ARCH THERAPEUTICS, INC. The following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K (this "Annual Report"). 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, as amended, 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 our current cash position and our need to raise
additional capital in order to be able to continue to fund operations; the
stockholder dilution that may result from future capital raising efforts and the
exercise or conversion, as applicable of our outstanding convertible debt
instruments, options, and warrants; our limited operating history which may make
it difficult to evaluate our business and future viability; our ability to
timely commercialize and generate revenues or profits from our AC5® Advanced
Wound System and other potential product candidates; our ability to achieve the
desired regulatory approvals in
AC5, AC5-G, AC5-V, AC5-P, Crystal Clear Surgery, NanoDrape and NanoBioBarrier
and associated logos are trademarks and/or registered trademarks of
Corporate Overview
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Table of Contents
ABS was incorporated under the laws of the
In the first quarter of 2021, the Company commenced commercial sales of our
first product, AC5® Advanced Wound System, and has devoted substantially all of
our operational effort to the research, development and regulatory programs
necessary to turn our core technology into commercial products. To date, the
Company has principally raised capital through debt borrowings, the issuance of
convertible debt, and the issuance of units consisting of the Company's common
stock,
The Company expects to incur substantial expenses for the foreseeable future relating to research, development and commercialization of its potential products. However, there can be no assurance that the Company will be successful in securing additional resources when needed, on terms acceptable to the Company, if at all. Therefore, there exists substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability of assets that might be necessary despite this uncertainty.
Liquidity
We devote a significant amount of our efforts on fundraising, planning and
conducting clinical trials, activities in connection with obtaining regulatory
approval, and product research. We have principally raised capital through
borrowings, the issuance of convertible debt, and units consisting of Common
Stock and warrants to fund our operations. For the year ended
Business Overview
We are a biotechnology company marketing and developing a number of products based on our innovative AC5® self-assembling technology platform. We believe these products can be important advances in the field of stasis and barrier applications, which includes stopping bleeding ("hemostasis"), controlling leaking ("sealant"), and managing wounds created during surgery, trauma or interventional care, or from disease. We have only recently commenced commercial sales of our first product, AC5® Advanced Wound System, and have devoted substantially all of our operational effort to the research, development and regulatory programs necessary to turn our core technology into commercial products. Our goal is to make care faster and safer for patients with products for use on external wounds, which we refer to as Dermal Sciences applications, and products for use inside the body, which we refer to as BioSurgery applications.
Core Technology
Our flagship products and product candidates are derived from our AC5®
self-assembling peptide ("SAP") technology platform and are sometimes referred
to as AC5 or the "AC5 Devices." These include AC5® Advanced Wound System and
AC5® Topical Hemostat, which have received marketing authorization as medical
devices in
Products based on AC5 platform contain a biocompatible peptide that is synthesized from proteogenic, naturally occurring L-amino acids. Unlike products that contain traditional peptide sequences, when applied to a wound, AC5-based products intercalate into the interstices of the connective tissue and self-assemble into a protective physical-mechanical nanoscale structure that can provide a barrier to leaking substances, such as blood, while also acting as a biodegradable scaffold that enables healing. Self-assembly is a central component of the mechanism of action of our technology. Individual AC5 peptide units readily build themselves, or self-assemble, into an ordered network of nanofibrils when in aqueous solution by the following process:
? Peptide strands line up with neighboring peptide strands, interacting via
hydrogen bonds (non-covalent bonds) to form a ribbon-like structure called a
beta sheet.
? This process continues such that hundreds of strands organize with charged
and polar side chains oriented on one face and non-polar side chains
oriented on the opposite face of the beta sheets.
? Interactions of the resulting structure with water molecules and ions
results in formation nanofibrils, which extend in length and can join
together to form larger nanofibers.
? This network of AC5 peptide nanofibers forms the semi-solid
physical-mechanical barrier that interacts with the extracellular matrix, is
responsible for sealant, hemostatic and other properties, regardless of the
presence of antithrombotic agents, and which subsequently becomes the
scaffold that supports the repair and regeneration of damaged tissue.
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Based on the intended application, we believe that the underlying AC5 SAP technology can impart important features and benefits to our products that may include, for instance, stopping bleeding (hemostasis), mitigating contamination, modulating inflammation, donating moisture, and enabling an appropriate wound microenvironment conducive to healing. Furthermore, we believe that AC5® SAP technology permits cell and tissue growth and is self-healing, in that it can dynamically self-repair around migrating cells. For instance, AC5® Advanced Wound System, which is indicated for the management of partial and full-thickness wounds, such as pressure sores, leg ulcers, diabetic ulcers, and surgical wounds, is shipped and stored at room temperature, is applied directly as a liquid, can conform to irregular wound geometry, self-assembles into a wound care matrix that can provide clinicians with multi-modal support, and does not possess sticky or glue-like handling characteristics. We believe these properties enhance its utility in several settings and contribute to its user-friendly profile.
We believe that our technology lends itself to a range of potential applications in which there is a wound inside or on the body, and in which there is need for a hemostatic agent or sealant. For instance, the results of certain preclinical and clinical investigations that either we have conducted, or others have conducted on our behalf, have shown quick and effective hemostasis with the use of AC5 SAP technology, 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." Furthermore, the transparency and physical properties of certain AC5 Devices may enable a surgeon to operate through it in order to maintain a clearer field of vision and prophylactically stop or lessen bleeding as surgery starts, a concept that we call Crystal Clear Surgery (TM). An example of a product that contains related features and benefits is AC5 Topical Hemostat, which is indicated for use as a dressing and to control mild to moderate bleeding, each during the management of injured skin and the micro-environment of an acute surgical wound.
Operations
Much of our operational efforts to date, which we often perform in collaboration
with partners, have included selecting compositions and formulations for our
initial products; conducting preclinical studies, including safety and other
tests; conducting a human trial for safety and performance of AC5; developing
and conducting a human safety study to assess for irritation and sensitization
potential; securing marketing authorization for our first product in
Our long-term business plan includes the following goals:
? conducting biocompatibility, pre-clinical, and clinical studies on our
products and product candidates;
? obtaining additional marketing authorization for products in the United
States , Europe , and other jurisdictions as we may determine;
? continuing to develop third party relationships to manufacture, distribute,
market and otherwise commercialize our products;
? continuing to develop academic, scientific and institutional relationships
to collaborate on product research and development;
? expanding and maintaining protection of our intellectual property portfolio; and
? developing additional product candidates in Dermal Sciences, BioSurgery, and
other areas.
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 as required to support the previously described
milestones necessary to support operations;
? work with our manufacturing partners to scale up production of product
compliant with current good manufacturing practices ("cGMP"), which
activities will be ongoing and tied to our development and commercialization
needs;
? further clinical development of our product platform;
? assess our technology platform in order to identify and select product
candidates for potential advancement into development;
? seek regulatory input to guide activities related to expanded and new
product marketing authorizations;
? continue to expand and enhance our financial and operational reporting and
controls;
? pursue commercial partnerships; and
? expand and enhance our intellectual property portfolio by filing new patent
applications, obtaining allowances on currently filed patent applications,
and/or adding to our trade secrets in self-assembly, manufacturing,
analytical methods and formulation, which activities will be ongoing as we
seek to expand our product candidate portfolio.
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We have no commitments for any future capital. We will require significant additional financing to fund our planned operations, including further research and development relating to AC5®, seeking regulatory approval of any 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.
The estimated capital requirements potentially could increase significantly if a
number of risks relating to conducting these activities were to occur, including
without limitation those set forth under the heading "RISK FACTORS" in this
Annual Report. 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
Preclinical Testing
We have engaged and continue to engage third parties in the US and abroad to advise on and perform certain preclinical bench-top and animal research and development studies, typically with assistance from our team. These third parties can include contract research organizations, academic institutions, consultants, advisors, scientists, clinicians, and/or other collaborators.
We completed the biocompatibility studies required to receive marketing authorizations for AC5 Advanced Wound System in the US and AC5 Topical Hemostat in the EU, and such test results support that the products are biocompatible. We will perform further biocompatibility testing that we deem necessary for additional indications, classifications, jurisdictions, and/or as required by regulatory authorities.
Acute and survival animal studies assessing safety and performance of our technology have also demonstrated favorable outcomes in Dermal Sciences and BioSurgery applications.
Clinical Testing
We have engaged and continue to engage third parties in the US and abroad to advise on and perform certain clinical studies and related activities, typically with assistance from our team. These third parties can include contract research organizations, academic institutions, consultants, advisors, scientists, clinicians, and/or other collaborators.
We completed two clinical studies. The first study, which met its primary and
secondary endpoints, assessed the safety and performance of our product
candidate in 46 patients with bleeding skin wounds that resulted from excision
of skin lesions and followed for 30 days. The second study assessed our product
candidate on skin, determining that it was neither an irritant nor a sensitizer,
and no immunogenic response or serious or other adverse events attributable to
our product were reported in any of the approximately 50 enrolled volunteers.
The product candidate in these studies subsequently received marketing
authorization and is presently known as AC5® Advanced Wound System in the US and
AC5 Topical Hemostat in
Commercialization
Our commercialization efforts are currently focused on Dermal Sciences. Our BioSurgery products for internal use will require additional preclinical and clinical testing before we seek marketing authorization to commercialize them.
Our Dermal Sciences products are AC5® Advanced Wound System in
? Under the supervision of a health care professional, AC5® Advanced Wound
System is a topical dressing used for the management of partial and
full-thickness wounds, such as pressure sores, leg ulcers, diabetic ulcers,
and surgical wounds.
? AC5 Topical Hemostat is intended for use locally as a dressing and to control
mild to moderate bleeding, each during the management of injured skin and the
micro-environment of an acute surgical wound.
We have prioritized the launch of AC5® Advanced Wound System in
We expect the Dermal Sciences product commercialization ramp to be initially
gradual and then moderately accelerate as we identify and encourage product use
by key opinion leaders and early adopters in developing market channels. We are
actively concentrating our marketing and selling efforts on doctor's offices,
other ambulatory settings, and government facilities, such as hospitals in the
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Securing reimbursement for AC5 Advanced Wound System in ambulatory settings,
such as doctor's offices, is an important part of our commercial strategy.
Consequently, we applied to the
A dedicated HCPCS code is an important step toward, although not a guarantee of,
coverage and reimbursement, and it would enhance our ability to work directly
with payors as we expand access in outpatient settings and continue to advocate
for clinically appropriate usage of our technology for patients. A final
decision, which we anticipate, but cannot guarantee, will be positive, is
expected during the first calendar quarter of 2023 with a "go live" date of
To support commercialization in government facilities, AC5® Advanced Wound
System has been added to the Federal Supply Schedule (FSS),
We envision hiring additional internal sales representatives to help commercialize the Dermal Sciences products.
We have engaged and continue to engage third parties in
While our core team oversees initial inventory distribution from the warehouse to the customer, our commercialization plans include entering into collaboration agreements with contract sales partners, including independent sales representatives and distributors, and potentially strategic partners. We anticipate that we will enter and periodically terminate certain agreements based on performance or other business criteria.
We are committed to continuous improvement processes. We collect feedback and data when feasible and appropriate to develop and commercialize products that serve patients and doctors; to develop marketing messages; to learn about product use; to evaluate product performance in different settings; to improve our products; to address reimbursement needs, and to support collaborations that we may have or may establish. Data has been and will continue to be collected by informal feedback, observational case reports and/or clinical trials.
The COVID-19 Pandemic Impact on Commercialization
The COVID-19 pandemic environment has introduced significant challenges related to product launch, marketing and sales, as clinicians and facilities became overburdened and increasingly focused on managing resources, the disease, and the virus spread. We have observed the following effects, and anticipate that they will variously wax and wane over time:
? the volume of elective surgical procedures has been constrained periodically,
with many institutions indefinitely suspending or eliminating such procedures
at times;
? healthcare facilities often have been required to ration staff and resources,
including ventilators, personal protective equipment ("PPE"), and operating
rooms, thereby negatively impacting the focus on wound care;
? clinicians often have been required to divert their time and resources to
urgent COVID-19 needs;
? clinicians often have been required to quarantine due to exposure to a
COVID-19 positive individual or isolate because of contracting symptomatic or
asymptomatic COVID-19 disease;
? some institutions have been periodically designated "COVID Hospitals";
? access to surgeons, potential strategic partners, and facilities outside of
the United States has become curtailed;
? administrators who may be required to facilitate or approve new product intake
are constrained by new and other pressing priorities; and
? both clinicians and patients often try to minimize possible COVID-19 exposure,
resulting in reduced access to healthcare system and essential care treatments
and services.
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We believe that these challenges may present an opportunity for our new technology to address certain poorly met needs.
Wound interventions are too often considered to be elective procedures instead
of being treated essentially or emergently as
While highlighted by the COVID-19 pandemic, we also believe that these challenges reveal an underlying problem in the healthcare system-clinicians and other providers are being asked to accomplish more in less time with fewer resources. These resources may include higher acuity settings, such as operating rooms; expensive wound care products that may not work as well as desired; nursing time to change wound dressings; and surgeon time for managing wounds during debridement; repeat patient visits over months and often years, and others. Our COVID-19 related discussions with surgeons, economic stakeholders and other decision-making personnel often include whether AC5® Advanced Wound System may enable them to accomplish more for their patients while deploying overall fewer resources and achieving desired outcomes.
Manufacturing
We work with contract manufacturing and related organizations, including those
operating under cGMP, as is required by applicable regulatory agencies for
production of product that can be used for preclinical and human testing as well
as for commercial use. We also have engaged and continue to engage other third
parties in
Our products are regulated as medical devices, and as such, many of our activities have focused on optimizing traditional parameters to target specifications, biocompatibility, physical appearance, stability, and handling characteristics, among other metrics, to achieve the desired product. We and our partners intend to continue to monitor manufacturing processes and formulation methods closely, as success or failure in establishing and maintaining appropriate specifications may directly impact our ability to conduct additional preclinical and clinical trials and/or deliver commercial product.
Merger with ABS and Related Activities
On
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.
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Table of Contents Recent Developments
On
On
The 2022 Notes are convertible into shares of Common Stock at the option of each
holder of the 2022 Notes from the date of issuance at
The 2022 Notes contain customary events of default, which include, among other
things, (i) our failure to pay when due any principal or interest payment under
the 2022 Notes; (ii) our insolvency; (iii) delisting of our Common Stock; (iv)
our breach of any material covenant or other material term or condition under
the 2022 Notes; and (v) our breach of any representations or warrants under the
2022 Notes which cannot be cured within five (5) days. Further, events of
default under the 2022 Notes also include (i) the unavailability of Rule 144 on
or after
The 2022 Warrants (i) have an exercise price of
Pursuant to an engagement agreement that we entered into with
On
During the month of
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Table of Contents Results of Operations
The following discussion of our results of operations should be read together with the consolidated financial statements included in this Annual Report and the notes thereto. Our historical results of operations and the period-to-period comparisons of our results of operations that follow are not necessarily indicative of future results.
Year Ended
September 30, September 30, Increase
2022 2021 (Decrease)
($) ($) ($)
Revenue 15,652 11,565 4,087
Operating Expenses
Cost of revenues 51,489 26,282 25,207
Selling, general and administrative 4,519,636 5,009,323 (489,687 )
Research and development 1,153,333 1,353,084 (199,751 )
Loss from Operations (5,708,806 ) (6,377,124 ) 668,318
Other income 432,952 136,642 296,310
Net loss (5,275,854 ) (6,240,482 ) 964,628
Revenue
Revenue for the year ended
Cost of revenues
Cost of revenues during the year ended
Selling, General and Administrative Expense
General and administrative expense during the year ended
Research and Development Expense
Research and development expense during the year ended
Other Income
Other income during the year ended
Liquidity and Capital Resources
In the first quarter of 2021, the Company commenced commercial sales of our first product, AC5® Advanced Wound System. We devote a significant amount of our efforts on fundraising as well as planning and conducting product research and development and activities in connection with obtaining regulatory marketing authorization. We have principally raised capital through borrowings and the issuance of convertible debt and units consisting of Common Stock and warrants to fund our operations.
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Table of Contents Working Capital
At
September 30, September 30,
2022 2021
Total Current Assets $ 2,598,195 $ 3,667,745
Total Current Liabilities 3,320,494 1,727,547
Working Capital $ (722,299 ) $ 1,940,198 Total current assets as of
Total current liabilities as of
Cash Flow
September 30 , September 30,
2022 2021
Cash Used in Operating Activities
- (3,275 )
Cash Provided by Financing Activities 2,936,376 7,269,233
Net increase (decrease) in cash
Cash Used in Operating Activities
Cash used in operating activities decreased
Cash Provided by (Used in) Investing Activities
Cash used in investing activities decreased
Cash Provided by Financing Activities
Cash provided by financing activities decreased
Cash Requirements
We anticipate that our operating expenses, interest expense and other expenses
will increase significantly as we continue to implement our business plan and
pursue our operational goals. As of
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In the first quarter of 2021, the Company commenced commercial sales of our first product, AC5® Advanced Wound System. That revenue will not be sufficient to fund our business operations and we will need to obtain additional 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 potential new product candidates, seeking regulatory approval of any other product candidates we may choose to develop, commercializing any product candidates 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 contractual terms and obligations that may limit or otherwise impact our ability to raise additional funding in the near-term including, but not limited to, provisions in the 2018 SPA (see Note 6) and the 2022 SPA (see Note 10) restricting our ability to effect or enter into an agreement to effect any issuance by the Company or any of its subsidiaries of Common Stock or securities convertible, exercisable or exchangeable for Common Stock (or a combination of units thereof) involving a Variable Rate Transaction (as defined in the 2018 SPA) including, but not limited to, an equity line of credit or "At-the-Market" financing facility until the three lead investors in the 2018 Financing collectively own less than 20% of the Series G Warrants (see Note 6) purchased by them pursuant to the 2018 SPA. 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. 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 commenced commercial sales of our first product, AC5® Advanced Wound
System. From inception, we have had recurring losses from operations. While the
Company anticipates that it will have cash on hand into the second quarter of
fiscal 2023, the continuation of our business as a going concern is dependent
upon raising additional capital and eventually attaining and maintaining
profitable operations. As of
Critical Accounting Policies and Significant Judgments and Estimates
Pursuant to certain disclosure guidance issued by the
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 the
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Table of Contents Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises expenditures incurred in acquiring the inventories, the cost of conversion and other costs incurred in bringing them to their existing location and condition. The cost of raw materials, work-in-progress and finished goods and other products are determined on a First in First out (FiFo) basis. When determining net realizable value, appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value.
Complex Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks. The Company evaluates its financial
instruments, including warrants, to determine if such instruments are
derivatives or contain features that qualify as embedded derivatives. The
Company values its derivatives using the Black-Scholes option-pricing model or
other acceptable valuation models, including
The Company reviews the terms of debt instruments, equity instruments, and other financing arrangements to determine whether there are embedded derivative features, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Additionally, in connection with the issuance of financing instruments, the Company may issue freestanding options and warrants, including options or warrants to non-employees in exchange for consulting or other services performed.
The Company accounts for its common stock warrants in accordance with Accounting Standards Codification ("ASC") 815, Derivatives and Hedging ("ASC 815"). Based upon the provisions of ASC 815, the Company accounts for common stock warrants as liabilities if the warrant requires net cash settlement or gives the holder the option of net cash settlement, or it fails the equity classification criteria. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement and the warrants meet the requirements to be classified as equity. Common stock warrants classified as liabilities are initially recorded at fair value on the grant date and remeasured at fair value each balance sheet date with the offset adjustments recorded in change in fair value of warrant liability within the consolidated statements of operations. Common stock warrants classified as equity are initially measured at fair value on the grant date and are not subsequently remeasured.
Recent Accounting Guidance
In
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.
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