0.30 | | |
$ | 0.20 - $0.30 | | |
$ | 0.20 | | |
$ | 0.20 | |
Expected volatility | |
| 85 - 90 | % | |
| 80 – 90 | % | |
| 80 – 110 | % | |
| 55- 85 | % | |
| 75-85 | % |
Risk-free interest rate | |
| 0.02 - 1.55 | % | |
| .01 – 1.39 | % | |
| 0.03 – 1.41 | % | |
| 0.27 - 1.68 | % | |
| 0.28 – 1.63 | % |
Dividend yield | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Remaining expected term of underlying securities (years) | |
| 0.33 - 4.33 | | |
| 0.33 – 4.6 | | |
| 0.22 – 4.3 | | |
| 1.03 – 4.03 | | |
| 1.01 – 4.01 | |
Common Stock
At the February 4, 2014 closing date of the 2014 Private
Placement Financing, the Company issued 11,400,000 shares of Common Stock and recorded the par value of the shares issued of
$11,400 (at par value of $0.001 per share) with a corresponding reduction in additional paid-in capital, given that the fair
value of the warrant liability recorded exceeded the total consideration received as of February 4, 2014.
| 7. | 2015 PRIVATE PLACEMENT FINANCING |
Beginning June 22, 2015 and through June 30, 2015, the Company entered into a series of substantially similar subscription agreements
(each a “Subscription Agreement”) with 20 accredited investors (collectively, the “2015 Investors”)
providing for the issuance and sale by the Company to the 2015 Investors, in a private placement, of an aggregate of
14,390,754 Units (“Unit”) at a purchase price of $0.22 per Unit (the “2015 Private Placement
Financing”). Each Unit consisted of a share of Common Stock (the “2015 Shares”) and a Series D Warrant to
purchase a share of Common Stock at an exercise price of $0.25 per share at any time prior to the fifth anniversary of the
issuance date of the Series D Warrant (the “Series D Warrants,” and the shares issuable upon exercise of the
Series D Warrants, collectively, the “2015 Warrant Shares”). The Company did not engage any underwriter or
placement agent in connection with the 2015 Private Placement Financing, and the aggregate gross proceeds raised by the
Company in the 2015 Private Placement Financing totaled approximately $3,100,000.
The Company’s obligation to issue and sell the
2015 Shares and the Series D Warrants and the corresponding obligation of the 2015 Investors to purchase such 2015
Shares and Series D Warrants were subject to a number of conditions precedent including, but not limited to, the amendment of
the Company’s Series A Warrants and Series C Warrants to delete certain of the anti-dilution provisions contained
therein, as described in Footnote 6, Private Placement Financing, and other customary closing conditions. The conditions
precedent were satisfied June 30, 2015 (the “Initial Closing Date”), and the Company conducted an initial closing
(the “Initial Closing”) pursuant to which it sold and 19 of the 2015 Investors (the “Initial
Investors”) purchased 13,936,367 Units at an aggregate purchase price of $3,066,000. On July 2, 2015, the Company
conducted a second closing (the “Second Closing” and together with the Initial Closing, the
“Closings”) pursuant to which it sold and one of the 2015 Investors purchased 454,387 Units at an aggregate
purchase price of $100,000. The 454,387 Units have been recorded as Common Stock subscribed and the $100,000 has been
recorded as a stock subscription receivable as of June 30, 2015.
On the Initial Closing Date, the Company entered into
a registration rights agreement with the Initial Investors (the “ 2015 Registration Rights Agreement”), pursuant
to which the Company will be obligated, subject to certain conditions, to file with the Securities and Exchange
Commission within 90 days after the closing of the 2015 Private Placement Financing one or more registration statements (any
such registration statement, a “Resale Registration Statement”) to register the 2015 Shares and the 2015 Warrant
Shares for resale under the Securities Act of 1933, as amended (the “Securities Act”). The remaining 2015
Investor became a party to the 2015 Registration Rights Agreement upon the consummation of the Second Closing.
The Company’s failure to satisfy certain filing and effectiveness deadlines with respect to a Resale Registration
Statement and certain other requirements set forth in the 2015 Registration Rights Agreement may subject the Company to
payment of monetary penalties.
Following each Closing, each 2015 Investor was also
issued Series D Warrants to purchase shares of the Company’s Common Stock up to 100% of the 2015 Shares purchased by
such 2015 Investor under such 2015 Investor’s Subscription Agreement. The Series D Warrants have an exercise price of
$0.25 per share, are exercisable immediately after their issuance and have a term of exercise equal to five years after their
issuance date. The number of shares of the Company’s Common Stock into which each of the Series D Warrants is
exercisable and the exercise price therefor are subject to adjustment, as set
forth in the Series D Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock
dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, at anytime during the term of the
Series D Warrants, the Company may reduce the then current exercise price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.
Derivative Liabilities
The Company accounted for the Series D Warrants relating
to the aforementioned 2015 Private Placement Financing in accordance with ASC 815-10, Derivatives and Hedging.
Because the Series D Warrants are not indexed to the Company’s stock and are not classified within stockholders’
equity, they are recorded as liabilities at fair value. They are marked to market each reporting period through the
consolidated statement of operations.
On the Initial Closing Date, the derivative liabilities were
recorded at fair value of $2,458,204. Given that the fair value of the derivative liabilities were less than the total
proceeds of the 2015 Private Placement Financing of $3,066,000, the remaining proceeds of $607,796 were allocated to the
Common Stock and additional paid in capital.
Fair Value Measurements Using Significant Unobservable
Inputs
(Level 3) |
|
|
|
|
|
Warrant Derivative Liability |
|
Beginning balance at September 30, 2014 |
|
$ |
- |
|
|
|
|
|
|
Issuances |
|
|
2,458,204 |
|
|
|
|
|
|
Adjustments to estimated fair value |
|
|
- |
|
|
|
|
|
|
Ending balance at June 30, 2015 |
|
$ |
2,458,204 |
|
The derivative liabilities were valued as of June 30, 2015 using
Monte Carlo Simulation with the following assumptions:
| |
June 30, 2015 | |
Closing price per share of common stock | |
$ | 0.26 | |
Exercise price per share | |
$ | 0.25 | |
Expected volatility | |
| 85 | % |
Risk-free interest rate | |
| 1.63 | % |
Dividend yield | |
| — | |
Remaining expected term of underlying securities (years) | |
| 5.00 | |
Common Stock
At the June 30, 2015 Initial Closing Date of the 2015 Private
Placement Financing, the Company issued 13,936,367 shares of Common Stock and recorded the par value of the shares issued of
$13,936 (at par value of $0.001 per share) with the remaining proceeds of $593,860 allocated to additional paid-in capital.
On July 2, 2015, the Company conducted the Second Closing pursuant to which it sold and one of the 2015 Investors
purchased 454,387 Units at an aggregate purchase price of $100,000. The 454,387 Units have been recorded as Common Stock
subscribed and the $100,000 has been recorded as a stock subscription receivable as of June 30, 2015.
In contemplation of the Merger, on April 19, 2013, the Company entered
into a financing agreement (the “Financing Agreement”) with Coldstream Summit Ltd. (“Coldstream”) pursuant
to which we agreed to issue and sell, and Coldstream agreed to purchase or assist in securing the purchase of $2,000,000 worth
of units in a private offering within the 12-month period following the closing of the Merger (the “Coldstream Financing”).
Each unit issued in the Coldstream Financing was to be sold at a price of $0.50 per share and was to consist of (i) one share of
common stock and (ii) one warrant to purchase one share of common stock at an exercise price of $0.75 per share and with a term
of 12 months. Pursuant to the Coldstream Financing, we issued and sold units consisting of 4,000,000 shares of common stock and
warrants to purchase 4,000,000 shares of common stock for aggregate gross proceeds of $2,000,000. As of September 30, 2014, all
warrants issued in connection with the Coldstream Financing had expired.
During the period commencing July 1, 2015 and ending on August
5, 2015, additional Series A and Series C Warrants have been exercised for an aggregate issuance of 7,345,000 shares of the Company’s
Common Stock at an exercise price of $0.20 per share, resulting in gross proceeds to the Company of $1,469,000.
As part of the amendment made to the Series A Warrants and Series
C Warrants to delete the full ratchet anti-dilution provisions set forth in the Series A Warrants and Series C Warrants and to
extend the expiration date of the Series C Warrants, an additional 125,000 shares of the Inducement Shares have been issued during
July 2015. The remaining 10,000 Inducement Shares will be issued upon the execution and delivery by remaining holders of an investor
certificate to the Company.
ARCH THERAPEUTICS, INC.
PROSPECTUS
Up to 28,781,508 Shares of Common Stock
Prospectus dated September ____, 2015
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
As used in this Part II, unless the context indicates or
otherwise requires, the terms “we”, “us”, “our”, and the “Company”
refer to Arch Therapeutics, Inc., a Nevada corporation, and its consolidated subsidiary, and the term “ABS”
refers to Arch Biosurgery, Inc., a private Massachusetts corporation that, through a reverse merger acquisition completed on June
26, 2013 (the “Merger”), has become our wholly owned subsidiary. On May 24, 2013, we effected a forward stock
split, by way of a stock dividend, of our issued and outstanding shares of Common Stock at a ratio of 11 shares to each one issued
and outstanding share, and unless the context indicates or otherwise requires, all share numbers and share price data included
in this Part II have been adjusted to give effect to that stock split.
Item 13. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the approximate
amount of the fees and expenses payable by us in connection with the issuance and distribution of the securities being offered.
EXPENSE | |
AMOUNT | |
SEC Registration Fees | |
$ | 1,100 | |
Legal Fees | |
| 100,000 | |
Accounting Fees | |
| 20,000 | |
Miscellaneous Fees and Expenses | |
| 28,900 | |
| |
| | |
Total | |
$ | 150,000 | |
Item 14. Indemnification of Directors and Officers.
We have not entered into separate indemnification agreements
with our directors and officers. Our amended and restated bylaws provide that we shall indemnify any director or officer to the
fullest extent authorized by the laws of the State of Nevada. Our amended and restated bylaws further provide that we shall pay
the expenses incurred by an officer or director (acting in his capacity as such) in defending any action, suit or proceeding in
advance of the final disposition of such action, suit or proceeding, subject to the delivery to us by or on behalf of such director
or officer of an undertaking to repay the amount of such expenses if it shall ultimately be determined that he or she is not entitled
to be indemnified by us as authorized in our bylaws or otherwise.
The Nevada Revised Statutes provide us with the power to indemnify
any of our directors, officers, employees and agents as follows:
| · | a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the
right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he or she acted in good
faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful; |
| · | a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that
he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him or her in connection
with the defense or settlement of the action or suit if he or she acted in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue
or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom,
to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court
in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all
the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper;
and |
| · | to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding, or in defense of any claim, issue or matter therein, the corporation must indemnify
him or her against expenses, including attorneys’ fees, actually and reasonably incurred by him or her in connection with
the defense. |
The Nevada Revised Statutes provide that a corporation may make
any discretionary indemnification only as authorized in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances. The determination must be made:
| · | by the stockholders of the corporation; |
| · | by the board of directors of the corporation by majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding; |
| · | if a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by
independent legal counsel in a written opinion; |
| · | if a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent
legal counsel in a written opinion; or |
The Nevada Revised Statutes further provide that a corporation
may purchase and maintain insurance or make other financial arrangements on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other enterprise for any liability asserted against him and
liability and expenses incurred by him in his capacity as a director, officer, employee or agent, or arising out of his status
as such, whether or not the corporation has the authority to indemnify him against such liability and expenses. We have secured
a directors’ and officers’ liability insurance policy. We expect that we will continue to maintain such a policy.
Item 15. Recent Sales of Unregistered Securities.
By the Company
On June 18, 2013, pursuant to the approval of our Board of Directors,
we issued an aggregate of 1,500,000 shares of our Common Stock pursuant to restricted stock awards granted outside of our 2013
Stock Incentive Plan to two consultants performing services for the Company. The issuance of those shares has not been registered
under the Securities Act, and such shares have been issued in reliance upon an exemption from registration under Section 4(a)(2)
of the Securities Act. Such shares may not be offered or sold in the United States absent registration under or exemption from
the Securities Act and any applicable state securities laws. In determining that the issuance of such shares qualified for an exemption
under Section 4(a)(2) of the Securities Act, we relied on the following facts: the recipients of the shares represented that were
provided with or had access to information regarding the Company sufficient to provide a basis for an informed investment decision
and that they had such knowledge and experience in financial and business matters that Recipient is capable of evaluating the merits
and risk of this investment; the recipients of the shares represented that they are acquiring the shares for investment purposes
and without a view toward disposition of the shares; we used no advertising or general solicitation in connection with the issuance
of such shares; and the shares were issued as restricted securities.
In contemplation of the Merger, on April 19, 2013, we entered
into a financing agreement with Coldstream Summit Ltd. (“Coldstream”), pursuant to which we agreed to issue
and sell, and Coldstream agreed to purchase or assist in securing the purchase of, $2,000,000 worth of units in a private offering
within the 12 month period following the closing of the Merger (the “Coldstream Financing”). Each unit issued
in the Coldstream Financing has been sold at a price of $0.50 per share and consisted of (i) one share of our Common Stock;
and (ii) a warrant to purchase one share of our Common Stock at an exercise price of $0.75 per share and with a term of 12
months. On June 26, 2013, we issued and sold units consisting of 2,500,000 shares of Common Stock and warrants to purchase 2,500,000
shares of Common Stock in the Coldstream Financing to a foreign accredited investor; on July 3, 2013, we issued and sold additional
units consisting of 500,000 shares of Common Stock and warrants to purchase 500,000 shares of Common Stock to a foreign accredited
investor ; and on August 30, 2013, we issued and sold additional units consisting of 1,000,000 shares of Common Stock and warrants
to purchase 1,000,000 shares of Common Stock to a foreign accredited investor. Following such issuance and sale on August 30, 2013,
we had issued the full amount of units to be issued in the Coldstream Financing, totaling 4,000,000 shares of Common Stock and
warrants to purchase up to 4,000,000 shares of Common Stock (all of which expired on or prior to August 30, 2014). The issuance
of securities in the Coldstream Financing has not been registered under the Securities Act, and such securities have been issued
in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act and Regulation S promulgated thereunder.
Such securities may not be offered or sold in the United States absent registration under or exemption from the Securities Act
and any applicable state securities laws. In determining that the issuance of such securities qualifies for an exemption under
Section 4(a)(2) of the Securities Act and Regulation S promulgated thereunder, we have relied on the following facts: the
recipients of the securities represented that they are not a “U.S. Person” as defined in as defined in Rule 902 promulgated
under the Securities Act and are “accredited investors” as defined in Rule 501 under the Securities Act; and the securities
were issued as restricted securities.
Upon the closing of the Merger, we issued an aggregate of 14,645,237
shares of our Common Stock to stakeholders of ABS in exchange for the cancellation of their shares, or rights to acquire shares,
of ABS. The issuance of shares in connection with the Merger to stakeholders of ABS has not been registered under the Securities
Act, and such shares have been issued in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder. Such shares may not be offered or sold in the United States absent registration
under or exemption from the Securities Act and any applicable state securities laws. In determining that the issuance of such shares
qualifies for an exemption under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, we
have relied on the following facts: the recipients of the shares represented that they are acquiring the shares for investment
purposes and without a view toward disposition of the shares; the recipients of the shares represented that they are “accredited
investors” as defined in Rule 501 under the Securities Act or otherwise financially sophisticated; we used no advertising
or general solicitation in connection with the issuance of such shares; and the shares were issued as restricted securities.
In connection with and as a condition of the MLSC Loan Agreement,
on September 30, 2013, we issued to MLSC a warrant (the “MLSC Warrant”) to purchase 145,985 shares of our Common
Stock at an exercise price of $0.274 per share. The MLSC Warrant has been issued as partial consideration for the funding provided
under the MLSC Loan Agreement and for no separate consideration. The MLSC Warrant is exercisable immediately upon its issuance
and expires on the earlier of September 30, 2023 and the completion of a sale of substantially all of our assets or a change-of-control
transaction. The issuance of the MLSC Warrant has not been registered under the Securities Act, and such securities have been issued
in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act. In determining that the issuance of
such securities qualifies for an exemption under Section 4(a)(2) of the Securities Act, we relied on the following facts: the securities
were issued to one recipient that is acquiring the securities for investment purposes and without a view toward disposition
thereof; no advertising or general solicitation was used in connection with the issuance of such securities; and the
securities were issued as restricted securities.
On February 4, 2014, pursuant to a securities purchase agreement
we entered into with a nine accredited investors on January 30, 2014, we issued and sold an aggregate of 11,400,000 shares of our
Common Stock at a purchase price of $0.25 per share and three series of warrants, the Series A Warrants, the Series B Warrants
and the Series C Warrants, to purchase up to an aggregate of 34,200,000 shares of the Company’s Common Stock, for aggregate
gross proceeds to us of $2.85 million (the “2014 Private Placement Financing”). The issuance and sale of the
securities in the 2014 Private Placement Financing has not been registered under the Securities Act, and such shares have been
issued in reliance upon an exemption from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder. Such securities may not be offered or sold in the United States absent registration under or exemption
from the Securities Act and any applicable state securities laws. In determining that the issuance of such securities qualifies
for an exemption under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, we have relied
on the following facts: each of the investors represented that it is an accredited investor as defined in Rule 501 promulgated
under the Securities Act, that it is acquiring the securities for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof in violation of applicable securities laws and that it has sufficient
investment experience to evaluate the risks of the investment; we used no advertising or general solicitation in connection with
the issuance and sale of the securities to the investors; and the securities will be issued as restricted securities.
Beginning March 11, 2015 and through March 13, 2015, we entered
into a series of substantially similar subscription agreements (each a “Convertible Notes Subscription Agreement”)
with each of Anson Investments Master Fund, LP., Equitec Specialists, LLC and Capital Ventures International (collectively, the
“Convertible Notes Investors”) pursuant to which we issued unsecured 2016 8% Convertible Notes (the “Convertible
Notes”, and such transaction, the “Notes Offering”) to the Convertible Notes Investors in the aggregate
principal amount of $750,000. On the Closing of the Notes Offering on March 13, 2015, each Convertible Notes Investor was issued
a Convertible Note in the principal amount of $250,000. At any time prior to the March 13, 2016, the holders of the Convertible
Notes have the right to convert some or all of such Convertible Notes into the number of shares of Common Stock determined by dividing
(a) the aggregate sum of the (i) principal amount of the Convertible Note to be converted, and (ii) amount of any accrued but unpaid
interest with respect to such portion of the Convertible Note to be converted; and (b) the conversion price then in effect (the
shares of Common Stock issuable upon such conversion, the “Conversion Shares”). The initial conversion price
is $0.20 per share, and it may be (A) reduced to any amount and for any period of time deemed appropriate by our Board of Directors,
or (B) reduced or increased proportionately as a result of stock splits, stock dividends, recapitalizations, reorganizations, and
similar transactions. A holder shall not have the right to convert any portion of a Convertible Note, if after giving effect to
such conversion, the holder, together with its affiliates collectively, would beneficially own more than 4.99% or 9.99% (at the
holder’s discretion) of our shares of Common Stock outstanding immediately after giving effect to such conversion. The
securities in the Notes Offering were issued and sold in reliance upon an exemption from registration afforded by Section 4(a)(2)
of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act, based on the following facts: each of
the Convertible Notes Investors represented that it is (and on the date of any conversion or sale of the Notes and/or Conversion
Shares will be) an accredited investor as defined in Rule 501(a) promulgated under the Securities Act, that it is acquiring the
Securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof
in violation of applicable securities laws and that it has sufficient investment experience to evaluate the risks of the investment;
we used no advertising or general solicitation in connection with the issuance and sale of the securities to the Convertible Notes
Investors; and the securities will be issued as restricted securities.
Beginning June 22, 2015 and through June
30, 2015, we entered into a series of substantially similar subscription agreements (each a “Subscription Agreement”)
with 20 accredited investors (collectively, the “Investors”) providing for the issuance and sale by us to the
Investors, in a private placement, of an aggregate of 14,390,754 Units at a purchase price of $0.22 per Unit (the “2015
Private Placement Financing”). Each Unit consisted of a share of the Company’s common stock, par value $0.001 per
share (“Common Stock”, and such shares, the “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 “Warrants,” and the shares issuable upon exercise of the Warrants, collectively,
the “Warrant Shares”). Our obligation to issue and sell the Shares and Warrants, and the corresponding obligation
of the Investors to purchase such Shares and Warrants were subject to a number of conditions precedent including, but not limited
to, the amendment of our Series A Warrants and Series C Warrants to delete certain of the anti-dilution provisions contained therein,
and other customary closing conditions. The conditions precedent were satisfied June 30, 2015 (the “Initial Closing Date”),
and we conducted an initial Closing (the “Initial Closing”) pursuant to which we sold and 19 of the Investors
(the “Initial Investors”) purchased 13,936,367 Units at an aggregate purchase price of $3,066,000. On July 2,
2015, we conducted a second closing (the “Second Closing” and together with the Initial Closing, the “Closings”)
pursuant to which we sold and 1 of the Investors purchased 454,387 Units at an aggregate purchase price of approximately $100,000.
The issuance and sale of the Shares, Warrants and Warrant Shares in the 2015 Private Placement Financing has not been, and will
not upon issuance be, registered under the Securities Act, and the such securities may not be offered or sold in the United States
absent registration under or exemption from the Securities Act and any applicable state securities laws. The securities were issued
and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act based on the following
facts: each of the Investors has represented that it is an accredited investor as defined in Rule 501 promulgated under the Securities
Act, that it is acquiring the Securities for investment only and not with a view towards, or for resale in connection with, the
public sale or distribution thereof in violation of applicable securities laws and that it has sufficient investment experience
to evaluate the risks of the investment; the Company used no advertising or general solicitation in connection with the issuance
and sale of the Securities to the Investors; and the Securities will be issued as restricted securities. This Current Report on
Form 8-K is not and shall not be deemed to be an offer to sell or the solicitation of an offer to buy any of the Securities.
The Shares and Warrants issued and sold
in the 2015 Private Placement Financing and the Warrant Shares issuable upon the exercise of the Warrants were issued and sold
in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act based on the following facts:
each of the Investors has represented that it is an accredited investor as defined in Rule 501 promulgated under the Securities
Act, that it is acquiring such securities for investment only and not with a view towards, or for resale in connection with, the
public sale or distribution thereof in violation of applicable securities laws and that it has sufficient investment experience
to evaluate the risks of the investment; we used no advertising or general solicitation in connection with the issuance and sale
of such securities to the Investors; and such securities will be issued as restricted securities.
On August 6, 2015, we entered into separate
consulting agreements with two investor relations firms, Excelsior Global Advisors LLC (“Excelsior”) and Acorn
Management Partners, LLC (“Acorn”). In consideration of the services to be provided under and in accordance
with the terms of each consulting agreement, we issued 300,000 shares of Common Stock subject to time-based vesting restrictions
to each of Excelsior and John R. Exley, Acorn’s Chief Executive Officer and the party designated by Acorn to receive its
shares, at an agreed upon value of $0.35 per share, which was the closing price of our Common Stock on August 6, 2015. 150,000
of shares of Common Stock granted to each of Excelsior and Mr. Exley vested immediately upon issuance, and the remaining 150,000
shares are scheduled to vest in 75,000, 50,000 and 25,000 share increments on September 4, 2015, October 2, 2015, and November
4, 2015, respectively. The issuance and sale of the shares of Common Stock to Excelsior and Acorn has not been registered under
the Securities Act, and such securities may not be offered or sold in the United States absent registration under or exemption
from the Securities Act and any applicable state securities laws. The securities were issued and sold in reliance upon an exemption
from registration afforded by Section 4(a)(2) of the Securities Act based on the following facts: each of Excelsior and Acorn has
represented that it is an accredited investor as defined in Regulation D promulgated under the Securities Act, that it is acquiring
the securities for investment only and not with a view towards, or for resale in connection with, a distribution thereof in violation
of applicable securities laws; that it understood that the securities would be issued as restricted securities and as a result,
it must bear the economic risk of its investment in the securities for an indefinite period of time.
By ABS
During the three-year period preceding the date hereof, ABS
issued promissory notes in aggregate principal amount of $620,397 and bearing interest at rates ranging from 6% to 10% together
with related warrants to a total of 20 purchasers. Those securities were originally issued to the purchasers thereof on various
dates during the past three-year period in bridge loan transactions in expectation of potential financings of ABS’s capital
stock. In contemplation of the Merger, any such potential financing of the capital stock of ABS was abandoned and all such securities
were amended and restated to provide for (i) the conversion of all amounts owed under all outstanding convertible promissory
notes into the right to receive an aggregate of 2,283,038 shares of the Company’s Common Stock upon the closing of the Merger,
calculating to approximately one share of the Company’s Common Stock for each $0.27 outstanding under the promissory notes;
and (ii) the cancellation of the warrants in full upon the closing of the Merger. The issuance of such promissory notes and
related warrants were not registered under the Securities Act, and such securities were issued in reliance upon an exemption from
registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. In determining that
the issuance of such securities qualified for an exemption under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation
D promulgated thereunder, ABS relied on the following facts: the securities were issued to recipients that represented they were
“accredited investors” as defined in Rule 501 under the Securities Act acquiring the securities for investment purposes
and without a view toward disposition thereof; ABS used no advertising or general solicitation in connection with the issuance
of such securities; and the securities were issued as restricted securities.
Item 16. Exhibits and Financial Statement Schedules
Exhibits
See the Exhibit Index immediately following the signature page
hereto, which is incorporated into this Item 16 by reference.
Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable or the required information is shown in the consolidated financial statements or notes thereto.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation
of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information
in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under
the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating
to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A
(§ 230.430A of Title 17 of the Code of Federal Regulations), shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with
a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first
use.
(5) That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used
to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i) Any preliminary prospectus or prospectus
of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of Title 17
of the Code of Federal Regulations);
(ii) Any free writing prospectus relating to
the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf
of the undersigned registrant; and
(iv) Any other communication that is an offer
in the offering made by the undersigned registrant to the purchaser.
(6) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized
in the City of Framingham, State of Massachusetts, on September 11, 2015.
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Arch Therapeutics, Inc. |
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By: |
/s/ Terrence W. Norchi, MD |
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Terrence W. Norchi, MD |
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President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned
officers and directors of Arch Therapeutics, Inc., a Nevada corporation (the “Company”), do hereby constitute
and appoint Terrence W. Norchi as his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution,
for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective
amendments, exhibits thereto and other documents in connection therewith) to this Registration Statement and any subsequent registration
statement filed by the registrant pursuant to Rule 462(b) of the Securities Act of 1933, as amended, which relates to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE |
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TITLE |
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DATE |
/s/ Terrence W. Norchi, MD |
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President, Chief Executive Officer and Director |
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September 11, 2015 |
Terrence W. Norchi, MD |
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(Principal Executive Officer) |
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/s/ Richard E. Davis |
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Chief Financial Officer |
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September 11, 2015 |
Richard E. Davis |
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(Principal Financial and Accounting Officer) |
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/s/ Avtar Dhillon |
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Director |
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September 11, 2015 |
Dr. Avtar Dhillon |
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/s/ James R. Sulat |
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Director |
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September 11, 2015 |
James R. Sulat |
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EXHIBIT INDEX
Exhibit |
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Number |
Description of Exhibit |
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2.1** |
Agreement and Plan of Merger dated May 10, 2013, by and among Almah, Inc., Arch Acquisition Corporation, and Arch Therapeutics, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company with the SEC on May 13, 2013)(File Number 333-178883) |
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3.1** |
Restated Articles of Incorporation of Arch Therapeutics, Inc. (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by the Company with the SEC on December 12, 2014)(File Number 000-54986) |
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3.2** |
Amended and Restated Bylaws of Arch Therapeutics, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Company with the SEC on June 24, 2013)(File Number 333-178883) |
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5.1* |
Opinion of McDonald Carano LLP. |
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10.1** |
Binding Letter of Intent by and between Almah, Inc. and Arch Therapeutics, Inc. dated April 19, 2013 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on April 25, 2013)(File Number 333-178883) |
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10.2** |
Promissory Note by and between Almah, Inc. and Arch Therapeutics, Inc. dated April 19, 2013 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company with the SEC on April 25, 2013)(File Number 333-178883) |
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10.3** |
Financing Agreement by and between Almah, Inc. and Coldstream Summit Ltd. dated April 19, 2013 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Company with the SEC on April 25, 2013)(File Number 333-178883) |
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10.4** |
Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Company with the SEC on April 25, 2013)(File Number 333-178883) |
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10.5** |
Form of Warrant (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the Company with the SEC on April 25, 2013)(File Number 333-178883) |
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10.6** |
Amended and Restated Exclusive Patent License Agreement dated May 23, 2011 between ABS and the Massachusetts Institute of Technology, as amended by the First Amendment to Amended and Restated Exclusive Patent License Agreement dated May 15, 2012 between ABS and the Massachusetts Institute of Technology, and further amended by the Second Amendment to Amended and Restated Exclusive Patent License Agreement dated February 1, 2013 between ABS and the Massachusetts Institute of Technology, as further amended by the Third Amendment to Amended and Restated Exclusive Patent License Agreement dated April 30, 2013 between ABS and the Massachusetts Institute of Technology, and as further amended by the Letter Agreement dated June 10, 2013 between ABS and the Massachusetts Institute of Technology (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed by the Company with the SEC on June 26, 2013)(File Number 333-178883) |
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10.7#** |
Termination Agreement and Release dated June 25, 2013, between ABS and Terrence W. Norchi (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed by the Company with the SEC on June 26, 2013)(File Number 333-178883) |
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10.8#** |
Executive Employment Agreement dated June 26, 2013 between Arch Therapeutics, Inc. and Terrence W. Norchi (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed by the Company with the SEC on June 26, 2013)(File Number 333-178883) |
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10.9#** |
Executive Employment Agreement dated June 26, 2013 between Arch Therapeutics, Inc. and Alan T. Barber (incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed by the Company with the SEC on June 26, 2013)(File Number 333-178883) |
10.10#** |
Executive Employment Agreement, effective July 8, 2013, by and between Arch Therapeutics, Inc. and William M. Cotter (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on July 8, 2013)(File Number 000-54986) |
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10.11** |
Amendment No. 1 to Agreement and Plan of Merger, dated May 23, 2013, by and among Almah, Inc., Arch Acquisition Corporation, and Arch Therapeutics, Inc. (incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q filed by the Company with the SEC on August 14, 2013)(File Number 000-54986) |
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10.12#** |
Arch Therapeutics, Inc. 2013 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on June 24, 2013)(File Number 333-178883) |
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10.13#** |
Form of Stock Option Award Agreement under Arch Therapeutics, Inc. 2013 Stock Incentive Plan (incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form 10-Q filed by the Company with the SEC on August 14, 2013)(File Number 000-54986) |
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10.14#** |
Form of Restricted Stock Unit Award Agreement under Arch Therapeutics, Inc. 2013 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 to the Quarterly Report on Form 10-Q filed by the Company with the SEC on August 14, 2013)(File Number 000-54986) |
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10.15#** |
Form of Restricted Stock Bonus Award Agreement under Arch Therapeutics, Inc. 2013 Stock Incentive Plan (incorporated by reference to Exhibit 10.15 to the Quarterly Report on Form 10-Q filed by the Company with the SEC on August 14, 2013)(File Number 000-54986) |
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10.16** |
Life Sciences Accelerator Funding Agreement dated September 30, 2013 between Arch Therapeutics, Inc. and the Massachusetts Life Sciences Center (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on October 4, 2013)(File Number 000-54986) |
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10.17** |
Form of Warrant to Purchase Shares of Common Stock dated September 30, 2013 issued by Arch Therapeutics, Inc. to the Massachusetts Life Sciences Center (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company with the SEC on October 4, 2013)(File Number 000-54986) |
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10.18** |
Sublease dated August 30, 2013 and effective October 1, 2013, between Arch Therapeutics, Inc. and Stream Global Services, Inc. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Company with the SEC on October 4, 2013)(File Number 000-54986) |
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10.19** |
Securities Purchase Agreement dated January 30, 2014, by and among Arch Therapeutics, Inc. and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on January 31, 2014)(File Number 000-54986) |
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10.20** |
Form of Series A Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by the Company with the SEC on January 31, 2014)(File Number 000-54986) |
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10.21** |
Form of Series B Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed by the Company with the SEC on January 31, 2014)(File Number 000-54986) |
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10.22** |
Form of Series C Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed by the Company with the SEC on January 31, 2014)(File Number 000-54986) |
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10.23** |
Form of Registration Rights Agreement dated January 30, 2014, by and among Arch Therapeutics, Inc. and the investors listed on the Schedule of Buyers attached thereto (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company with the SEC on January 31, 2014)(File Number 000-54986) |
10.24#** |
First Amendment to Executive Employment Agreement, dated March 23, 2014, by and between Arch Therapeutics, Inc. and Terrence W. Norchi Stock (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on March 27, 2014)(File Number 000-54986) |
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10.25#** |
First Amendment to Executive Employment Agreement, dated March 23, 2014, by and between Arch Therapeutics, Inc. and William M. Cotter (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company with the SEC on March 27, 2014)(File Number 000-54986) |
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10.26#** |
Executive Employment Agreement, effective July 7, 2014, by and between Arch Therapeutics, Inc. and Richard E. Davis (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on July 7, 2014)(File Number 000-54986) |
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10.27** |
Amendment to Series A Warrants, Series B Warrants and Series C Warrants to Purchase Common Stock (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on December 2, 2014)(File Number 000-54986) |
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10.28** |
Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on March 13, 2015)(File Number 000-54986) |
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10.29** |
Form of 8% Convertible Note (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company with the SEC on March 13, 2015)(File Number 000-54986) |
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10.30** |
Amendment to Series C Warrants to Purchase Common Stock (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Company with the SEC on March 13, 2015)(File Number 000-54986) |
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10.31†** |
Project Agreement by and between Arch Therapeutics, Inc. and the National University of Ireland Galway dated May 28, 2015 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by the Company with the SEC on August 7, 2015) (File Number 000-54986) |
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10.32** |
Amendment to Series C Warrants to Purchase Common Stock dated May 30, 2015 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on June 1, 2015) (File Number 000-54986) |
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10.33#** |
Separation Agreement dated June 15, 2015 by and between Arch Therapeutics, Inc. and William M. Cotter incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by the Company with the SEC on August 7, 2015) (File Number 000-54986) |
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10.34** |
Amendment to Series A and Series C Warrants to Purchase Common Stock dated June 22, 2015 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on June 23, 2015) (File Number 000-54986) |
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10.35** |
Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Company with the SEC on July 6, 2015) (File Number 000-54986) |
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10.36** |
Form of Series D Warrants (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company with the SEC on July 6, 2015) (File Number 000-54986) |
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10.37** |
Registration Rights Agreement dated June 30, 2015, by and among Arch Therapeutics, Inc. and the Purchasers set forth on the signature pages thereto (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Company with the SEC on July 6, 2015) (File Number 000-54986) |
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10.38#** |
First Amendment to Executive Employment Agreement, dated July 27, 2015, by and between Arch
Therapeutics, Inc. and Richard E. Davis (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
by the Company with the SEC on July 31, 2015) (File Number 000-54986) |
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10.39** |
Form of MLSC Subordination Agreement (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed by the Company with the SEC on September 9, 2015) (File Number 000-54986) |
21.1** |
List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the Current Report on Form 8-K filed by the Company with the SEC on June 26, 2013)(File Number 333-178883) |
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23.1* |
Consent of Independent Registered Public Accounting Firm |
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23.2* |
Consent of McDonald Carano LLP (included in Exhibit 5.1) |
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24.1* |
Power of Attorney (included on the signature page hereto). |
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101.INS* |
XBRL Instance Document |
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101.SCH* |
XBRL Taxonomy Extension Schema Document |
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101.CAL* |
XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* |
XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* |
XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* |
XBRL Taxonomy Extension Presentation Linkbase Document |
| † | Confidential treatment has been requested for certain portions of the Exhibit pursuant to Rule 24b-2 promulgated under the
Securities Exchange Act of 1934. Such portions have been omitted and filed separately with the Securities and Exchange Commission. |
| # | Management contract or compensatory plan or arrangement. |
EXHIBIT
5.1
September 11, 2015
Board of Directors
Arch Therapeutics, Inc.
235 Walnut Street, Suite 6
Framingham, MA 01702
Re: Registration Statement/Form S-1
Gentlemen:
We have acted as special Nevada counsel to Arch Therapeutics,
Inc. (the “Company”) in connection with the filing by the Company of that certain Registration Statement on Form S-1
(the “Registration Statement”), with the Securities and Exchange Commission in connection with the registration under
the Securities Act of 1933, as amended (the “Securities Act”), of the offering from time to time by the selling securityholders,
as described in the Registration Statement, of up to 28,781,508 shares of the Company’s Common Stock, par value $0.001 per
share, including 14,390,754 shares of Common Stock (the “Common Shares”), and an aggregate of 14,390,754 shares of
Common Stock currently issuable upon the exercise of the Company’s Series D Warrants (the “Warrants” and such
shares of Common Stock issuable upon the exercise of the Warrants, the “Warrant Shares”), as more fully described
in the Registration Statement. Pursuant to Rule 416 under the Securities Act, the securities registered under the Registration
Statement include such indeterminate number of additional shares of Common Stock of the Company as may be issued or issuable because
of stock splits, stock dividends, stock distributions, and similar transactions.
As the special Nevada counsel to the Company
in connection with the Registration Statement, we have examined the actions taken by the Company in connection with the authorization
of the issuance of the Common Shares, the Warrants, and the Warrant Shares, and such documents as we have deemed necessary to render
this opinion.
Based upon and subject to the foregoing,
it is our opinion that (i) the Common Shares to be sold by the selling securityholders pursuant to the Registration Statement have
been duly authorized and are validly issued, fully paid and non-assessable, and (ii) the Warrant Shares to be sold by the selling
securityholders pursuant to the Registration Statement have been duly authorized and, when issued in accordance with the terms
and conditions of the respective Warrants (including the due payment of any exercise price therefore specified in the Warrants),
will be validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration Statement and any amendment thereto.
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Sincerely, |
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/s/McDonald Carano Wilson LLP |
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McDONALD CARANO WILSON LLP |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors
Arch Therapeutics, Inc. and Subsidiary
Framingham, MA 01702
We hereby consent to the use in the Registration
Statement on Form S-1 of Arch Therapeutics, Inc. and Subsidiary (collectively, the "Company") of our report dated December
12, 2014, relating to the consolidated financial statements of the Company appearing in the Annual Report on Form 10-K for the
years ended September 30, 2014 and 2013.
We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
/s/ Moody, Famiglietti & Andronico,
LLP
Moody, Famiglietti & Andronico, LLP
Tewksbury, Massachusetts
September 11, 2015
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