As filed with the U.S. Securities and Exchange Commission on June 24, 2016January 23, 2023

 

RegistrationNo. 333-333-268008



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1S-1/A

(Amendment No. 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

Alan Wovsaniker

Lowenstein Sandler LLP

One Lowenstein Drive

Roseland, NJ 07068

(973) 597-2500

Mitchell S. Nussbaum

David J. Levine

Loeb & Loeb LLP

345 Park Avenue

New York, NY 10154

(212) 407-4159

 

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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth 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 companyx

Emerging growth company ☐

 

CALCULATION OF REGISTRATION FEEIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

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  16,482,082  $0.425  $7,004,884.85  $705.39 

(1)Consists of 9,418,334 shares of Common Stock, par value $0.001 per share (“Common Stock”) and an aggregate of 7,063,748 shares of Common Stock currently issuable upon the exercise of Arch Therapeutics, Inc.’s (the “Company”) Series E 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 $0.42 and low $0.43 bid prices of our Common Stock on June 20, 2016 as reported by on the QB tier of the OTC Marketplace.

 

The registrant hereby amends this registration statementRegistration 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 Securities and Exchange 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 hereinWe 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 June 24, 2016JANUARY 23, 2023

PRELIMINARY PROSPECTUS

 

ARCH THERAPEUTICS, INC.

PROSPECTUS

[●] Units consisting of

Up to 16,482,082 [●] Shares of Common Stock and

Investor Warrants to Purchase up to [] Shares of Common Stock

 

This prospectus relates to theWe are offering and resale by the selling securityholdersunits (“Units”), on a firm commitment basis, each unit consisting of Arch Therapeutics, Inc. named hereinone share of up to 16,482,082 shares ofour common stock, par value $0.001 per share (“Common Stock”). These shares include the 9,418,334 shares of issued, and outstanding Common Stock currently held by the selling securityholders and 7,063,748 shares of Common Stock currently underlying Series E Warrants held by the selling securityholders, all of which were initially issued and sold in a private placement offering that was concluded on May 26, 2016 (the “2016 Private Placement Financing”). The Common Stock issued in the 2016 Private Placement Financing was sold as a part of a unit (“Unit”) consisting of aone warrant to purchase one share of our Common Stock (the “Investor Warrants”). The Units have no stand-alone rights and a Series E Warrant at a purchase price of $0.36 per Unit.will not be certificated or issued as stand-alone securities. The Series E Warrants entitle the holders thereof to purchase 0.75 shares of Common Stock can be purchased in this offering only with the accompanying Investor Warrants as part of a Unit (other than pursuant to the underwriters’ option to purchase additional shares of Common Stock and/or Investor Warrants). The shares of Common Stock and Investor Warrants comprising the Units are immediately separable and will be issued separately in this offering. Each Investor Warrant offered hereby is exercisable on the date of issuance at an initial exercise price of $0.4380 per share were exercisable immediately upon issuanceof Common Stock equal to not less than 100% of the public offering price of the Units in this offering, and will expire five years thereafter.

The selling securityholders may sellfrom the date of issuance. Pursuant to this prospectus, we are also offering 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 timeissuable upon exercise 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.Investor Warrants.

 

Our Common Stock is tradedcurrently quoted on the QB tier of the OTC Marketplace (“OTCQB”) under the symbol “ARTHARTHD”. On June 23, 2016, the closingThe last reported sale price of our Common Stock on January [●], 2023, was $0.50$[●] per share. Currently, there is a very limited market for our Common Stock and no established public trading market for the Investor Warrants being offered in this offering. We have applied to list our Common Stock and Investor Warrants on The Nasdaq Capital Market (the “Nasdaq Capital Market”) under the symbols “ARTH” and “ARTH.W,” respectively. There is no assurance that our listing application will be approved by the Nasdaq Capital Market or The Nasdaq Global Market, NYSE or NYSE American (each of the NYSE American, The Nasdaq Global Market and NYSE, an “Alternate Exchange”), or, if successful, that an active trading market for our Common Stock and Investor Warrants will develop or be sustained. If we are unable to list our Common Stock on the Nasdaq Capital Market or an Alternate Exchange, we will not consummate this offering.

The final public offering price per Unit will be determined through negotiation between the underwriters and us at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business, and may be at a discount to the current market price. The price at which our Common Stock was quoted on the OTCQB may not be indicative of the actual public offering price for the Units or of the price at which our Common Stock may trade on the Nasdaq Capital Market or an Alternate Exchange in the future.

In connection with this offering, we effected a 1-for-200 reverse stock split of our Common Stock on January 17, 2023 and increased our authorized shares to 12,000,000. Unless otherwise indicated, and other than in the consolidated historical financial statements and related notes included in this prospectus, the share and per share information in this prospectus is adjusted to reflect the reverse stock split.

 

We originally offeredare a “smaller reporting company” as defined under the federal securities laws and, sold the securities issued in the 2016 Private Placement Financing under an exemption from the registrationas such, are eligible for reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary — Implications of the Securities Act of 1933, as amended (the “Being aSecurities ActSmaller Reporting Company), pursuant to Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated under Securities Act..

 

Investing in our Common Stocksecurities involves a high degree of risk. Before making any investment in our Common Stock,securities, you should read and carefully consider the risks described in this prospectus under the heading “RISK FACTORS”Risk Factors beginning on Page 12page 13 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.

 

Per Unit

Total

Public offering price(1)

$

$

Underwriting discounts and commissions (2)

$

$

Proceeds, before expenses, to us

$

$

This

(1)

Does not include additional compensation payable to the underwriters. We have agreed to reimburse the underwriters for certain expenses in connection with this offering. In addition, we have agreed to issue to the Representative (as defined below), or its designees, warrants to purchase a number of shares of Common Stock equal to 9% of the number of Units sold in this offering, including any shares sold in the over-allotment option, if any (the “Underwriter Warrants”). We refer you to the section entitled “Underwriting” for additional information regarding underwriting compensation.

We have granted the underwriters an option, exercisable within 45 days from the date of this prospectus, to purchase from us, up to an additional [●]shares of Common Stock at the public offering price and/or Investor Warrants to purchase up to [●]shares of Common Stock (equal to 15% of the shares of Common Stock and Investor Warrants underlying the Units sold in this offering), in any combination, at a price per Investor Warrant equal to the public offering price, less, in each case, the underwriting discounts and commissions, to cover over-allotments, if any. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable will be $[●], and the total proceeds to us, before expenses, will be $[●].

The underwriters expect to deliver the shares of Common Stock and Investor Warrants comprising the Units to the purchasers on or about       , 2023.

Sole Book-Running Manager

Maxim Group LLC

The date of this prospectus is                   dated ___________, 2016, 2023

 


 

 

TABLE OF CONTENTS

 

SUMMARY

5
RISK FACTORS

ABOUT THIS PROSPECTUS

12

1

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

29

2

SELLING SECURITYHOLDERS

PROSPECTUS SUMMARY

31

3

DETERMINATION OF OFFERING PRICE

RISK FACTORS

36

13

PLAN OF DISTRIBUTION36

USE OF PROCEEDS

38

39

DESCRIPTION OF SECURITIES38

MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED MATTERS

43

40

CAPITALIZATION

41

DILUTION

43

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

44

45

OUR BUSINESS

55

58

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

68

76

EXECUTIVE COMPENSATION

70

80

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

74

85

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

77

86

LEGAL MATTERS

SHARES ELIGIBLE FOR FUTURE SALE

78

88

EXPERTS

DESCRIPTION OF SECURITIES

78

89

UNDERWRITING

97

LEGAL MATTERS

104

EXPERTS

104

WHERE YOU CAN FIND MORE INFORMATION

78

104

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-2

 

-3- 

 


 

ABOUT THIS PROSPECTUS

 

You should rely only onThis prospectus relates to the information that weprimary offering and sale by Arch Therapeutics, Inc. of [●] Units, each consisting of one share of Common Stock and one Investor Warrant to purchase one share of Common Stock. This prospectus also registers the [●] shares (or [●]shares if the underwriters exercise their over-allotment option in full) of Common Stock issuable upon exercise of the Underwriter Warrants.

We have provided or incorporated by reference in this prospectus, any applicable prospectus supplementnot, and any related free writing prospectus that we may authorize to be provided to you. Wethe underwriters have not, authorized anyone to provide you with information that is different information. No dealer, salesperson or other person is authorizedfrom that contained in this prospectus. When you make a decision about whether to giveinvest in our securities, you should not rely upon any information or to represent anything notother than the information in this prospectus. Neither the delivery of this prospectus nor the sale of our securities means that the information 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.is correct after the date of this prospectus. This prospectus is not an offer to sell onlyor the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful.

For investors outside the United States: We have not, and the underwriters have not, taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the securities offeredcovered hereby but only under circumstances and in jurisdictions where it is lawful to do so. You should assume that the distribution of this prospectus outside the United States.

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any applicable prospectus supplement or any related free writing prospectus is accurate only as of the date on the front of the documentindependent source, and that any information we have incorporatednot independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

We further note that the representations, warranties and covenants made by referenceus in any agreement that is accurate onlyfiled 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 underan exhibit to the registration statement of which this prospectus formsis a part.part were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to you. Moreover, such representations, warranties or covenants were accurate only as of the date when made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.

 

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 thethis registration statement of which this prospectus forms a part, and you may obtain copies of those documents as described below under the heading “WHERE YOU CAN FIND MORE INFORMATION.WhereYouCanFindMoreInformation beginning on page 104 of this prospectus.

 

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™,AC5-G, AC5-V, AC5-P, Crystal Clear Surgery™, NanoDrape™Surgery, NanoDrape and NanoBioBarrier™.NanoBioBarrier and associated logos are trademarks and/or registered trademarks of Arch Therapeutics, Inc. and subsidiary. All other trademarks, trade names and service marks included in this prospectus are the property of their respective owners.

 

-4- 

This prospectus and the information incorporated by reference into this prospectus contain references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus and the information incorporated by reference into this prospectus, including logos, artwork, and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other company.

 

 

SUMMARYCAUTIONARY NOTE REGARDING 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” beginning on page 13 of this prospectus, 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;

Our ability to comply with the terms and covenants of our existing agreements and outstanding convertible notes, including the First Notes (as defined below) which are secured by security interests in substantially all of our assets and the repayment of the 2022 Notes (as defined below) if this offering is successful;

The dilutive effect of our outstanding warrants and convertible notes;

The results of our research and development activities, including uncertainties relating to the preclinical and clinical testing of our product candidates;

The commercialization of our primary product candidate;

Our ability to develop, obtain required approvals for and commercialize our product candidates;

Our ability to recruit and retain qualified key executives, and medical and science personnel;

Our ability to develop and maintain an effective sales force to market our approved product candidates;

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;

The impact of the COVID-19 pandemic, and related responses of businesses and governments to the pandemic, on our operations and personnel, on commercial activity in the markets in which we operate and on our results of operations;

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.

PROSPECTUS SUMMARY

This summary highlights selected information from this prospectus and does not contain all of the information that should be considered before investingis important to you in our Common Stock. Investors should read the entire prospectus carefully, includingmaking an investment decision. This summary is qualified in its entirety by the more detailed information regardingincluded elsewhere in this prospectus. Before making your investment decision with respect to our businesssecurities, you should carefully read this entire prospectus, including the information under the heading “OUR BUSINESS”Risk Factors, beginning on Page55page 13 of this prospectus, the risksManagements Discussion and Analysis of purchasing our Common Stock discussed in this prospectus under the heading “RISK FACTORS”Financial Condition and Results of Operations, beginning on Page12 of this prospectuspage 45, and our consolidatedthe financial statements and the accompanying notes beginning on Page page F-1 of this prospectus.

 

Our Company

 

We are a biotechnology company in the development stage with limited operations to date. We aim to developmarketing a number of 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 aour innovative AC5® 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.technology platform. We believe our technology could support an innovative platform of potentialthese products are important advances in the field of stasis and barrier applications.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 recently devoted substantially all of our operational effort to continue the ongoing commercialization and market adoption of our first product. Our lead product candidate, the AC5 Surgical Hemostatic Device™ (whichgoal is to make care faster and safer for patients with products for use on external wounds, which we sometimes refer to as Dermal Sciences applications, and products for use inside the body, which we refer to as BioSurgery applications.

Our flagship products and product candidates are derived from our AC5® self-assembling peptide (“AC5™SAP”), is designed technology platform and are sometimes referred to achieve hemostasisas AC5 or the “AC5 Devices.” These include AC5 Advanced Wound System and AC5 Topical Hemostat, which have received marketing authorization as medical devices in the United States and Europe, respectively, and which are intended for skin applications, such as management of complicated chronic wounds or acute surgical wounds. Other products are in development for use in minimally invasive andor open surgical procedures and we hopeinclude, for example, AC5-GTM for gastrointestinal endoscopic procedures and AC5-VTM and AC5 Surgical Hemostat for hemostasis inside the body, all of which are currently investigational devices limited by law to develop other hemostatic or sealant product candidates in the futureinvestigational use.

Products based on our self-assemblingthe AC5 platform contain a biocompatible peptide technology platform. Our plan and business modelthat is to developsynthesized from proteogenic, naturally occurring L-amino acids. Unlike products that apply that core technology to use with human bodily fluids and connective tissues.

AC5 is designed to be a biocompatible syntheticcontain traditional peptide comprising naturally occurring amino acids. Whensequences, when applied to a wound, AC5 intercalatesAC5-based products intercalate into the interstices of the connective tissue where it self-assemblesand self-assemble into a physical, mechanicalprotective physical-mechanical nanoscale structure that providescan provide a barrier to leaking substances, such as blood.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.

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 designedself-healing, in that it can dynamically self-repair around migrating cells. For instance, AC5® Advanced Wound System, which is indicated for direct applicationthe 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, which we believe will make it user-friendly and able tocan conform to irregular wound geometry. Additionally, AC5 isgeometry, self-assembles into a wound care matrix that can provide clinicians with multi-modal support, and does not possess sticky or glue-like which wehandling characteristics. We believe willthese properties enhance its utility in the settingseveral settings and contribute to its user-friendly profile.

We believe that our technology lends itself to a conceptrange of potential additional 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 call Crystal Clear Surgery™ becausehave 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 (“TTH”) is comparable among test subjects regardless of whether such test subject had or had not been treated with therapeutic doses of anticoagulant or antiplatelet medications, commonly called “blood thinners.” Furthermore, the transparency and physical properties of certain AC5 Devices may enable a surgeon to operate through it in order to maintain a clearer field of vision and prophylactically stop or lessen bleeding as it starts.surgery starts, a concept that we call Crystal Clear Surgery™. An example of a product that contains related features and benefits is AC5 Topical Hemostat, which is indicated for use as a dressing and to control mild to moderate bleeding, each during the management of injured skin and the micro-environment of an acute surgical wound.

Sales and marketing efforts for our AC5 Advanced Wound System, which has received 510(k) marketing clearance from the FDA, address the demand for improved solutions to treat challenging chronic and acute surgical wounds, with a particular early focus on diabetic foot ulcers, venous leg ulcers and pressure ulcers. Chronic wounds are typically defined as wounds that have not healed after four weeks of standard care. Approximately 4 million to 6.5 million new onset chronic wounds are estimated to occur in the U.S. annually, including approximately 700,000 to 2 million diabetic foot ulcers, 2.5 million pressure ulcers, and 1.2 million venous leg ulcers. If untreated, improperly treated or unresponsive to treatment, these wounds can ultimately lead to amputation. The 5-year mortality rate among patients with chronic wounds, especially after an amputation, is significant.

Published data on AC5 Advanced Wound System shows encouraging outcomes, including limb salvage (avoided limb loss), among patients with multiple co-morbidities and challenging chronic wounds that failed to heal despite treatment with either traditional or other advanced wound care modalities over prolonged periods of time. 

 

We currently maintain an internal commercial team focused on driving awareness and adoption of AC5 Advanced Wound System in several targeted channels with a particular focus on physician offices and government channels, such as Veterans Affairs (“VA”) hospitals and military treatment facilities (“MTFs”). We anticipate that material growth in the physician office setting will require product reimbursement. To that end, we submitted an application to the Centers for Medicare and Medicaid Services (“CMS”) in July 2022 for a unique product reimbursement code. If approved, we would expect a final decision from CMS in July 2023 with a go-live date of April 1, 2023. In the meantime, we have no products that have obtained marketing approvallaunched a temporary reimbursement support program in line with CMS guidance to support commercial use and adoption of AC5 Advanced Wound System while awaiting the decision by CMS on the unique product code. In support of the VA and MTF market, we partnered with Lovell Government Services (“LGS”), a service-disabled veteran-owned small business, as its distributor in the government channel. As a direct result of its relationship with LGS, AC5 Advanced Wound System is listed on the four major government supply schedules (ECAT, DAPA, FSS and GSA) in order to allow doctors in any jurisdiction, weVA or MTF to order AC5 Advanced Wound System. We have not generated revenues since inceptionalso established and we do not expectwill continue to do so inseek partnerships with reputable, value-added independent sales distributors on a case-by-case basis to expand the foreseeable future dueoverall reach and footprint of its total sales organization. Presently, our commercialization efforts and resources remain dedicated to the early stage nature of our current product candidates. We had net lossesU.S. market for the years ended September 30, 2014 and September 30, 2015 of $8,142,823 and $2,947,526, respectively, and we had an accumulated deficit as of March 31, 2016 of $18,131,931. To date, we have financed our operations primarily through funding received from private placement offerings, such as the 2016 Private Placement Financing, 2015 Private Placement Financing (as later defined), 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 muchadvanced wound care.

Much of our operational effortefforts to date, to the researchwhich we often perform in collaboration with partners, have included selecting compositions and development of our core technology, including selectingformulations for our initial product composition,products; conducting initialpreclinical studies, including safety and other related tests, generatingtests; conducting a human trial for safety and performance of AC5; developing and conducting a human safety study to assess for irritation and sensitization potential; securing marketing authorization for our first product in the United States and in Europe; developing, optimizing, and validating manufacturing methods and formulations, which are particularly important components of self-assembling peptide development; developing methods for manufacturing scale-up, reproducibility, and manufacturingvalidation; engaging with regulatory authorities to seek early regulatory guidance as well as marketing authorization for our products; sourcing and formulation methods,evaluating commercial partnering opportunities in the United States and abroad; and developing and protecting the intellectual property rights underlying our technology platform.

 

For more information

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 milestones described previously and our operations generally;

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.

We believe that our current cash on hand as of December 28, 2022 is sufficient to meet our anticipated cash requirements into at least the second quarter of fiscal 2023. Depending upon additional input from EU and US regulatory authorities, however, we do not expect to generate sufficient revenues from operations before we need to raise additional capital. Further, our estimates 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 elsewhereuse of cash could change if we encounter unanticipated difficulties or other issues arise, including without limitation those set forth in this prospectus. For a description of certain risks related to our business, see the disclosureprospectus under the heading “RISK FACTORSRisk Factors” beginning on Page 12page 13, in which case our current funds may not be sufficient to operate our business for the period we expect.

As a result of the private placement that we completed on July 6, 2022 (the “First Closing”) and January 18, 2023 (the “Second Closing” and, together with the First Closing, the “2022 Private Placement Financing”), we have (i) Senior Secured Convertible Promissory Notes in the aggregate principal amount of $4.23 million outstanding (the “First Notes”), (ii) Unsecured Promissory Notes in the aggregate principal amount of $636,000 outstanding (the “Second Notes” and, collectively with the First Notes and the Exchanged Notes, the “2022 Notes”), and (iii) Series 3B Convertible Promissory Notes in the aggregate principal amount of $699,780.93 outstanding (the “Exchanged Notes”). The holders of the First Notes have been granted a security interest in substantially all of our assets pursuant to the terms of the Security Agreement (as defined below). If we fail to make payments on the First Notes when due or otherwise comply with the covenants contained in the First Notes, the First Note holders could declare us in default, in which event such holders would have the right to exercise their rights as a secured creditor with respect to our assets that secure the indebtedness, which would force us to suspend operations.

Further, in connection with the 2022 Private Placement Financing, we are required to complete an uplisting of our Common Stock to the Nasdaq Capital Market or an Alternate Exchange by February 15, 2023 (an “Uplist Transaction”) under the terms of the 2022 Notes. This offering is intended to qualify as an Uplist Transaction. If we are unable to complete an Uplist Transaction, then the 2022 Notes will become immediately due and payable and we will be obligated to pay to each 2022 Note holder an amount equal to 125% multiplied by the sum of the outstanding principal amount of the 2022 Notes plus any accrued and unpaid interest on the unpaid principal amount of the 2022 Notes to the date of payment, plus any default interest and any other amounts owed to the holder, payable in cash or shares of Common Stock. Upon completion of our Uplist Transaction, the 2022 Note holders have the right to require us to immediately apply the proceeds to repay the outstanding balance of the 2022 Notes within two (2) days of receipt of such demand for repayment. See the section entitled “Recent Developments 2022 Private Placement Financing” for more information.

Proposed Listing on the Nasdaq Capital Market or an Alternate Exchange

Our Common Stock is presently quoted on the OTCQB under the trading symbol “ARTHD.” In connection with this offering, we have applied to list our Common Stock and Investor Warrants on the Nasdaq Capital Market under the symbols “ARTH” and “ARTH.W,” respectively. Although we have applied to list the Investor Warrants, there is no established public trading market for the Investor Warrants and without an active trading market, the liquidity of the Investor Warrants will be limited. No assurance can be given that our listing application for our Common Stock and Investor Warrants will be approved by the Nasdaq Capital Market or an Alternate Exchange. If our listing application is approved, our Common Stock will cease to be traded on the OTCQB. This offering will occur only if the Nasdaq Capital Market or an Alternate Exchange approves the listing of our Common Stock by February 15, 2023. The Nasdaq Capital Market and Alternate Exchange listing requirements include, among other things, a stock price threshold. As a result, prior to effectiveness, we will need to take the necessary steps to meet Nasdaq Capital Market listing requirements or the listing requirements of an Alternate Exchange, including but not limited to a reverse split of our outstanding shares of Common Stock.

Implications of Being a Smaller Reporting Company

We are a “smaller reporting company,” meaning that the market value of our Common Stock held by non-affiliates is less than $700 million and our annual revenue is less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Corporate Information

We were 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. On May 10, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Arch Biosurgery, Inc. (formerly known as Arch Therapeutics, Inc.), a Massachusetts corporation (“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, or that can be accessed through, on our website, and you should not consider it to be a part of this prospectus.document. You should not rely on any information on that website in making your decision to purchase shares of our Common Stock.

 

Private Placement OfferingsABS 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.

 

2016Prior 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 biotechnology company.

Recent Developments

During the month of September 2022, the Company launched and announced a reimbursement support program designed to help drive increased commercial use of the company’s FDA-approved AC5® Advanced Wound System. During the fiscal year ended September 30, 2022, the Company invoiced and shipped a total of 33 units, of which 23 units were shipped in connection with the launch of the Company’s reimbursement support program. Under the terms of the program, the invoice amount may be adjusted through full or partial write-offs based on actual reimbursement amounts paid by Centers for Medicare and Medicaid Services (“CMS”) for AC5 units applied and billed by doctors. As such, revenue, if any, for the units shipped in connection with the Company’s reimbursement support program will be booked in future periods when all conditions have been satisfied.

Reverse Stock Split

On September 29, 2022, we held our annual meeting of stockholders (the “Annual Meeting”). At the Annual Meeting, the stockholders approved a proposal authorizing our Board of Directors (the “Board”), in its sole and absolute discretion, without further action by the stockholders, to amend the Company’s amended and restated articles of incorporation (the “Charter”) to (i) effect a reverse stock split of its issued and outstanding and authorized shares of Common Stock at a specific ratio, ranging from 1-for-100 to 1-for-200, at any time prior to September 29, 2023 (the “Reverse Stock Split”), with the exact ratio to be determined by our Board, and (ii) increase the number of authorized shares of Common Stock following consummation of the Reverse Stock Split by 300%. On January 6, 2023, the Board approved a reverse split ratio of 1-for-200 to be effective prior to the pricing of this offering. The Reverse Stock Split and authorized share increase were effected on January 17, 2023.

Convertible Promissory Notes and Warrants Private Placement Financing

 

Beginning May 24, 2016 and through May 26, 2016,First Closing

On July 6, 2022 (the “First Closing Date”), we entered into a series of substantially similar subscription agreements (each aSecurities Purchase Agreement (the2016 Subscription AgreementSPA”) with 18certain institutional and accredited individual investors (collectively, the “2016 Investors”) providing for the issuance and sale by the Company to the 2016 Investors, in a private placement, of an aggregate of 9,418,334 Units at a purchase price of $0.36 per Unit (the “2016 Private Placement Financing”). Each Unit consisted of a share(i) 63,833 shares of Common Stock and a Series E Warrant(the “First Inducement Shares”); (ii) First Notes in the aggregate principle amount of $4.23 million that are convertible into 462,801 shares of Common Stock (the “First Conversion Shares”); (iii) warrants (the “First Warrants”) to purchase 0.75up to 425,554 shares of Common Stock (the “First Warrant Shares”) at an exercise price of $9.94 per share; and (iv) Placement Agent Warrants (the “First Placement Agent Warrants”) to purchase up to 31,510 shares of Common Stock at an exercise price of $0.4380$10.06 per shareshare.

The First Notes become due and payable on January 6, 2024 (the “Maturity Date”) and may not be prepaid, in whole or in part, at any time prior towithout the fifth anniversarywritten consent of the issuance datelead investor, with such prepayment amounts subject to adjustment as a result of certain time-based prepayment premiums set forth in the First Notes; provided, that, the written consent of the Series E Warrant (the “Series E Warrants,” andlead investor is not required in connection with a prepayment made from the shares issuable upon exerciseproceeds of an Uplist Transaction. The First Notes bear interest on the unpaid principal balance at a rate equal to ten percent (10%) (computed on the basis of the Series E Warrants, collectively,actual number of days elapsed in a 360-day year) per annum accruing from the Series E Warrant Shares”). The exercise priceFirst Closing Date until the First Notes become due and payable at maturity or upon their conversion, acceleration or by prepayment, and may become due and payable upon the occurrence of an event of default under the First Notes. Any amount of principal or interest on the First Notes which is not paid when due shall bear interest at the rate of the Series E Warrants was set to equallesser of (i) eighteen percent (18%) per annum or (ii) the closing price of our Common Stock onmaximum amount allowed by law from the due date of their issuance (May 26, 2016), which was $0.4380, and therefore the Series E Warrants were not issued at a discount to the market price of our Common Stock as of such date.thereof until payment in full.

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The number ofFirst Notes are convertible into shares of Common Stock into whichat the option of each of the Series E Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series E Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, (i) at any time during the term of the Series E Warrants, we may reduce the then-current exercise price to any amount and for any period of time deemed appropriate by our Board of Directors (the “Board”); and (ii) certain of the Series E Warrants provide that they shall not be exercisable in the event and to the extent that the exercise thereof would result in the holder of the Series E Warrant,First Notes from the date of issuance at the initial conversion price of $9.14 (the “Conversion Price”) through the later of (i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined below); provided, however, certain First Notes include a provision preventing such conversion if, as a result, the holder, together with its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than 4.99% of the outstanding shares of the Common Stock;Stock (as applicable, the “Ownership Limitation”) immediately after giving effect to the Conversion; and provided however,further, the holder, upon notice to us, may increase or decrease the ownership limitation,Ownership Limitation; provided that any increase is limited (i) the Ownership Limitation may only be increased to a maximum of 9.99% of the Company’soutstanding shares of the Common Stock,Stock; and (ii) any increase in the ownership limitationOwnership Limitation will not become effective until the 61st61st day after delivery of such waiver notice. The Conversion Price is subject to adjustment as set forth in the First Notes.

 

We engaged Maxim Group LLC (“The First 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 First 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 First Notes; and (v) our breach of any representations or warranties under the First Notes which cannot be cured within five (5) days. Further, events of default under the First Notes also include (i) the unavailability of Rule 144 on or after six (6) months from the First Closing Date or January 6, 2023; (ii) our failure to deliver the shares of Common Stock to the First Note holder upon exercise by such holder of its conversion rights under the First Notes; (iii) our loss of the “bid” price for our Common Stock and/or a market and such loss is not cured during the specified cure periods; (iv) our failure to complete an Uplist Transaction; and (v) upon completion of an Uplist Transaction, our failure to repay the outstanding balance of the First Notes within two days of receipt of a First Note holder’s demand for repayment.

Upon an event of default, the First Notes shall become immediately due and payable and the Company shall pay to each First Note holder an amount equal to 125% (the “MaximDefault Premium”) as our exclusive institutional investor placement agentmultiplied by the sum of the outstanding principal amount of the First Notes plus any accrued and unpaid interest on the unpaid principal amount of the First Notes to the date of payment, plus any Default Interest and any other amounts owed to the Holder under the SPA (the “Default Amount”); provided that, upon any subsequent event of default not in connection with the 2016 Private Placement Financing, and in consideration for the services provided by it, Maxim wasfirst event of default, such holder shall be entitled to receivean additional 5% to the Default Premium for each subsequent event of default. At the election of each First Note holder, the Default Amount may be paid in cash feesor shares of Common Stock equal to 8.2%the Default Amount divided by the Conversion Price at the time of payment.

The First Warrants (i) have an exercise price of $9.94 per share; (ii) have a term of exercise equal to 5 years after their issuance date; (iii) became exercisable immediately after their issuance; and (iv) have a provision preventing the gross proceeds received by us from certain institutional investors participating in the 2016 Private Placement Financing (the “Maxim Investors”), as well as reimbursement for all reasonable expenses incurred by it in connection with its engagement. We received gross proceedsexercisability of approximately $3,390,600 in the aggregate, of which approximately $2,084,000 was attributable to the Maxim Investors, resulting in a fee of approximately $170,888. In addition, the number of shares of our Common Stock outstanding increasedsuch First Warrants if, as a result of the 2016 Private Placement Financing by approximately eight percent (8%) from 118,592,070 to 128,010,404.

Our existing stockholders will experience dilution upon any exercise of the Series EFirst Warrants, issued in the 2016 Private Placement Financing. Such Series E Warrants are currently exercisable for an aggregate of 7,063,748 shares of our Common Stock which, assuming no adjustments toholder, together with its affiliates and the full exercise of the Series E Warrants and noany other issuancespersons whose beneficial ownership of our Common Stock would equal approximately 5.4%be aggregated with the holder’s, would be deemed to beneficially own more than the Ownership Limitation. The holder, upon notice to us, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of 9.99% of the 131,924,004 shares of Common Stock outstanding as June 23, 2016, and approximately 5.1% of the 138,987,752 shares of Common Stock that would be outstanding after giving effect to the exercise of all such warrants.

On May 26, 2016, we entered into a registration rights agreement with the 2016 Investors (the “2016 Registration Rights Agreement”), pursuant to which we became obligated, subject to certain conditions, to file with the Securities and Exchange Commission (the “SEC”) within 45 days after the closing of the 2016 Private Placement Financing one or more registration statements to register the shares of Common Stock issued in the Closings and the Series E Warrant Shares for resale under the Securities Act of 1933, as amended (the “Securities Act”). As a result, we are registering for resale under this registration statement (the “2016 Registration Statement”) an aggregate of 16,482,082 shares of Common Stock, representing the 9,418,334 shares issued at the closing of the 2016 Private Placement Financing and the 7,063,748 shares underlying the Series E Warrants.

Pursuant to our filing of this registration statement, we are in compliance with such filing obligation under the 2016 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 2016 Registration Rights Agreement may require us to pay monetary penalties to the 2016 Investors and/or their assignees. Because the Series E 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 E Warrants, the provisions of the 2016 Registration Rights Agreement would obligate us to register for resale any additional shares of our Common Stock that may then be issuable upon exercise ofStock; and (ii) any increase in the Series E Warrants.

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Under the 2016 Registration Rights Agreement, subject to exception in certain circumstances, we have agreed to keep the 2016 Registration StatementOwnership Limitation will not become 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 2016 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 E Warrants issued in the 2016 Private Placement Financing, then the selling securityholders will be entitled to exercise their Series E Warrants on a “cashless exercise” or “net exercise” basis during the period when the shares issuable upon exercise61st day after delivery of such Series E Warrants are not so registered.

Twelve of the 2016 Investors, or their respective affiliates, have participated in previous financings that were conducted by us. In particular and as set forth in the table below, (i) Anson Investments Master Fund LP (“Anson”), Intracoastal Capital, LLC (“Intracoastal”) and CVI Investments, Inc. (“CVI”) or their respective affiliates, were investors in the Company’s 2014 Private Placement Financing and Notes Offering; and (ii) Anson, Karen Carlin, Drake Partners Equity LLC (“Drake”), Jonathan Galli, Intracoastal, the Keyes Sulat Revocable Trust (the “Trust”), Lorraine A. Malanga, James M. McKeone, an affiliate of IRA FBO Ana B Parker (“Ms. Parker”), Dr. Stephanie Plent, and Popham Management, LLC (“Popham”) and/or their respective affiliates were investors in the Company’s 2015 Private Placement Financing. The table below summarizes the securities purchased by each of the 2016 Investors in the 2014 Private Placement Financing, Notes Offering and 2015 Private Placement Financing.

  2014 Private Placement  Notes
Offering
  2015 Private Placement 
Investor 2014 Private
Placement
Shares
  Series A
Warrant
Shares
  Series B
Warrant
Shares
  Series C
Warrant
Shares
  Aggregate
Principal
Amount of
Notes
  2015 Private
Placement
Shares
  Series D
Warrant
Shares
 
Anson Investments Master Fund LP  2,000,000   2,000,000   2,000,000   2,000,000   250,000   1,600,000   1,600,000 
Karen Carlin  0   0   0   0   0   113,637   113,637 
CVI Investments, Inc.  2,000,000   2,000,000   2,000,000   2,000,000   250,000   0   0 
Drake Partners Equity LLC  0   0   0   0   0   227,273   227,273 
Jonathan Galli  0   0   0   0   0   350,000   350,000 
Intracoastal Capital, LLC  800,000   800,000   800,000   800,000   0   1,590,909   1,590,909 
Keyes Sulat Revocable Trust  0   0   0   0   0   454,546   454,546 
Lorraine A. Malanga  0   0   0   0   0   113,637   113,637 
James M. McKeone  0   0   0   0   0   454,546   454,546 
IRA FBO Ana B Parker  0   0   0   0   0   5,000,000   5,000,000 
Dr. Stephanie Plent  0   0   0   0   0   227,273   227,273 
Popham Management, LLC  0   0   0   0   0   454,546   454,546 

James R. Sulat, who was appointed as a member of the Board on August 19, 2015, is a co-trustee of the Trust along with his wife. In accordance with the Company’s policies governing related party transactions, Mr. Sulat disclosed his interest in the 2016 Private Placement Financing to the remaining members of the Board, all of whom were disinterested in the transaction (the “Disinterested Directors”), and recused himself from discussing or voting on matters related to the 2016 Private Placement Financing. On May 24, 2016, The Disinterested Directors unanimously approved the 2016 Private Placement Financing.

In addition to participating in both the 2016 Private Placement Financing and 2015 Private Placement Financing, the Trust also 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.

The net proceeds to us from the 2016 Private Placement Financing, after giving effect to legal and other expenses incurred through the date of this prospectus, were approximately $3,055,600. The table below describes in more detail these costs associated with the 2016 Private Placement Financing through the date of this prospectus:

Gross proceeds of the 2016 Private Placement Financing: $3,390,600(1)
     
Legal and other expenses incurred in connection with the 2016 Private Placement Financing: $335,000(2)
     
Resulting net proceeds to the Company: $3,055,600(3)

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(1)Does not include potential gross proceeds payable to us upon exercise of the Series E Warrants issued in the 2016 Private Placement Financing, which would equal approximately $3,093,922 if all 7,063,748 of the shares issuable under the Series E Warrants outstanding on June 23, 2016 were exercised on a cash basis.

(2)This amount represents our legal, accounting, registration, placement agent and other fees and expenses associated with the 2016 Private Placement Financing (collectively, “Transaction Expenses”), which were estimated to total $335,000. 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 2016 Registration Rights Agreement the Common Stock issued in the 2016 Private Placement Financing or issuable upon exercise of the Series E Warrants(in a cash amount equal to 1.5% of the price paid to us by each investor in the 2016 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 2016 Registration Rights Agreement. Although we intend to comply with the requirements of the 2016 Subscription Agreements and the 2016 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 2016 Private Placement Financing.

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 “2015 Subscription Agreement”) with twenty accredited investors (collectively, the “2015 Investors”) providing for the issuance and sale by us 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 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 DWarrant Shares”). On June 30, 2015, we conducted an initial closing pursuant to which we sold and 19 of the 2015 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 pursuant to which we sold and the remaining 2015 Investor purchased 454,387 Units at an aggregate purchase price of approximately $100,000. The aggregate gross proceeds raised by us in the 2015 Private Placement Financing totaled approximately $3,166,000, and the number of shares of our Common Stock outstanding increased by over eighteen percent (18%) from 78,766,487 to 93,157,241. We did not engage any underwriter or placement agent in connection with the 2015 Private Placement Financing.

waiver notice. The number of shares of Common Stock into which each of the Series DFirst Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series DFirst Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition,

Pursuant to an engagement agreement (the “2022 Engagement Letter”) that we entered into with Maxim Group LLC (“Maxim”), we agreed, among other things, to (i) at any time during the termpay Maxim 10% of the Series D Warrants, we may reducegross proceeds in the then-current exercise price to any amount and for any period of time deemed appropriate by our Board;First Closing from certain institutional investors, or $240,000, and (ii) certainissue to Maxim, or its designees, warrants to purchase up to 10% of the Series D Warrants provide that they shall not be exercisableaggregate number of shares sold to the institutional investors in the event andFirst Closing, or warrants to purchase up to 31,510 shares of Common Stock. The First Placement Agent Warrants have substantially the extentsame terms as the First Warrants, except that the exercise thereof would result in the holderprice of the Series D Warrant or anyFirst Placement Agent Warrants is $10.06 per share and are not exercisable until six months from the date 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.issuance. We also reimbursed Maxim approximately $58,000 for non-accountable expenses, legal fees and other expenses.

 

On June 30, 2015,In connection with the First Closing, we entered into a registration rightssecurity agreement with 19 of the 2015 Investorscertain investors on July 6, 2022 (the “2015 Registration RightsSecurity Agreement”), pursuant to which we became obligated, subjectprovided a security interest in, and a lien on, substantially all of our assets as collateral to the investors. Upon an event of default under the First Notes, each investor may exercise its rights to the collateral pursuant to the terms of the Security Agreement.

In addition, on July 6, 2022, we issued 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 2015 Private Placement Financing and the Series D 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 on July 2, 2015. As a result, we initially registered for resale under a registration statement on Form S-1 (File Number 333-206873, and such registration statement, the “2015 Registration Statement”) an aggregate of 28,781,508 shares of Common Stock, representing the (i) 14,390,754 shares issued at the Closings of the 2015 Private Placement and (ii) 14,390,754 shares underlying the Series D Warrants.

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Our failure to satisfy certain deadlines with respect to the 2015 Registration Statement and certain other requirements set forth in the 2015 Registration Rights Agreement may require us to pay monetary penalties to the 2015 Investors and/or their assignees. Under the 2015 Registration Rights Agreement, subject to exception in certain circumstances, we have agreed to keep the 2015 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 2015 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.

investors Exchanged 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 Specialists, LLC, an affiliate of Intracoastal (“Equitec”), and Capital Ventures International, an affiliate of CVI (“Capital Ventures” and together with Anson and Equitec, the “Convertible Notes Investors”) pursuant to which we issued unsecured 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$699,780.93 issued in exchange (the “Notes Exchange”) for a portion of the Notes Offering on March 13, 2015, eachCompany’s unsecured 10% Series 1 Convertible Notes Investor was issued a(the “Series 1 Convertible Note in the principal amount of $250,000. We did not engage any underwriter or placement agent in connectionNotes”) and unsecured 10% Series 2 Convertible Notes (the “Series 2 Convertible Notes” and, together with the Notes Offering. Equitec and Capital Ventures also purchased Units in the 2014 Private Placement Financing and in May 2015 and September 2015, respectively, they assigned the remaining securities that they acquired in or as a result of the Notes Offering and 2014 Private Placement Financing to their respective affiliates, Intracoastal and CVI.

On September 8, 2015, we, along with the current holders of theSeries 1 Convertible Notes, entered into a series of substantially similar subordination agreements with the Massachusetts Life Sciences Center (“MLSC” and such agreements, the “Subordination AgreementsSeries Convertible Notes”), pursuant to which the holders of the Convertible. The Exchanged 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 could not be repaid unless and until all indebtedness and fees owed to MLSC under the MLSC Loan Agreement were repaid in full, but the right to convert the Convertible Notesare convertible into 76,563 shares of Common Stock was expressly allowed.

Subject to the terms and conditions of the Subordination Agreements, the Convertible Notes issued in the Notes Offering became due and payable on March 13, 2016 (the “Stated Maturity Date”) and could not be prepaid. The Convertible Notes bore 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 was paid in full by us. Interest on the Convertible Notes became due and payable upon their conversion or the Stated Maturity Date and could become due and payable upon the occurrence of an event of default under the Convertible Notes. In the event that the Stated Maturity Date occurred and repayment of the indebtedness accrued under the Convertible Notes was 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 was automatically extended until repayment was permitted under the Subordination Agreements; and (2) interest would 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.

At any time prior to the Stated Maturity Date, the holders of the Convertible Notes had 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 “Exchanged Conversion Shares”);provided, however, conversion was not permitted to the extent that, 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 initial conversion price was $0.20 per share, and it could 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.

As of the date of this prospectus, all principal and interest accrued under the Convertible Notes has been converted into Conversion Shares, with the last such conversion occurring in April 2016. In total, approximately $796,073 in principal and accrued interest accrued under the Convertible Notes was converted in to 3,980,359 Conversion Shares at a conversion price of $0.20 per share.$9.14. The terms of the Exchanged Notes are substantially similar to those of the First Notes. In connection with the issuance of the Exchanged Notes, the prior Series Convertible Notes holders entered into a subordination agreement on July 6, 2022 to subordinate their rights in respect of the Exchanged Notes to the rights of the investors in respect of the First Notes. As of January 18, 2023, up to 76,563 Exchanged Conversion Shares may be acquired upon the conversion of the Exchanged Notes.

 

 

2014 Private Placement Financing

Second Closing

 

On January 30, 2014,18, 2023 (the “Second Closing Date”), we entered into a securities purchase agreement (the “Securities Purchase Agreement”)an amendment to the SPA with ninecertain institutional and accredited individual investors (the “2014 Investors”) providing for ourthe issuance and sale to the 2014 Investors, in a private placement, of an aggregate of 11,400,000 Units at a purchase price of $0.25 per Unit, for aggregate gross proceeds to us of $2.85 million (the “2014 Private Placement Financing”). Each Unit consisted of a share of our Common Stock and a Series A Warrant, a Series B Warrant, and a Series C Warrant (collectively, the “2014 Warrants”), each of which was exercisable for a share of Common Stock. Upon the closing of the 2014 Private Placement Financing on February 4, 2014, we issued to the 2014 Investors 11,400,000(i) 9,598 shares of Common Stock and 2014 Warrants exercisable up to an aggregate of 34,200,000 shares of our Common Stock.

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, which occurred on July 2, 2014 (the “2014 Registration Statement Effective DateSecond Inducement Shares). 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 totogether with the shorter of 18 months after their issuance date and nine months after the 2014 Registration Statement Effective Date. 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 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. In addition, as a result of the amendments described in greater detail below, the exercise price of both the Series A Warrants and Series C Warrants is currently $0.20 per share. 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”), which was the lead investor in the 2014 Private Placement Financing and is an affiliate of Intracoastal and Equitec, 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 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.

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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,First Inducement Shares, the “Inducement Shares”); (ii) Second Notes in the aggregate principle amount of $636,000 that are convertible into 69,585 shares of Common Stock (the “Second Conversion Shares”); and (iii) warrants (the “Second Warrants” and, together with the First Warrants, the “2022 Warrants”) to purchase up to 127,968 shares of Common Stock (the “Second Warrant Shares” and, together with the First Warrant Shares, the “2022 Warrant Shares”) at an exercise price of $9.94 per share. The terms of the Second Notes are substantially similar to those of the First Notes, except that the Second Notes are unsecured.

In connection with the Second Closing, we agreed to (i) pay Maxim 10% of the gross proceeds in the Second Closing from the institutional investors, or $50,000, and (ii) issue warrants to purchase up to 6,565 shares of Common Stock to Maxim pursuant to the 2022 Engagement Letter (the “Second Placement Agent Warrants”). AsThe Second Placement Agent Warrants have substantially the same terms as the Second Warrants, except that the exercise price of the Second Placement Agent Warrants is $10.06 per share and are not exercisable until six (6) months from the date of this prospectus, all 570,000issuance. The Second Inducement Shares, have been issued.Second Notes, Second Warrants and Second Placement Agent Warrants were issued and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act.

 

Also uponOn the closing of the 2014 Private Placement Financing,Second Closing Date, we entered into aan amended and restated registration rights agreement (thewith certain investors (as amended and restated, the2014A&R Registration Rights Agreement”) with the 2014 Investors, pursuant to which we becameare obligated, subject to certain conditions, to file with the SEC one or more registration statements (any such registration statement, a “Resale Registration Statement”) to register the Second Inducement Shares, the Second Conversion Shares and the Second Warrant Shares for resale under the Securities Act within the sharesearlier of Common Stock issued in(i) the date that is 45 days following the Uplist Transaction, and underlying(ii) the 2014 Warrants issued indate that is 90 days following 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.Second Closing Date. Our failure to satisfy certain otherfiling and effectiveness deadlines with respect to the 2014a Resale Registration Statement and certain other requirements set forth in the 2014A&R Registration Rights Agreement may requiresubject us to paypayment of monetary penalties to the 2014 Investors. 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 2014 Investors and their assignees (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.penalties.

 

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

 

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 ishttp://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 biotechnology company.

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The Offering

 

This prospectus relates to the resale from time to time by the selling securityholders identified in this prospectus of up to 16,482,082 shares of our Common Stock issued or underlying the Series E Warrants issued in the 2016 Private Placement Financing. None of the shares to be registered hereby are being offered for sale by us.

Common stock outstanding prior to offering

Units being offered 

131,924,004 (1)[●] Units. Each Unit will consist of one share of Common Stock and one Investor Warrant to purchase one share of Common Stock. The Units have no stand-alone rights and will not be certificated or issued as stand-alone securities. The shares of Common Stock can be purchased in this offering only with the accompanying Investor Warrants as part of Units (other than pursuant to the underwriters’ option to purchase additional shares of Common Stock and/or Investor Warrants), but the components of the Units will be immediately separable and will be issued separately in this offering. 

  

Common stock offered byStock outstanding prior to the selling securityholdersoffering(1)

16,482,082 (2)

1,259,280

  

Common stockStock to be outstanding after the offeringoffering(1) 

138,987,752 (3)

[●] shares ([●] shares if the underwriters exercise their option to purchase additional shares in full, and assuming, in each case, no exercise of the Investor Warrants). 

  
Use

Over-allotment Option 

We have granted the underwriters an option, exercisable for 45 days after the date of proceeds

We will not receive any proceeds from the salethis prospectus, to purchase up to an additional [●] shares of Common Stock offeredand/or Investor Warrants to purchase up to an additional [●] shares of Common Stock (equal to 15% of the shares of Common Stock and Investor Warrants underlying the Units sold in this offering), in any combination, at the public offering price per share of Common Stock and per Investor Warrant, respectively, less the underwriting discounts payable by the selling securityholders under this prospectus.us, solely to cover over-allotments, if any. 

  
OTCQB symbol

Description of Investor

Warrants

The Investor Warrants will have an exercise price per share of Common Stock equal to not less than 100% of the offering price of the Unit in this offering, will be exercisable on the date of issuance and will expire five years from the date of issuance. Each Investor Warrant is exercisable for one share of Common Stock, subject to adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our Common Stock. A holder may not exercise any portion of an Investor Warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of our outstanding shares of Common Stock after exercise, as such ownership percentage is determined in accordance with the terms of the Investor Warrants, except that upon notice from the holder to us, the holder may waive such limitation up to a percentage not in excess of 9.99% of our outstanding shares of Common Stock.

This prospectus also registers the shares of Common Stock issuable upon exercise of the Investor Warrants. To better understand the terms of the Investor Warrants, you should carefully read the ARTH”Description of Securities - Description of Investor Warrants to be Issued in this Offering” section of this prospectus. You should also read the form of Investor Warrant, which is filed as an exhibit to the registration statement that includes this prospectus. 

Description of Underwriter Warrants 

Upon the closing of this offering, we will issue to the Representative, or its designees, warrants entitling it to purchase a number of shares of Common Stock equal to 9% of the number of Units sold in this offering, including any shares sold in the over-allotment option, if any, at an exercise price equal to 110% of the public offering price of the Units (the “Underwriter Warrants”). The Underwriter Warrants shall be exercisable commencing six months after the closing of this offering and will expire five years after the commencement date of sales in this offering. This prospectus also registers the shares (or shares if the underwriters exercise their over-allotment option in full) of Common Stock issuable upon exercise of the Underwriter Warrants.

  
Risk Factors

Use of proceeds 

We estimate that we will receive net proceeds from this offering of approximately $[●], or approximately $[●] if the underwriters exercise their over-allotment option in full, based upon an assumed public offering price of per Unit and after deducting the underwriting discounts and commissions and estimating offering expenses payable by us.

We intend to use the net proceeds we receive from this offering for product marketing, for general working capital purposes, and to repay the outstanding balances under the 2022 Notes upon completion of our Uplist Transaction. See “RISK FACTORSUse of Proceeds” beginning on Page 12page 39 of this prospectus for more information. 

Market for Common Stock

Our Common Stock is traded on the OTCQB under the symbol “ARTHD.” On January [●], 2023, the closing price of our Common Stock was $[●] per share. We have applied to list our Common Stock on the Nasdaq Capital Market under the symbol “ARTH.” No assurance can be given that an active trading market will develop for the Common Stock. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on the Nasdaq Capital Market or an Alternate Exchange. We cannot guarantee that we will be successful in listing our Common Stock on the Nasdaq Capital Market or an Alternate Exchange; however, we will not complete this offering unless we are so listed.

Market for Investor Warrants

There is no established public trading market for the Investor Warrants. We have applied to list the Investor Warrants on the Nasdaq Capital Market under the symbol “ARTH.W.” No assurance can be given that such listing will be approved or, if successful, that an active trading market for the Investor Warrants will develop or be sustained.

Risk Factors 

See “Risk Factors” beginning on page 13 and other information in this prospectus for a discussion of the factors you should consider before you decide to invest in our Common Stocksecurities.

Lock-ups 

We, our directors and warrants.

(1)Asexecutive officers, and the holder of June 23, 2016, includes an aggregate5% or more of 9,418,334the outstanding shares of our Common Stock issuedwill enter into customary “lock-up” agreements pursuant to which such persons and entities will agree, for a period of six months after the selling securityholders in connection withclosing of this offering, not to offer, issue, sell, contract to sell, encumber, grant any option for the Closings conducted under the 2016 Private Placement Financing. Includes 21,418,383sale of, or otherwise dispose of, any shares of Common Stock held byor any securities convertible into or exchangeable for our affiliates.Common Stock. See “UnderwritingLock-Up Agreements.” 

 

(2)

(1)

Consists of: (a)

Gives effect to the 9,418,334 sharesone-for-two hundred Reverse Stock Split of the outstanding Common Stock currently held by the selling securityholders that were originally issued in connection with the closing of the 2016 Private Placement Financing; and (b) 7,063,748Company, resulting in 1,259,280 shares of Common Stock issuable upon exercise of the Series E Warrants determined as if the Series E 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 E Warrants; and (b) the full exercise of the Series E Warrants held by the selling securityholders as of June 23, 2016, which would result in the issuance of an aggregate of 7,063,748 shares of Common Stock.(post-split) outstanding immediately before this offering. Excludes (i) 15,051,741 shares of Common Stock that are reserved for future issuanceoptions granted to employees, directors and consultants under our 2013 Stock Incentive Plan (the “2013 Plan”), to purchase up to an aggregate of which 12,772,964104,325 shares are subject to outstanding option awards granted under the 2013 Planof Common Stock at exercise prices ranging from $0.17$4.00 to $0.43$130.00 per share and with a weighted average exercise price of $0.32$ 39.06 per share; (ii) 145,985730 shares of Common Stock issuable upon the exercise of outstanding warrants issued in connection withto the Massachusetts Life Sciences Center (“MLSC Loan (as later defined)”), with an exercise price of $0.274$54.80 per share (the “MLSC Warrant”), none; (iii) 34,013 shares of which are beingCommon Stock issuable upon the exercise of our Series G Warrants (“Series G Warrants”) issued in our registered pursuant todirect financing that closed on July 2, 2018 (the “2018 Registered Direct Financing”) at an exercise price of $140.00 per share; (iv) 43,077 shares of Common Stock issuable upon the 2016 Registration Statementexercise of which this prospectus forms a part; (iii) 1,100,275our Series H Warrants (“Series H Warrants”) issued in our registered direct financing that closed on May 14, 2019 (the “May 2019 Registered Direct Financing”) at an exercise price of $80.00 per share; (v) 71,429 shares of Common Stock issuable upon the exercise of our Series I Warrants (“Series I Warrants”) that were issued in our registered direct financing that closed on October 18, 2019 (the “October 2019 Registered Direct Financing”) at an exercise price of $44.00 per share; (vi) 5,358 shares of Common Stock issuable upon the exercise of the Series C Warrants, none of which are being registered pursuantwarrants granted to the 2016 Registration Statementplacement agent that we engaged in the October 2019 Registered Direct Financing (the “2019 Placement Agent Warrants”) at an exercise price of which this prospectus forms a part; (iv) 4,000,000$43.75 per share; (vii) 161,719 shares of Common stock issuable upon the exercise of the Series K Warrants (“Series K Warrants”) issued in the private placement that closed on February 17, 2021 (the “2021 Private Placement Financing”) with an exercise price of $34.00 per share; (viii) 16,172 shares of Common Stock issuable upon the exercise of the Series Aplacement agent warrants issued in the 2021 Private Placement Financing with an exercise price of $40.00 per share (the “2021 Placement Agent Warrants none of which are being registered pursuant to the 2016 Registration Statement of which this prospectus forms a part; and (v) 11,200,163”); (ix) 21,302 shares of Common Stock issuable upon the conversion of our Series 1 Convertible Notes at a conversion price of $54.00 per share; (x) 18,815 shares of Common Stock issuable upon conversion of our Series 2 Convertible Notes at a conversion price of $50.00 per share; (xi) 462,801 First Conversion Shares issuable upon conversion of the First Notes; (xii) 425,554 First Warrant Shares issuable to selling stockholders upon exercise, at an exercise price of $9.94 per share, of our First Warrants; (xiii) 31,510 shares of Common Stock issuable upon exercise of the Series DFirst Placement Agent Warrants noneat an exercise price of which are being registered pursuant$10.06 per share; (xiv) 76,563 Exchanged Conversion Shares issued to certain holders in the Notes Exchange issuable upon the conversion of the Exchanged Notes with a conversion price of $9.14 per share; (xv) 69,585 shares of Common Stock issuable upon conversion of the Second Notes; (xvi) 127,968 Second Conversion Shares issuable upon the exercise of the Second Warrants; (xvii) 6,565 shares of Common Stock issuable upon exercise of the Second Placement Agent Warrants at an exercise price of $10.06 per share; (xviii) [●] shares of Common Stock issuable upon exercise of the Investor Warrants to be issued in this offering; and (xix) [●] shares of Common Stock issuable upon exercise of the Underwriter Warrants to be issued to the 2016 Registration StatementRepresentative, or its designees, upon completion of which this prospectus forms a part.offering.

 

Except as indicated otherwise, the discussion above assumes no exercise of the underwriters’ option to purchase additional shares of Common Stock and/or Investor Warrants.

RISK FACTORS

Investment in our Common Stocksecurities involves a high degree of risk. You should carefully consider the risks that are summarized below and discussed in greater detail in the following risk factorspages, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, before making an investment decision. If any of the following risks and uncertainties actually occurs,occur, our business, financial condition, and results of operations could be negatively impacted, and you could lose all or part of your investment.

 

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Risk Factor Summary

 

There is substantial doubt about our ability to continue as a going concern, and we believe that our current cash on hand will only meet our anticipated cash requirements into the second quarter of fiscal 2023.

We have incurred significant losses since inception, we expect to continue to incur losses for the foreseeable future, and we may not generate sufficient revenue to achieve or maintain profitability.

We will need to raise additional capital, which may not be available to us on acceptable terms, or at all. In addition, the terms of our previous financings could impose additional challenges on our ability to raise funding in the future.

Our obligations under the First Notes, including our obligation to repay the outstanding balance under the First Notes upon such holder’s demand for repayment upon the completion of an Uplist Transaction, are secured by security interests in substantially all of our assets and our failure to comply with the terms and covenants of the First Notes could result in our loss of substantially all of our assets.

The holders of our 2022 Notes have certain additional rights upon an event of default under such notes, which could harm our business, financial condition, and results of operations and could require us to reduce or cease our operations.

If we issue additional shares in the future, including issuances of shares upon exercise of our outstanding warrants or conversion of our outstanding convertible notes, our existing stockholders will be significantly diluted and our stock price may be negatively affected.

If we do not successfully market our products, we will continue to incur losses and will never be profitable.

Our business may be materially adversely affected by the coronavirus (COVID-19) pandemic. Should the pandemic or its aftereffects continue, our business operations could and will likely be delayed or interrupted.

If we do not receive a dedicated HCPCS code for AC5 Advanced Wound System or if private or government insurers elect to not reimburse providers at all or at lower than anticipated rates, our ability to commercialize the product will be significantly impaired; receipt of the dedicated HCPCS code is not a guarantee of product coverage and reimbursement.

Our flagship product is novel without any history of use in the clinical fields in which it is marketed requiring education and training regarding its application to gain and maintain market acceptance by patients, physicians, healthcare payors or others in the medical community.

Applications for regulatory marketing authorization for commercialization of our additional products or elements of our supply chain may not be accepted, or if accepted, may be voluntarily withdrawn or eventually rejected, and the future success of our business is significantly dependent on the success of our being able to obtain regulatory marketing authorization for our development stage candidates.

Our additional product candidates are inherently risky because they are based on novel technologies and thus create significant challenges with respect to product development and optimization, engineering, manufacturing, scale-up, quality systems, pre-clinical in vitro and in vivo testing, government regulation and approval, third-party reimbursement and market acceptance.

 

Any changes in our supply chain, including to the third-party contract manufacturers, service providers, or other vendors, or in the processes that they employ, could adversely affect us.

If the FDA or similar foreign agencies or intermediaries impose requirements more onerous than we anticipate, our business could be adversely affected.

We are subject to extensive and dynamic medical device regulations outside of the United States, which may impede or hinder the approval, marketing authorization or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved or authorized products.

Any clinical trials that are planned or are conducted on our flagship product or additional 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.

We cannot market and sell any additional product candidate in the United States or in any other country or region if we fail to obtain the necessary marketing authorization, clearances or certifications from applicable government agencies.

The flagship product for which we obtained required regulatory marketing authorization is subject to post-approval regulation, and we may be subject to penalties if we fail to comply with such post-approval requirements.

Use of third parties to manufacture our product and our additional 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 face competition from companies that have greater resources than we do, and we may not be able to effectively compete against these companies.

If others claim we and/or the parties from whom we license some of our intellectual property are infringing on their intellectual property rights, we may be subject to costly and time-consuming litigation.

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. Although we have applied to list our Common Stock on the Nasdaq Capital Market there is no assurance that our application will be approved.

Even if this offering is successful and our application to list our Common Stock and Investor Warrants on the Nasdaq Capital Market or an Alternate Exchange is approved, no assurance can be given that an active trading market for our Common Stock or Investor Warrants will develop or be maintained.

AC5, AC5-G, AC5-V, AC5-P, Crystal Clear Surgery, NanoDrape and NanoBioBarrier and associated logos are trademarks and/or registered trademarks of Arch Therapeutics, Inc. and subsidiary. For purposes herein, references to regulatory approval and marketing authorization may be used interchangeably.

Risks Related to our Business, Financial Position and Capital Requirements

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 Even if this offering is in the process of being developed, andsuccessful, we 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 substantialneed 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 fundingour operations 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 failfail.,”

We have only recently commenced commercial sales of our first product, AC5®Advanced Wound System, and we have incurred substantial net losses as a result. We believe that our current cash on hand as of June 23, 2016, we believe thatDecember 28, 2022 is sufficient to meet our anticipated cash requirements into at least the second quarter of fiscal 2023. Even if this offering is successful, we will need to secure additional resources to support our continued operations.

During the first and second quarters of fiscal 2021, the fourth quarter of fiscal 2022 and the second quarter of fiscal 2023, we obtained additional cash to continue operations and fund our planned future operations, which include research and development of our product candidates, steps related to seeking regulatory marketing authorization for our initial product candidates, and planning for their commercialization in the U.S. and Europe. Even with the additional funds received from these financings, there exists substantial doubt about our ability to continue as a going concern. In addition, our plans may change and/or we may use our capital resources more rapidly than we currently anticipate. We presently expect that our expenses will increase in connection with our ongoing activities to support our business operations, inclusive of regulatory submissions, marketing authorization, and commercialization of our product candidates and products, and, therefore, we will require additional funding.

Our future capital requirements will depend on many factors, including:

the success of our marketing efforts;

the success of our additional commercialization efforts;

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 marketing authorization 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 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 may also seek funding through collaborative arrangements with strategic partners if we determine them to be necessary or appropriate, although these arrangements could require us to relinquish rights to our technology or product candidates and could result in our receipt of only a portion of any revenues associated with the partnered product. We cannot provide any assurance that additional financing from these sources will be available on favorable terms, if at all.

In addition, we are bound by certain contractual terms and obligations that may limit or otherwise impact our ability to raise additional cash withinfunding in the next twelve months.near-term including, but not limited to, provisions in the Securities Purchase Agreement that we entered into on June 28, 2018 (the “2018 SPA”) in connection with the 2018 Registered Direct Financing and the SPA that we entered into in connection with the 2022 Private Placement Financing, in each case as described in greater detail in the risk factor entitled “The terms of the 2018 Financing and 2022 Private Placement Financing could impose additional challenges on our ability to raise funding in the future ” below.

These restrictions and provisions could make it more challenging for us to raise capital through the incurrence of additional debt or through future equity issuances. Further, if we do raise capital through the sale of equity, or securities convertible into equity, the ownership of our then existing stockholders would be diluted, which dilution could be significant depending on the price at which we may be able to sell our securities. Also, if we raise additional capital through the incurrence of indebtedness, we may become subject to covenants restricting our business activities, and the holders of debt instruments may have rights and privileges senior to those of our equity investors. Finally, servicing the interest and principal repayment obligations under any debt facilities that we may enter into in the future could divert funds that would otherwise be available to support research and development, clinical or commercialization activities.

If we are unable to obtain adequate financing on a timely basis or on acceptable terms in the future, we would likely be required to delay, reduce or eliminate one or more of our product development activities, which could cause our business to fail.

We have incurred significant losses since inception. We expect to continue to incur losses for the foreseeable future, and we may never generateincrease 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 concernconcern,we are we have only recently commenced commercial sales of our first product, AC5®Advanced Wound System, and we have incurred substantial net losses as a development stage company with no commercial products.result. 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 entirelyprimarily 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. In addition, we expect to continue to incur additional general and administrative expenses due to the costs associated with being a public company, including obligations to regulatory agencies, and increased investor relations and corporate communications expenses. We have devoted much of our operationsoperational effort to date to the research and development of our core technology, including selecting our initial product composition, conducting initial safety and other related tests, generatingconducting a human trial for safety and performance, developing methods for manufacturing scale-up, reproducibility and manufacturing and formulation methods,validation, and developing and protecting the intellectual property rights underlying our technology platform. We have recently devoted substantially all of our operational effort to continue the ongoing commercialization and market adoption of our first product.

 

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:we:

 

develop our principal product candidate, AC5, and the underlying technology, including advancing applications and conducting preclinical biocompatibility studies;

commercialize AC5® Advanced Wound System;

 

raise capital needed to fund our operations;

develop our additional product candidates, and the underlying technology, including advancing applications and conducting biocompatibility and other preclinical studies and clinical studies;

 

build and enhance investor relations and corporate communications capabilities;

raise capital needed to fund our operations;

 

conduct additional clinical trials relating to AC5 and any other product candidate we seek to develop;

enhance investor relations and corporate communications capabilities;

 

attempt to gain regulatory approvals for product candidates that successfully completes clinical trials;

conduct clinical trials on products and product candidates;

 

build relationships with contract manufacturing partners, and invest in product and process development through such partners;

attempt to obtain regulatory marketing authorizations for product candidates;

 

maintain, expand and protect our intellectual property portfolio;

build relationships with additional contract manufacturing partners, and invest in product and process development through such partners;

 

advance additional product candidates and technologies through our research and development pipeline;

maintain, expand and protect our intellectual property portfolio;

 

seek to commercialize selected product candidates which may require regulatory approval; and

advance additional product candidates and technolJogies through our research and development pipeline;

 

hire additional regulatory, clinical, quality control, scientific, financial, and management, consultants and advisors.

seek to market selected product candidates, which may require regulatory marketing authorization; and

hire additional regulatory, clinical, quality control, scientific, financial, and management, consultants and advisors.

 

To become and remain profitable, we must successfully market AC5® Advanced Wound System and succeed in developing and eventually commercializing other 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 approvalmarketing authorization for our product candidates and manufacturing, marketing and selling any products for which we have or may obtain regulatory approval.marketing authorization. We are only in the preliminary stages of many of those activities. We may never succeed in those activities and may never generate sufficient operating revenues orto 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 sufficient operating revenues orto 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 pricesprice of our Common Stock could cause our stockholders to lose all or a part of their investment in the Company.

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We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts and could cause our business to fail.

Based on our current operating expenses and working capital requirements, as of June 23, 2016, we believe that we will need to raise additional cash within the next twelve months. 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 cash to continue operations and fund our planned future operations, including the continuation of our ongoing research and development efforts, the licensing or acquisition of new assets, and researching and developing any potential patents, the related compounds and any further intellectual property that we may acquire. In addition, our plans may change and/or we may use our capital resources more rapidly than we currently anticipate. We presently expect that our expenses will increase in connection with our ongoing activities, particularly as we commence preclinical and clinical development for our lead product candidate, AC5. In particular, we currently estimate that in order to support our business operations as well as obtain regulatory approval of AC5 in the U.S. and Europe we will require up to $8,000,000 to $12,000,000 and potentially more in additional capital. Our future capital requirements will depend on many factors, including:

the scope, progress and results of our research, preclinical, and clinical 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, but not limited to, provisions in the MLSC Loan Agreement (i) restricting our ability to incur certain types of additional indebtedness, and (ii) that would cause all amounts under the MLSC Loan Agreement to become immediately due and payable if we receive net proceeds of $5,000,000 or more in one or more financing transactions in any 12-month period from third parties other than our then-existing shareholders. These restrictions and provisions, which are discussed in greater detail below under the risk factor entitled “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,” 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 could divert funds that would otherwise be available to support research and development, clinical or commercialization activities..

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If we are unable to obtain adequate financing on a timely basis or on acceptable terms in the future, we would likely be required to delay, reduce or eliminate one or more of our product development activities, which could cause our business to fail.

The terms of the 20162018 Financing and 2022 Private Placement Financing could impose additional challenges on our ability to raise funding in the future.

 

The 2016 Subscription Agreements2018 SPA contains provisions that we entered intoprovide that until such time as the three lead investors in connection with the 2016 Private Placement2018 Financing impose certain restrictions on our ability to issue equity or debt securities, including the following: (i) until the 60-day anniversarycollectively own less than 20% of the first date on which allSeries G Warrants purchased by them pursuant to the Registrable Securities2018 SPA, the Company is prohibited from effecting or entering into an agreement to effect any issuance by the Company or its subsidiary of Common Stock or securities convertible, exercisable or exchangeable for Common Stock (or a combination of units thereof) involving a Variable Rate Transaction (as defined below) including, but not limited to, an equity line of credit or “At-the-Market” financing facility .

As of January 18, 2023, none of the lead investors for the 2018 Financing have exercised or transferred any of their Series G Warrants. As defined in the 2016 Registration Rights Agreement)(the2018 SPA,2016 Registrable Securities”) are covered by one or more effective registration statements, we may not offer, sell or issue any securities, except for equity awards granted to our directors, officers, employees and service providers under the 2013 Plan, securities issued upon the conversion, exercise or exchange of our convertible securities outstanding prior to the 2016 Private Placement Financing, and securities issued in connection with certain types of strategic transactions; (ii) until the six-month anniversary of the first date on which all the 2016 Registrable Securities are covered by one or more effective registration statements, the 2016 Investors shall have certain notice and participation rights with respect to offers and sales of securities that we may pursue; and (iii) until the earlier of the nine-month anniversary of the first date on which all the 2016 Registrable Securities are covered by one or more effective registration statements and the date on which the 2016 Investors have sold all such 2016 Registrable Securities, we may not effect or enter into an agreement for a VRT, where a “VRTVariable Rate Transactionismeans a transaction in which we (1) issuethe Company (a) issues or sells any debt or equity securities that are convertible securitiesinto, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (A) at (A) a conversion price, exercise price or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of our Common Stock at any time after the initial issuance of such convertible securities;debt or equity securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such convertible securitiesdebt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to ourthe business of the Company or the market for the common stock, other than pursuant toCommon Stock (excluding adjustments under customary anti-dilution provisions) or (b) enters into, or effects a customary “weighted average” anti-dilution provision; or (2) enter intotransaction under, any agreement, (including, without limitation,including, but not limited to, an “equityequity line of credit” or an “at-the-market offering”)credit, whereby we or any subsidiarythe Company may sellissue securities at a future determined price, other than standard and customary “preemptive” or “participation” rights.price. These provisions could make our securities less attractive to investors and could limit our ability to obtain adequate financing on a timely basis or on acceptable terms in the future, which could have significant harmful effects on our financial condition and business and could include substantial limitations on our ability to continue to conduct operations.

The SPA, as amended, entered into in connection with the 2022 Private Placement Financing contains certain restrictions on our ability to conduct subsequent sales of our equity securities and certain business activities. In particular, until the 2022 Notes are paid in full and/or converted in full and the 2022 Warrants are exercised in full, we are prohibited from (i) changing the nature of business, (ii) selling, divesting, acquiring, or changing the structure of any material assets other than in the ordinary course of business; or (iii) negotiating or entering into any variable rate debt transactions that do not contain a floor price that is more than $4.97 or $[●], or 50% of the closing price of the Common Stock on the trading day immediately prior to the First Closing Date and Second Closing Date, respectively; in each instance without each applicable 2022 Note holder’s prior written consent, which shall not be unreasonably withheld.

Our currentobligations under the First Notes are secured by security interests in substantially all of our assets and any future debt facilities or instruments may require usour failure to usecomply with the terms and covenants of the First Notes could result in our limited capital to repay amounts owed and may impose limitations onloss of substantially all of our operations, which could negatively affect our business plans.assets.

 

On September 30, 2013,Our obligations under the First Notes and the related transaction documents are secured by a security interest in substantially all of our assets. As a result, if we entered intodefault on our obligations under such First Notes, the MLSC Loan AgreementFirst Note holders could foreclose on the security interests and liquidate some or all of our assets, which would harm our business, financial condition and results of operations and could require us to reduce or cease operations.

In connection with MLSCthe First Closing, the First Note holders were granted a security interest in substantially all of our assets pursuant to the terms of the Security Agreement. If we fail to make payments on the First Notes when due or otherwise comply with the covenants contained in the First Notes, the First Note holders could declare us in default, in which MLSC has providedevent such holders would have the right to exercise their rights as a secured creditor with respect to our assets that secure the indebtedness, which would force us to suspend operations.

In addition, 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 warranties 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 six (6) months after the First Closing Date or the Second Closing date, as applicable; (ii) our failure to deliver the shares of Common Stock to the 2022 Note holder upon exercise by such holder of its conversion rights under the 2022 Notes; (iii) our loss of the “bid” price for our Common Stock and/or a market and such loss is not cured during the specified cure periods; (iv) our failure to complete an unsecured subordinated loan inuplisting of our Common Stock (“Uplist Transaction”) by February 15, 2023; and (v) upon completion of an Uplist Transaction, our failure to repay the outstanding balance of the 2022 Notes within two days of receipt of a 2022 Note holder’s demand for repayment.

The 2022 Note holders have certain additional rights upon an event of default under such notes, which could harm our business, financial condition, and results of operations and could require us to reduce or cease our operations.

Under the 2022 Notes, the holders have certain rights upon an event of default. Such rights include that, upon an event of default, the 2022 Notes will become immediately due and payable and we will be obligated to pay to each such note holder an amount equal to the Default Premium multiplied by the sum of the outstanding principal amount of $1,000,000 (such loan,such notes plus any accrued and unpaid interest on the MLSC Loan”).unpaid principal amount of such notes to the date of payment, plus any Default Interest and any other amounts owed to the holder under the SPA, or the Default Amount; provided that, upon any subsequent event of default not in connection with the first event of default, such holder shall be entitled to an additional 5% to the Default Premium for each subsequent event of default. At the election of each 2022 Note holder, the Default Amount may be paid in cash or shares of Common Stock equal to the Default Amount divided by the $9.14 (subject to adjustment as more specifically set forth in the 2022 Notes) at the time of payment.

In addition, the 2022 Notes are subject to prepayment penalties, subject to adjustment as a result of certain time-based prepayment premiums set forth in such notes; provided, that, the written consent of the lead investor is not required in connection with a prepayment made from the proceeds of an Uplist Transaction. The MLSC Loan bears2022 Notes bear interest on the unpaid principal balance at a rate equal to ten percent (10%) (computed on the basis of 10%the actual number of days elapsed in a 360-day year) per annum and willaccruing from July 6, 2022 until such notes become fully due and payable on the earlierMaturity Date or upon their conversion, acceleration or by prepayment. Any amount of principal or interest on the 2022 Notes which is not paid when due will bear interest at the rate of the lesser of (i) September 30, 2018;eighteen percent (18%) per annum or (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. Default Interest.

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 ablesufficient funds to obtain. Any failure to make paymentspay the Default Amount and, as requireddescribed above, this could trigger rights under the MLSC Loan Agreement would constitute an event of default,security interest granted to the holders and could result in among other things, MLSC’s accelerationthe foreclosure of all amounts due thereunder.

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Further, the MLSC Loan Agreement restricts our usetheir security interests and liquidation 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.assets. The exercise of any of these rights upon an event of default could substantially harm our financial condition, substantially dilute our other stockholders and force us to reduce or cease operations and cause our stockholders to lose all or a part of their investment in the Company.

General economic factors may adversely affect our financial performance.

General economic conditions may adversely affect our financial performance. In the United States, changes in interest rates, changes in fuel and other energy costs, weakness in the housing market, inflation or deflation or expectations of either inflation or deflation, higher levels of unemployment, decreases in discretionary consumer spending or consumer demand, unavailability or limitations of consumer credit, higher consumer debt levels or efforts by consumers to reduce debt levels, higher tax rates and other changes in tax laws, overall economic slowdown, changes in consumer desires affecting demand for the products we sell and other economic factors could adversely affect consumer demand for the products we sell, change the mix of products we sell to a mix with a lower average gross margin and result in slower inventory turnover. Higher interest rates, transportation costs, inflation, higher costs of labor, insurance and healthcare, foreign exchange rates fluctuations, higher tax rates and other changes in tax laws, changes in other laws and regulations and other economic factors in the United States or internationally can increase our cost of sales and operating, selling, general and administrative expenses, decrease sales, and otherwise adversely affect our operations and operating results. These factors affect not only our operations, but also the operations of suppliers from whom we purchase goods and services, a condition that can result in an increase in the cost to us of the goods we sell to customers.

The COVID-19 pandemic could continue to affect our suppliers and employees, and cause disruptions in current and future plans for operations and expansion.

The COVID-19 pandemic may continue to directly and indirectly adversely impact our business, financial condition and operating results. The extent to which this will continue will depend on numerous evolving factors that are highly uncertain, rapidly changing and cannot be predicted with precision or certainty at this time.

Our business may continue to be disrupted due to the costs incurred as a result of additional necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations, including enhanced cleaning processes, protocols designed to implement appropriate social distancing practices, and/or adoption of additional wage and benefit programs to assist employees. We also cannot predict the effect of the COVID-19 pandemic on our supply chain’s reliability and costs.

In addition, our business and operations, and the operations of our suppliers, may continue to be adversely affected by the COVID-19 pandemic. The pandemic, including the related response, could cause disruptions due to potential suspension or slowdown of activities at our third-party suppliers, manufacturing delays, or increased prices implemented by our suppliers. The COVID-19 pandemic has disrupted nearly every aspect of the global supply chain, including the manufacturing or delivery of some of the key supplies used in our tests. We currently utilize third parties to, among other things, manufacture raw materials. If any third party involved in the production of our products, product candidates, or raw materials is adversely impacted by restrictions resulting from the coronavirus outbreak, our supply chain may be disrupted, limiting our ability to manufacture products for research and development operations, clinical trials and, in the case of AC5® Advanced Wound System) and AC5 Topical Hemostat, commercialization.

Finally, while we believe that we currently have sufficient supply of our products to continue commercialization efforts, our products and product candidates or the materials contained therein (such as the Active Pharmaceutical Ingredients (“APIs”) for our AC5 product line) are manufactured from facilities in areas impacted by the coronavirus, which could result in shortages due to ongoing efforts to address the outbreak. If any of the foregoing were to occur, it could materially adversely affect our future revenues, financial condition, profitability, and cash flows.

Unfavorable global political or economic conditions could adversely affect our business, financial condition or results of operations.

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The global credit and financial markets have experienced severe volatility and disruptions in the past several years. A severe or prolonged economic downturn, such as the global financial crisis, could result in a variety of risks to our business, including our ability to raise additional capital when needed on acceptable terms, if at all. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services.

Geopolitical conflicts could potentially affect our sales and disrupt our operations and could have a material adverse impact on the Company.

Geopolitical conflicts, including the recent war in Ukraine, could adversely impact our operations or those of our customers. The extent to which these events impact our operations and those of our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence. If the uncertainty surrounding geopolitical conflicts and in the global marketplace continues, or if we, or any of our customers encounter any disruptions to our or their respective operations or facilities, then we or they may be prevented or delayed from effectively operating our or their business, respectively, and the marketing and sale of our products and our financial results could be adversely affected.

Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from North American and European leaders. These events are currently escalating and creating increasingly volatile global economic conditions. Related sanctions, export controls or other actions have been or may in the future be initiated by nations including the United States, the European Union or Russia (e.g., potential cyberattacks, disruption of energy flows, etc.), which could adversely affect our business and/or our supply chain and other third parties with whom we conduct business. Furthermore, the current military conflict between Russia and Ukraine could disrupt or otherwise adversely impact our operations and those of third parties upon which we rely. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

Our short operating history may hinder our ability to successfully meet our objectives.

 

We are transitioning from being strictly a development stage company subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies in evolving markets.markets to a combination commercial stage and development stage company. 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.candidates, and funding one clinical trial. We have not demonstrated our ability to successfully complete large-scale, pivotal clinical trials, reliably obtain regulatory approvals,marketing authorizations, manufacture a commercial scale product or arrange for a third partythird-party to do so on our behalf, or conductand we have only recently begun to generate revenue from commercial sales of our first product, AC5®Advanced Wound System, and marketing activities necessary forthere can be no assurance that we will be successful product commercialization.in generating increased revenue.

 

Because of our limited operating history, we have limited insight into trends that may emerge and affect our business, and errors may be made in developing an approach to address those trends and the other challenges faced by development stage companies. Failure to adequately respond to such trends and challenges could cause our business, results of operations and financial condition to suffer or fail. Further, our limited operating history may make it difficult for our stockholders to make any predictions about our likelihood of future success or viability.

If we are not able to attract and retain qualified management and scientific personnel, we may fail to develop our technologies and product candidates.

 

Our future success depends to a significant degree on the skills, experience and efforts of the principal members of our scientific and management personnel. These members include Terrence Norchi, MD, our President and Chief Executive Officer. The loss of Dr. Norchi or any of our other key personnel could harm our business and might significantly delay or prevent the achievement of research, development or business objectives. Further, our operation as a public company will require that we attract additional personnel to support the establishment of appropriate financial reporting and internal controls systems. Competition for personnel is intense. We may not be able to attract, retain and/or successfully integrate qualified scientific, financial and other management personnel, which could materially harm our business.

If we fail to properly manage any growth we may experience, our business could be adversely affected.

 

We anticipate increasing the scale of our operations as we seek to develop our product candidates, including hiring and training additional personnel and establishing appropriate systems for a company with larger operations. The management of any growth we may experience will depend, among other things, upon our ability to develop and improve our operational, financial and management controls, reporting systems and procedures. If we are unable to manage any growth effectively, our operations and financial condition could be adversely affected.

If we fail to maintain appropriate internal controls in the future, we may not be able to report our financial results accurately, which may adversely affect our stock price and our business.

We have identified material weaknesses in

Our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting requires the commitment of significant financial and managerial resources. Internal control over financial reporting whichhas inherent limitations, including human error, the possibility that controls could ifbe circumvented or become inadequate because of changed conditions, and fraud. If we are unable to maintain effective internal controls, we may not remediated,have adequate, accurate or timely financial information, and we may be unable to meet our reporting obligations as a publicly traded company or comply with the requirements of the SEC or the Sarbanes-Oxley Act of 2002. This could result in material misstatementsa restatement of our financial statements, the imposition of sanctions, including the inability of registered broker dealers to make a market in our financial results.

Our managementstock, or investigation by regulatory authorities, all of which is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) underexacerbated by the Securities Exchange Actrecent determination of 1934, as amended (the “Exchange Act”). As disclosed in Item 9A of Part II of our Annual Report on Form 10-K and Item 4 of Part I of our Quarterly Reports on Form 10-Q filed with the SEC, management has identifieda material weaknesses in our disclosure controls and procedures andweakness related to our internal controlcontrols over financial reporting as disclosed herein. Any such action or other negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory requirements or by disclosure of September 30, 2015. A material weakness in internalan accounting, reporting or 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, 2015, based on criteria set forth byissue could adversely affect the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework.

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We have taken steps to remediate certain material weaknesses we had identified in our internal control over financial reporting. 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 markettrading price of our stock could decline significantly. Moreover,and our reputation with lenders, investors, securities analysts and others may be adversely affected.business.

We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.

 

We maintain sensitive data pertaining to our Company on our computer networks, including information about our research and development activities, our intellectual property and other proprietary business information. Our internal computer systems and those of third parties with which we contract may be vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures, despite the implementation of security measures. System failures, accidents or security breaches could cause interruptions to our operations, including material disruption of our research and development activities, result in significant data losses or theft of our intellectual property or proprietary business information, and could require substantial expenditures to remedy. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications or inappropriate disclosure of confidential or proprietary information, we could incur liability and our research and development programs could be delayed, any of which would harm our business and operations.

 

Legal, political and economic uncertainty surrounding the exit of the United Kingdom from the European Union is a source of instability and uncertainty.

Legal, political and economic uncertainty surrounding the exit of the United Kingdom from the European Union (“Brexit”) is a source of instability and uncertainty.

The uncertainty concerning the U.K’s legal, political and economic relationship with the E.U. after the Transition Period may be a source of instability in the international markets, create significant currency fluctuations, and/or otherwise adversely affect trading agreements or similar cross-border co-operation arrangements (whether economic, tax, fiscal, legal, regulatory or otherwise).

These developments, or the perception that any of them could occur, have had, and may continue to have, a significant adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and limit the ability of key market participants to operate in certain financial markets. In particular, it could also lead to a period of considerable uncertainty in relation to the U.K. financial and banking markets, as well as on the regulatory process in Europe. Asset valuations, currency exchange rates and credit ratings may also be subject to increased market volatility.

If the U.K. and the E.U. are unable to negotiate acceptable trading and customs terms or if other E.U. Member States pursue withdrawal, barrier-free access between the U.K. and other E.U. Member States or among the European Economic Area (“E.E.A.”) overall could be diminished or eliminated. The long-term effects of Brexit will depend on any agreements (or lack thereof) between the U.K. and the E.U. and, in particular, any arrangements for the U.K. to retain access to E.U. markets after the Transition Period. Such a withdrawal from the E.U. is unprecedented, and it is unclear how the U.K. access to the European single market for goods, capital, services and labor within the E.U., or single market, and the wider commercial, legal and regulatory environment, will impact our U.K. operations.

We may also face new regulatory costs and challenges that could have an adverse effect on our operations and development programs. For example, the U.K. could lose the benefits of global trade agreements negotiated by the E.U. on behalf of its members, which may result in increased trade barriers that could make our doing business in the E.U. and the E.E.A. more difficult. There may continue to be economic uncertainty surrounding the consequences of Brexit, which could adversely affect our financial condition, results of operations, cash flows and market price of our Common Stock.

Risks Related to the Development and Commercialization of our Product Candidates

The commercial success of AC5® Advanced Wound System will depend upon the degree of its market acceptance by patients, physicians, healthcare payors and others in the medical community. If AC5® Advanced Wound System does not achieve an adequate level of market acceptance, we may not generate sufficient revenues to achieve or maintain profitability.

AC5® Advanced Wound System is a novel use in the clinical fields in which it is marketed and may not gain or maintain market acceptance by patients, physicians, healthcare payors or others in the medical community. Additionally, we believe that we will need to educate physicians and other healthcare providers about AC5® Advanced Wound System in order to for these providers to administer AC5® Advanced Wound System. If we are unsuccessful in educating these practitioners about AC5® Advanced Wound System, we do not expect to achieve an appropriate level of market acceptance for AC5® Advanced Wound System. We could incur substantial and unanticipated additional expense in an effort to increase market acceptance, which would increase the cost of commercializing AC5® Advanced Wound System and could limit its commercial success and result in lower-than-expected revenues. We believe the degree of market acceptance of AC5® Advanced Wound System will depend on a number of factors, including:

its efficacy and potential advantages over other treatments,

the extent to which physicians are successful in treating patients with other products or treatments,

the extent to which physicians and patients experience similar or improved clinical results to that reported on the approved product labeling,

market acceptance of the cost at which we sell AC5® Advanced Wound System,

the timing of the release of competitive products or treatments,

our marketing and sales resources, the quantity of our supplies of AC5® Advanced Wound System and our ability to establish a distribution infrastructure for AC5® Advanced Wound System, and

whether third-party and government payors cover or reimburse for AC5® Advanced Wound System, and if so, to what extent and in what amount.

If market acceptance of AC5® Advanced Wound System is adversely affected by any of these or other factors, then sales of AC5® Advanced Wound System may be reduced and our business will be materially harmed.

We are seeking reimbursement arrangements with privately managed care organizations and government payors and additional third-party payors. If we are unable to obtain adequate reimbursement from third-party payors, or acceptable prices, for AC5® Advanced Wound System, our revenues and prospects for profitability will suffer.

Our future revenues and ability to become profitable will depend heavily upon the availability of adequate reimbursement for the use of AC5® Advanced Wound System from government-funded and private third-party payors. Reimbursement by a third-party payor depends on a number of factors, including the third-party payor’s determination that use of a product is:

a covered benefit under its health plan,

safe, effective and medically necessary,

appropriate for the specific patient,

cost effective, and

neither experimental nor investigational.

Obtaining reimbursement approval for AC5® Advanced Wound System from each government-funded and private third-party payor is a time-consuming and costly process, which in some cases requires us to provide to the payor supporting scientific, clinical and cost-effectiveness data for AC5® Advanced Wound System’s use. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement.

Even when a third-party payor determines that a product is generally eligible for reimbursement, third-party payors may impose coverage limitations that preclude payment for some product uses that are approved by the FDA or similar authorities or impose patient co-insurance or co-pay amounts that may result in lower market acceptance and which would lower our revenues. Some payors establish prior authorization programs and procedures requiring physicians to document several different parameters, which may impede patient access to therapy. Moreover, eligibility for coverage does not necessarily mean that AC5® Advanced Wound System will be reimbursed in all cases or at a rate that allows us to sell AC5® Advanced Wound System at an acceptable price adequate to make a profit or even cover our costs. If we are not able to obtain coverage and adequate reimbursement promptly from third-party payors for AC5® Advanced Wound System, our ability to generate revenues and become profitable will be compromised.

The scope of coverage and payment policies varies among private third-party payors, including indemnity insurers, employer group health insurance programs and managed care plans. These third-party payors may base their coverage and reimbursement on the coverage and reimbursement rate paid by carriers for Medicare beneficiaries, which are traditionally at a substantially discounted rate. Furthermore, many such payors are investigating or implementing methods for reducing healthcare costs, such as the establishment of capitated or prospective payment systems. Cost containment pressures have led to an increased emphasis on the use of cost-effective products by healthcare providers. If third-party payors do not provide adequate coverage or reimbursement for AC5® Advanced Wound System, it could have a negative effect on our revenues, results of operations and liquidity.

Applications for regulatory marketing authorization for commercialization of our additional product candidates or elements of our supply chain may not be accepted, or if accepted, may be voluntarily withdrawn or eventually rejected, and the future success of our business is significantly dependent on the success of our being able to obtain regulatory marketing authorization for our development stage candidates.

For example, on July 17, 2017, we filed a 510(k) notification with the FDA for AC5 Topical Gel. As previously announced on December 18, 2017, we voluntarily withdrew the submission after receiving a communication from the FDA near the end of the agency’s 90-day review period for a final decision on 510(k) notifications. The communication contained questions for which a comprehensive response could not be provided in the limited review time remaining on the submission. Given that it was not possible to respond in the time available, the Company made the decision to withdraw the 510(k) notification but noted at the time that it remained committed to continued collaboration with the FDA to appropriately address the outstanding questions and planned to submit a new 510(k) notification as soon as possible following further discussion with the agency. On March 12, 2018, we announced that we were utilizing the FDA’s pre-submission process to submit a proposed development strategy to the FDA to address the agency’s comments on our 510(k) notification. As indicated in that March 12, 2018, announcement, we determined that providing additional data to the FDA would be the most expeditious path forward for addressing the FDA’s comments, subject to any further comments that we may receive from the FDA.

On May 8, 2018, we announced that the Company would initiate the previously disclosed study designed to address FDA comments on Arch’s previous 510(k) notification for our AC5 Topical Gel. The agency provided feedback via the pre-submission process and indicated that the proposed study design was acceptable to support our future marketing application. On June 15, 2018, we further announced that we completed enrollment for our human skin sensitization study and that applications of our AC5 Topical Gel were underway for all subjects.

On October 1, 2018, we announced that the Company submitted a 510(k) notification to the FDA for our AC5 Topical Gel (AC5) and received acknowledgment from the FDA that the submission has been received. On December 17, 2018, we announced that the 510(k) premarket notification for AC5 Topical Gel has been reviewed and cleared by the FDA.

Our business plan is dependent on the success of our initialdevelopment stage product candidate, AC5.candidates.

 

Our business is currently focused almost entirely on the development and commercialization of oneour initial product candidate, AC5.candidates and products (“AC5 Devices”). Our reliance on one primary product candidateAC5 Devices means that, if we are not able to obtain both regulatory approvalsmarketing authorization and market acceptance of thatthose product candidates, our chances for success will be significantly reduced. We are also less likely to withstand competitive pressures if any of our competitors developsdevelop and obtainsobtain regulatory approvalmarketing authorization for similar products or certification for a similar product faster than we can orproducts that is otherwisemay be more attractive to the market than AC5.market. Our current dependence on one product candidateAC5 Devices increases the risk that our business will fail if our development efforts for that product candidatethose products experience delays or other obstacles or are otherwise not successful.

The Chemistry, Manufacturing and Control (“CMC”(CMC) process for our commercial product and product candidates may be challenging.

 

Because of the complexity of our lead product candidate,candidates, the CMC process, including but not limited to product scale-up activities and cGMP manufacturing for human use, may be difficult to complete successfully within the parameters required by the FDA or its foreign counterparts. Peptide formulation optimization is particularly challenging, and any delays could negatively impact our ability to conduct clinical trials and our subsequent commercialization timeline. Furthermore, we have, and the third parties with whom we may establish relationships may also have, limited experience with attempting to commercialize a self-assembling peptide as a medical device, which increases the risks associated with completing the CMC process successfully, on time, or within the projected budget. Failure to complete the CMC process successfully would impact our ability to start acomplete product development activities, such as conducting clinical trialtrials and submitting applications for regulatory approval, which could severely limitaffect the long-term viability of our business.

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Our principal product candidate isAC5 Devices are inherently risky because it isthey are based on novel technologies.

 

We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of AC5AC5® Devices creates significant challenges with respect to product development and optimization, engineering, manufacturing, scale-up, quality systems, pre-clinical in vitro and in vivo testing, government regulation and approval, third-party reimbursement and market acceptance. Our failure to overcome any one of those challenges could harm our operations, commercialization efforts, ability to complete aadditional clinical trial,trials, and overall chances for success.

Any changes in our supply chain, including to the third-party contract manufacturers, service providers, or other vendors, or in the processes that they employ could adversely affect us.

We are dependent on third parties in our supply chain, including manufacturers, service providers, and other vendors, and the processes that they employ to make major and minor components of our products, and this dependence exposes us to risks associated with regulatory requirements, delivery schedules, manufacturing capability, quality control, quality assurance and costs. We make periodic changes within our supply chain, for example, as our business needs evolve; and/or if a third party does not perform as agreed or desired; and/or if we decide to add an additional manufacturer, service provider, or vendor where we were previously single sourced; and/or if processes are altered to meet evolving scale requirements. For instance, the Company harmonized its U.S. and European product supply chains by adding a supplier and additional manufacturing processes to the list of approved suppliers and processes for the production of AC5® Advanced Wound System that is commercially available in the United States. The Company filed documentation with the FDA related to these supply chain changes and announced on March 23, 2020, that the FDA provided the required clearance to market with the supply chain and manufacturing process changes. We cannot yet provide assurance that the changes or resulting product will prove acceptable to us.

The manufacturing, production, and sterilization methods that we intend to be utilized are detailed and complex and are a difficult process to manage.

 

We intend to utilize third partythird-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 and/or obligations exist in many foreign jurisdictions. If our contractors or we fail to comply with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity, and our operations could be adversely affected.

If the FDA or similar foreign agencies or intermediaries impose requirements or an alternative product classification more onerous than we anticipate, our business could be adversely affected.

 

The FDA and other regulatory authorities or related bodies separately determine the classification of our products and product candidates. The development plan for our lead product candidatecandidates 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 BodyEuropean notified body (which is a private commercial entity designated by the national government of ana 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 Topical Hemostat fulfills the definition of a medical device within the EU, and will beit was classified as such in consideration forof the CE mark, designation. However,receipt of which was announced by the Company on April 13, 2020. The FDA and other applicable foreign agencies, including European Competent Authorities, will have authorityalso determined AC5 Topical Gel, which was later renamed AC5® Advanced Wound System, to finally determine the regulatory route for our product candidates in their jurisdictions.be a medical device. If the FDA or similar foreign agencies or intermediaries deem our productproducts to be a member of a category other than a medical device, such as a drug or biologic, or impose additional requirements on our pre-clinical and clinical development than we presently anticipate, financing needs would increase, the timeline for product approval would lengthen, the program complexity and resource requirements world increase, and the probability of successfully commercializing a product would decrease. Any or all of those circumstances would materially adversely affect our business.

We are subject to extensive and dynamic medical device regulations outside of the United States, which may impede or hinder the approval, or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of products that were previously approved.

In the European Union, we are required to comply with applicable medical device directives, including the Medical Devices Directive, and obtain CE mark in order to market medical device products. The CE mark is applied following approval from an independent notified body or declaration of conformity. As is the case in the United States, the process of obtaining marketing approval or clearance from comparable agencies in foreign countries for new products, or with respect to enhancements or modifications to existing products, could:

take a significant period of time;

require the expenditure of substantial resources;

involve rigorous pre-clinical and clinical testing;

require extensive post-marketing surveillance;

require changes to products; and

result in limitations on the indicated uses of products.

In addition, exported devices are subject to the regulatory requirements of each country to which the device is exported. Most foreign countries possess medical devices regulations and require that they be applied to medical devices before they can be commercialized.

There can be no assurance that we will receive the required approvals for our products on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive post-market study requirements.

Our global regulatory environment is becoming increasingly stringent and unpredictable, which could increase the time, cost and complexity of obtaining marketing authorization for our products, as well as the clinical and regulatory costs of supporting those approvals. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years and other countries have expanded existing regulations. Certain regulators are exhibiting less flexibility by requiring, for example, the collection of local preclinical and/or clinical data prior to approval. While harmonization of global regulations has been pursued, requirements continue to differ significantly among countries. We expect the global regulatory environment to continue to evolve, which could impact our ability to obtain future approvals for our products and increase the cost and time to obtain such approvals. By way of example, the European Union regulatory bodies recently implemented a new Medical Device Regulation (“MDR”). The MDR changes several aspects of the existing regulatory framework, such as clinical data requirements, and introduces new ones, such as Unique Device Identification (“UDI”). We, and the Notified Bodies who will oversee compliance to the new MDR, face uncertainties in the upcoming years as the MDR is rolled out and enforced, creating risks in several areas, including the CE mark process, data transparency and application review timetables.

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 approvalsmarketing authorization could be adversely impacted.

 

Our management has limited experience in conducting preclinical development activities and clinical trials. As a result, we have relied and will need to continue to rely on third partythird-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 partythird-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 approvalsmarketing authorization for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates. Any of those circumstances would materially harm our business and prospects.

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Any clinical trials that are planned or are conducted on our flagship product and additional product candidates may not start or may fail.

 

Clinical trials are lengthy, complex and extremely expensive processes with uncertain expenditures and results and frequent failures. While the Company haswe have completed patient enrollment and treatment in itsour first clinical trial in Western Europe, clinical trials that are planned or which have or shall commence for any of our product candidates could be delayed or fail for a number of reasons, including if:

 

the FDA or other regulatory authorities, or other relevant decision making

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, enroll more slowly than anticipated or remain in our trials;

we fail to produce necessary amounts of the product or product candidate;

subjects experience an unacceptable rate of efficacy of the product or product candidate;

subjects experience an unacceptable rate or severity of adverse side effects, demonstrating a lack of safety of the product or 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

 

sufficient suitable subjects do not enroll, enroll more slowly than anticipated or remain in our trials;

 

we fail to produce necessary amounts of product candidate;

prohibit us from using some or all of the resulting data in support of our marketing applications with the FDA or other applicable agencies;

 

subjects experience an unacceptable rate of efficacy of the product candidate;

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 cGMP or other applicable requirements;

 

subjects experience an unacceptable rate or severity of adverse side effects, demonstrating a lack of safety of the product candidate;

third-party contractors become debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements;

 

any portion of the trial or related studies produces negative or inconclusive results or other adverse events;

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;

 

reports from preclinical or clinical testing on similar technologies and products raise safety and/or efficacy concerns;

one or more IRB refuses to approve, suspends or terminates a trial at an investigational site, precludes enrollment of additional subjects, or withdraws its approval of the trial;

 

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;

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;

 

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;

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

 

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.

the FDA or other regulatory authorities impose prohibitive post-marketing restrictions on any of our product candidates that attain marketing authorization.

 

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.

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We cannot market and sell any additional product candidate in the U.S. or in any other country or region if we fail to obtain the necessary regulatory approvalsmarketing authorization, clearances or certifications from applicable government agencies.

 

We cannot sell our additional product candidates in any country until regulatory agencies grant marketing approval, clearance or other required certifications.certification(s). 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 otheradditional product candidatecandidates we may pursue, which we may never be able to do, it would likely be a process that takes many years to achieve.

 

To obtain marketing approvals in the U.S. for our product candidates, we believe that we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to demonstrate to the FDA that the product candidate is safe and effective for each indication for which we seek approval. As described above, many factors could cause those trials to be delayed or to fail.

 

We believe that the pathway to marketing approval in the U.S. for our lead product candidate for internal use will likely be classified as a Class III medical device and require the process of FDA Premarket Approval (“PMA”) 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 commercializemarket 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 commercializemarket directly, such products’ prospects will be harmed.

AnyAC5® Advanced Wound System and any other product for which we obtain required regulatory approvals could bemarketing authorization are subject to post-approval regulation, and we may be subject to penalties if we fail to comply with such post-approval requirements.

 

AnyAC5® Advanced Wound System and any other 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 consumingtime-consuming post-marketing approval testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of previously unknown problems with any approved product candidate or related manufacturing processes, or failure to comply with regulatory requirements, may result in consequences to us such as:

 

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restrictions on the marketing or distribution of a product, including refusals to permit the import or export of the product;

 

the requirement to include warning labels on the products;

 

restrictions on the marketing or distribution of a product, including refusals to permit the import or export of the product;

withdrawal or recall of the products from the market;

 

the requirement to include warning labels on the products;

refusal by the FDA or other regulatory agencies to approve pending applications or supplements to approved applications that we may submit;

 

withdrawal or recall of the products from the market;

suspension of any ongoing clinical trials;

 

refusal by the FDA or other regulatory agencies to approve pending applications or supplements to approved applications that we may submit;

fines, restitution or disgorgement of profits or revenue;

 

suspension of any ongoing clinical trials;

suspension or withdrawal of marketing approvals or certifications; or

 

fines, restitution or disgorgement of profits or revenue;

suspension or withdrawal of marketing approvals or certifications; or

civil or criminal penalties.

civil or criminal penalties.

 

If any of our product candidates achievesachieve 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 partythird-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 additional 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 partythird-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 candidatecandidates utilizing the manufacturing methods that are required to produce thatour product candidate,candidates, and our product candidates will compete with other product candidates for access to qualified manufacturing facilities. If we have difficulty locating third partythird-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 partythird-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.

 

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Reliance on third partythird-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;

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;

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;

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 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 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 partythird-party manufacturers to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval or other required certifications of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business, financial condition and operations.

Materials necessary to manufacture our product candidates may not be available on time, on commercially reasonable terms, or at all, which may delay or otherwise hinder the development and commercialization of those products and product candidates.

 

We will rely on the manufacturers of our product and product candidates to purchase from third partythird-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 approvalmarketing authorization of our product candidates wouldwill 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 approvalsauthorizations 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 approvalsauthorizations are obtained forto market any of our product candidates, then we may consider entering into additional collaboration arrangements with medical technology, pharmaceutical or biotechnology companies and/or seek to establish strategic relationships with marketing partners for the development, sale, marketing and/or distribution of our products within or outside of the U.S. If we elect to expand our current relationship with NUIG and/relationships 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.

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We compete with other pharmaceutical and medical device companies, including companies that may develop products that make our product and 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.candidates. Further, most of our competitors have greater resources or capabilities and greater experience in the development, approval and commercialization of medical devices or other products than we do. We may not be able to compete successfully against them. We also compete for funding with other companies in our industry that are focused on discovering and developing novel improvements in surgical bleeding prevention.

 

We anticipate that competition in our industry will increase. In addition, the healthcare industry is characterized by rapid technological change, resulting in new product introductions and other technological advancements. Our competitors may develop and market products that render our lead product candidate or any future product candidate we may seek to develop non-competitive or otherwise obsolete. Any such circumstances could cause our operations to suffer.

If we fail to generate market acceptance of our product and product candidates and establish programs to educate and train surgeons as to the distinctive characteristics of our product and product candidates, we will not be able to generate revenues on our product candidates.

 

Acceptance in the marketplace of AC5® Advanced Wound System and our lead product candidatecandidates depends in part on our and our third partythird-party contractors’ ability to establish programs for the training of surgeons in the proper usage of thatthose product candidate,candidates, which will require significant expenditure of resources. Convincing surgeons to dedicate the time and energy necessary to properly train to use new products and techniques is challenging, and we may not be successful in those efforts. If surgeons are not properly trained, they may ineffectively use our product candidates. Such misuse could result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. Accordingly, even if our product candidates are superior to alternative treatments, our success will depend on our ability to gain and maintain market acceptance for those product candidates among certain select groups of the population and develop programs to effectively train them to use those products. If we fail to do so, we will not be able to generate revenue from product sales and our business, financial condition and results of operations will be adversely affected.

We face uncertainty related to pricing, reimbursement and healthcare reform, which could reduce our potential revenues.

 

If our product candidates are approved for commercialization, any sales will depend in part on the availability of 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.

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The use of our product and product candidates in human subjects may expose us to product liability claims, and we may not be able to obtain adequate insurance or otherwise defend against any such claims.

 

We face an inherent risk of product liability claims and currently have product liability and clinical trial liability coverage. We will need to obtain additional product liability insurance coverage if and when we begin commercialization of any of our product candidates. If claims against us exceed any applicable insurance coverage we may obtain, then our business could be adversely impacted. Regardless of whether we would be ultimately successful in any product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources, which could significantly harm our business.

 

Risks Related to our Intellectual Property

If we are unable to obtain and maintain protection for our intellectual property rights that we own, seek, or have licensed from other parties, the value of our technology and products will be adversely affectedaffected.

 

Our success will depend in large part on our ability to obtain and maintain protection in the U.S. and other countries for the intellectual property rights covering or incorporated into our technology and products. The ability to obtain patents covering technology in the field of medical devices generally is highly uncertain and involves complex legal, technical, scientific and factual questions. We may not be able to obtain and maintain patent protection relating to our technology or products. Many of our owned or licensed patent applications are pending. Even if issued, patents issued or licensed to us may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, or determined not to cover our product candidates or our competitors’ products, which could limit our ability to stop competitors from marketing identical or similar products. OneBecause our patent portfolio includes certain patents and applications that are in-licensed on a non-exclusive basis, other parties may be able to develop, manufacture, market and sell products with similar features covered by the same patent rights and technologies, which in turn could significantly undercut the value of any of our product candidates and adversely affect our business. Our licensed Massachusetts Institute of Technology and Versitech Limited (“MIT”) European patentspatent No. 1879606 was recently opposed ,opposed; however, this patent was maintained in amended form following an administrative hearing. Both parties appealed this decision. MIT granted European patent EP1879606, to which Arch Therapeutics has an exclusive license, was the subject of a hearing at the European Patent Office (the “EPO”) Board of Appeal (the “Appeal Board”) on November 26, 2021 as a result of an appeal by MIT to obtain broader claim scope than was upheld by the European Patent Opposition Division in 2016 and appeals by opponents for the upheld scope to be denied to MIT. At the oral proceedings, in light of concerns expressed by the Appeal Board, MIT withdrew its appeal and the affected claims, resulting in a formal revocation of the European patent. There is a pending divisional patent application in which the concerns that the Appeal Board expressed can be addressed. MIT can file further divisional patent applications to seek additional claim scope. There is no guarantee that any divisional patent application will result in a granted patent or that any granted patent will not be opposed and revoked. The Appeal Board’s decision is in relation to the granted European patent EP1879606 and the various national patents that are derived therefrom, and it has no legal significance outside of Europe except in Hong Kong. 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 andand/or for which a party is using our proprietary information, trade secrets andand/or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. may be less willing to protect trade secrets. Costly and time consumingtime-consuming litigation could be necessary to seek to defend, enforce andand/or determine the scope of our intellectual property rights, and failure to obtain or maintain protection thereof could adversely affect our competitive business position and results of operations.

We do not have exclusive rights to certain intellectual property asMany of our owned patent applications are pending, and our patent portfolio includes certain patents and applications that are jointly owned with our collaborators and others that have been in-licensed on a non-exclusive basis.

 

As of June 15, 2016,January 18, 2023, we either own or license from others a number ofseveral 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.

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Our patent portfolio includes a total of 22foreign patents and applications assigned to Arch Biosurgery, Inc. This portfolio covers self-assembling peptides and methods of use thereof, and includes four patents that have been either allowed, issued or granted, and eighteen pending applications in nine jurisdictions.foreign patent applications.

 

We have also entered into a license agreement withMassachusetts Institute of Technology (“MIT”) and Versitech Limitedwith MIT pursuant to which we have been granted exclusive rights under one portfoliotwo portfolios of patents and non-exclusive rights under another portfoliothree portfolios of patents.

The portfoliotwo portfolios exclusively licensed from MITand Versitech Limited includes thirteenMIT include a total of 22 patents that have been either allowed, issued or granted and ninepending applications that are pendingdrawn to self-assembling peptides, formulations and methods of use thereof and self-assembling peptidomimetics and methods of use thereof in a total of nine jurisdictions.

The portfolio non-exclusively licensed from MIT includes a number of PCT applications which have now entered the nationalportfolios include five issued U.S. patents (US 9,511,113; US 9,084,837; US 10,137,166; US 9,327,010; and regional phases outside of the US including nine9,364,513) that expire between 2026 and 2027 (absent patent term extension), as well as fifteen patents that have been either allowed, issued or granted in foreign jurisdictions.

The three jurisdictionsportfolios non-exclusively licensed from MIT include a number of US and foreign applications, including three issued U.S. patents (US 7,846,891; US 7,713,923; and US 8,901,084) that expire between 2016 and 2027not before 2024 (absent patent term extension), and two pending patent applicationsas well as four patents that have been issued or granted in twoforeign jurisdictions.

If we lose certain intellectual property rights owned by third parties and licensed to us, our business could be materially harmed.

 

We have entered into certain in-license agreements with MIT and with certain other third parties and may seek to enter into additional in-license agreements relating to other intellectual property rights in the future. To the extent we and our product candidates rely heavily on any such in-licensed intellectual property, we are subject to our and the counterparty’s compliance with the terms of such agreements in order to maintain those rights. Presently, we, our lead product candidatecandidates and our business plans are dependent on the patent and other intellectual property rights that are licensed to us under our license agreement with MIT. Although that agreement has a durational term through the life of the licensed patents, it also imposes or imposed certain diligence, capital raising, and other obligations on us, our breach of which could permit MIT to terminate the agreement. Further, we are responsible for all patent prosecution and maintenance fees under that agreement, and a failure to pay such fees on a timely basis could also entitle MIT to terminate the agreement. Any failure by us to satisfy our obligations under our license agreement with MIT or any other dispute or other issue relating to that agreement could cause us to lose some or all of our rights to use certain intellectual property that is material to our business and our lead product candidate,candidates, which would materially harm our product development efforts and could cause our business to fail.

If we infringe or are alleged to infringe the intellectual property rights of third parties, our business and financial condition could suffer.

 

Our research, development and commercialization activities, as well as any product candidates or products resulting from those activities, may infringe or be accused of infringing a patent or other intellectual property under which we do not hold a license or other rights. Third parties may own or control those patents or other rights in the U.S. or abroad and could bring claims against us that would cause us to incur substantial time, expense, and diversion of management attention. If a patent or other intellectual property infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales, if any, of the applicable product or product candidate that is the subject of the suit. In order to avoid or settle potential claims with respect to any of the patent or other intellectual property rights of third parties, we may choose or be required to seek a license from a third partythird-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.

 

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Risks Related to Ownership of our Common Stock

We have pursued an Uplist Transaction by filing an application to list our Common Stock to trade on the Nasdaq Capital Market. We may not satisfy the listing requirements and thereby consummate an Uplist Transaction, including the requirement to have sufficient capital to satisfy our working capital requirements for at least one year, and the minimum bid price requirement to list on the Nasdaq Capital Market. In the event we fail to consummate an Uplist Transaction and list our Common Stock on the Nasdaq Capital Market, such failure may inhibit or preclude our ability to raise additional financing.

We have committed to pursue an Uplist Transaction. Accordingly, we have filed an application to list our Common Stock on the Nasdaq Capital Market. To successfully list our Common Stock, we are required to satisfy certain Nasdaq listing requirements, including having sufficient capital to satisfy our working capital requirements for at least one year, achieving a minimum bid price for our Common Stock, among other requirements relating to stockholder equity, market value of listed securities and number of market makers and stockholders. If we fail to meet any of those requirements, our application to list our Common Stock on the Nasdaq Capital Market will be denied. No assurances can be given that we will satisfy the listing requirements. If our application is not successful, our Board of Directors will weigh the available alternatives to successfully consummate an Uplist Transaction and list our Common Stock on the Nasdaq Capital Market. However, there can be no assurance that we will be able to successfully meet such listing requirements. If, for any reason, our listing application is not approved by Nasdaq and we are unable to otherwise consummate an Uplist Transaction on another national securities exchange or take action to successfully list our Common Stock on the Nasdaq Capital Market, our ability to raise additional capital may be adversely affected.

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. Even if this offering is successful and our application to list our Common Stock on the Nasdaq Capital Market or an Alternate Exchange is approved, no assurance can be given that an active trading market for our Common Stock will develop or be maintained.

 

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 ofhave applied to list our Common Stock on the Nasdaq Capital Market under the symbol “ARTH.” No assurance can be given that our application will be approved or that, if approved, an active trading market for our securities will develop or be maintained. If our Common Stock is not approved for listing on the Nasdaq Capital Market or any other nationalan Alternate Exchange, we will not complete this offering. Even if our Common Stock is approved for listing on the Nasdaq Capital Market or an Alternate Exchange, an active trading market for our Common Stock may not develop or be sustained. In the absence of an active trading market for our Common Stock, the ability of our stockholders to sell their securities exchange. We presentlycould be limited. As a result, investors must bear the economic risk of holding their shares of our Common Stock for an indefinite period of time.

Under the 2022 Notes, we are obligated to complete an Uplist Transaction by February 15, 2023 to the Nasdaq Capital Market or an Alternate Exchange. In the event we are unable to uplist our Common Stock, we 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. There is no assurance that our Common Stock will ever be listed on a national securities exchange, that we will be able to comply with or continue to meet such applicable listing standards.

 

A moreThere is not now and may not be an active liquid trading market for our Investor Warrants.

There is no established public trading market for our Investor Warrants. Although we plan to apply to have the Investor Warrants listed on the Nasdaq Capital Market or Alternate Exchange under the symbol “ARTH.W,” there is no assurance our application will be approved, or even if it is approved, that a public trading market will develop or if one develops that it will be maintained. Without a public market, the liquidity of the Investor Warrants will remain limited.

Even if our recent Reverse Stock Split achieves the requisite increase in the market price of our Common Stock, there can be no assurance that we will be approved for listing on the Nasdaq Capital Market or an Alternate Exchange or be able to comply with other continued listing standards of the Nasdaq Capital Market or an Alternate Exchange.

On September 29, 2022, the shareholders approved a reverse stock split between 1-for-100 and 1-for-200. Our Board of Directors set the reverse split ratio at 1-for-200 to be effective prior to pricing of this offering. The Reverse Stock Split was effected on January 17, 2023. Even if our recent Reverse Stock Split increased the market price of our Common Stock sufficiently so that we comply with the minimum market price requirement, no assurance can be given that we will be able to comply with the other standards that we are required to meet in order to be approved for listing on the Nasdaq Capital Market or an Alternate Exchange or maintain a listing of our Common Stock on such exchange. Our failure to meet these requirements prior to listing will result in the offering not occurring and our failure to meet these requirements following listing may result in our Common Stock being delisted from the Nasdaq Capital Market or an Alternate Exchange.

The Reverse Stock Split may decrease the liquidity of the shares of our Common Stock.

The liquidity of the shares of our Common Stock may never develop. be affected adversely by the Reverse Stock Split given the reduced number of shares outstanding following the Reverse Stock Split. In addition, the Reverse Stock Split may have increased the number of stockholders who own odd lots (less than 100 shares) of our Common Stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty affecting such sales.

If this offering is successful, we will be subject to the continued listing requirements of the Nasdaq Capital Market or an Alternate Exchange. If we are unable to comply with such requirements, our Common Stock and Investor Warrants would be delisted from the Nasdaq Capital Market or such Alternate Exchange, which would limit investors ability to effect transactions in our Common Stock and Investor Warrants and subject us to additional trading restrictions.

Even if this offering is successful and our application to list our Common Stock and Investor Warrants on the Nasdaq Capital Market or an Alternate Exchange is approved, if we fail to meet the Nasdaq Capital Market or such Alternate Exchange continued listing requirements, including stockholder equity requirements, our Common Stock and Investor Warrants could be subject to delisting by the Nasdaq Capital Market or such Alternate Exchange, which could reduce the liquidity of our Common Stock and Investor Warrants materially and result in a corresponding material reduction in the price of our Common Stock and Investor Warrants. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and business development opportunities. Such a delisting likely would impair your ability to sell or purchase our Common Stock and Investor Warrants when you wish to do so. Further, if we were to be delisted from the Nasdaq Capital Market or an Alternate Exchange, our Common Stock and Investor Warrants would no longer be recognized as a “covered security” and we would be subject to regulation in each state in which we offer our securities. Thus, delisting from the Nasdaq Capital Market or an Alternate Exchange could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly impact the ability of investors to trade our securities and would negatively impact the value and liquidity of our Common Stock and Investor Warrants.

Our Common Stock may experience extreme stock price volatility unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our Common Stock.

Recently, there have been instances of extreme stock price run-ups followed by rapid price declines and strong stock price volatility with a number of recent initial public offerings, especially among companies with relatively smaller public floats. As a relatively small-capitalization company with relatively small public float, we may experience greater stock price volatility, extreme price run-ups, lower trading volume and less liquidity than large-capitalization companies. In particular, our Common Stock may be subject to rapid and substantial price volatility, low volumes of trades and large spreads in bid and ask prices. Such volatility, including any stock-run up, may be unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our Common Stock.

In addition, if the trading volumes of our Common Stock are low, persons buying or selling in relatively small quantities may easily influence prices of our Common Stock. This low volume of trades could also cause the price of our Common Stock to fluctuate greatly, with large percentage changes in price occurring in any trading day session. Holders of our Common Stock may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due to low volume trading. If high spreads between the bid and ask prices of our Common Stock exist at the time of a purchase, the stock would have to appreciate substantially on a relative percentage basis for an investor to recoup their investment. Broad market fluctuations and general economic and political conditions may also adversely affect the market price of our Common Stock.

As a result of this volatility, investors must bearmay experience losses on their investment in our Common Stock. A volatile market price of our Common Stock also could adversely affect our ability to issue additional shares of Common Stock or other securities and our ability to obtain additional financing in the economicfuture.

Substantial future sales of our shares of Common Stock or rights to purchase shares of our Common Stock, or the perception that such sales could occur, could cause the market price of our Common Stock to decline, even if our business is doing well.

As noted above under the risk factor entitled, “There is substantial doubt about our ability to continue as a going concern. Even if this offering is successful, we will need additional funding to continue our operations and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts and could cause our business to fail.” As of holding theirDecember 28, 2022, we believe that our current cash on hand will meet our anticipated cash requirements into the second quarter of fiscal 2023. Sales of substantial amounts of our Common Stock in the public market or the perception that such sales could occur, could adversely affect the trading price of our Common Stock, and may make it more difficult for you to sell your Common Stock at a time and price that you deem appropriate. We are unable to predict the effect that such sales may have on the prevailing price of our Common Stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

We, our directors and executive officers, and the holder of 5% or more of the outstanding shares of our Common Stock have entered into or will enter into lock-up agreements with the underwriter of this offering pursuant to which they and we have agreed, or will agree, that, subject to certain exceptions, we will not issue or offer, and they will not sell, contract to sell, encumber, grant any option for the sale of, or otherwise dispose of any shares or any securities convertible into or exchangeable for shares of our Common Stock for an indefinitea period of time.

6 months after the offering is completed. See the section titled “Underwriting

Our” for more information. Sales of a substantial number of such shares upon expiration of, or the perception that such sales may occur, or early release of the securities subject to, the lock-up agreements, could cause our stock price to fall or make it more difficult for you to sell your Common Stock isat a “penny stock.”

The SEC has adopted regulationstime and price 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 marketyou deem appropriate. A decline in the price of our Common Stock is, and is expectedmight impede our ability to continue to beraise capital through the issuance of additional Common Stock or other equity securities.

In addition, in the near term, less than $5.00 per sharefuture, we may issue additional shares of Common Stock, warrants or other equity or debt securities convertible into Common Stock in one or more transactions, at prices and is thereforein a “penny stock.” Brokersmanner we determine from time to time, in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and dealers effecting transactions in “penny stock” must disclose certain information concerningcould cause 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 abilityprice of brokers or dealers to sell our Common Stock and may affect the ability of our stockholdersor warrants 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.decline.

If we issue additional shares in the future, including issuances of shares upon exercise of the Series E Warrants, the Series D Warrants,our outstanding warrants and the 2014 Warrants,convertible notes, our existing stockholders will be significantly diluted.

 

OurAs of January 18, 2023, our articles of incorporation authorize the issuance of up to 300,000,00012,000,000 shares of Common Stock. In connection with the 2016 Private Placement Financing that closed on May 26, 2016, we issued an aggregateThe issuance of 9,418,334 shares of our Common Stock which equaled approximately 8% of the 118,592,070 shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the 2016 Private Placement Financing. Upon the closing of the 2016 Private Placement Financing, we also issued Series E Warrants to acquire up to an additional 7,063,748 shares of our Common Stock at an initial exercise price of $0.4380 per share.

Similarly, 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. As of June 23, 2016, up to 11,200,163 shares may be acquired upon the exercise of our outstanding warrants or conversion of outstanding convertible notes, summarized below, could result in substantial dilution to our stockholders, which may have a negative effect on the Series D Warrants.

Upon the closing of the 2014 Private Placement Financing on February 4, 2014, we issued an aggregate of 11,400,000 sharesprice of our Common Stock, which equaled approximately 16%Stock.

As of January 18, 2023, there were 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 June 23, 2016, up to 1,100,275 shares may be acquired upon the exercise of the Series C Warrants and up to 4,000,000 shares may be acquired upon the exercise of the Series A Warrants.outstanding:

 

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Warrants exercisable for 924,095 shares of Common Stock with a weighted average exercise price of $25.60 per share, consisting of:

 

o

Series G Warrants to purchase up to an aggregate of 34,013 shares of Common Stock at an exercise price of $140.00 per share;

o

Series H Warrants to purchase up to an aggregate of 43,077 shares of Common Stock at an exercise price of $80.00 per share;

o

Series I Warrants to purchase up to an aggregate of 71,429 shares of Common Stock at an exercise price of $44.00 per share;

o

2019 Placement Agent Warrants to purchase up to an aggregate of 5,358 shares of Common Stock at an exercise price of $43.75 per share;

o

Series K Warrants to purchase up to an aggregate of 161,719 shares of Common Stock at an exercise price of $34.00 per share;

o

2021 Placement Agent Warrants to purchase up to an aggregate of 16,172 shares of Common Stock at an exercise price of $40.00 per share;

o

MLSC Warrant to purchase up to an aggregate of 730 shares of our Common Stock at an exercise price of $54.80 per share;

o

First Warrants to purchase up to an aggregate of 425,554 shares of our Common Stock at an exercise price of $9.94 per share;

o

First Placement Agent Warrants to purchase up to an aggregate of 31,510 shares of our Common Stock at an exercise price of $10.06 per share;

o

Second Warrants to purchase up to an aggregate of 127,968 shares of our Common Stock at an exercise price of $9.94 per share;

o

Second Placement Agent Warrants to purchase up to an aggregate of 6,565 shares of our Common Stock at an exercise price of $10.06 per share;

Convertible notes convertible into 649,066 shares of Common Stock with a weighted average conversion price of $11.80, consisting of:

o

Series 1 Convertible Notes convertible into 21,302 shares of Common Stock at a conversion price of $54.00 per share;

o

Series 2 Convertible Notes convertible into 18,815 shares of Common Stock at a conversion price of $50.00 per share;

o

First Notes convertible into up to 462,801 shares of our Common Stock at a conversion price of $9.14 per share;

o

Exchanged Notes convertible into up to 76,563 shares of our Common Stock at a conversion price of $9.14 per share; and

o

Second Notes convertible into up to 69,585 shares of our Common Stock at a conversion price of $9.14 per share;

Options granted to employees, directors and consultants under the 2013 Plan to purchase up to an aggregate of 104,325 shares of Common Stock at exercise prices ranging from $4.00 to $130.00 per share and with a weighted average exercise price of $39.06 per share.

 

Additionally, as of June 23, 2016, 15,051,741 shares of Common Stock that were reserved for future issuance under the 2013 Plan, of which 12,772,964 shares are subject to outstanding option awards granted under the 2013 Plan at exercise prices ranging from $0.17 to $0.43 per share and with a weighted average exercise price of $0.32 per share, and the numbers issuable under the 2013 Plan will increase by up to 3 million shares on the first business day of each following fiscal year as set forth in the 2013 Plan. Finally, in addition to the Series E Warrants granted in connection with the 2016 Private Placement Financing, the Series D Warrants granted in connection with the 2015 Private Placement Financing, and the 2014 Warrants granted in connection with the 2014 Private Placement Financing, 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. By way of example, on August 6, 2015,September 27, 2021, we issued an aggregate of 600,0001,500 shares of restricted stock in connection with our entrance into separatea consulting agreementsagreement with two investor relations firms, Excelsior Global Advisors LLC and Acorn Management Partners, LLC, in each caseMichael J. Parker, in consideration of the services to be provided under and in accordance with the terms of eachthe consulting agreement. Additionally, shares of Common Stock could be used for anti-takeover purposes or to delay or prevent changes in control or management of the Company. We cannot provide assurances that any issuances of Common Stock will be consummated on favorable terms or at all, that they will enhance stockholder value, or that they will not adversely affect our business or the trading price of our Common Stock. The issuance of any such shares will reduce the book value per share and may contribute to a reduction in the market price of the outstanding shares of our Common Stock. If we issue any such additional shares, such issuance will reduce the proportionate ownership and voting power of all current shareholders.stockholders. Further, such issuance may result in a change of control of our corporation.Company.

Future sales ofWe are a smaller reporting company, and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our Common Stock or rightsless attractive to purchase Common Stock, or the perception that such sales could occur, could cause our stock price to fall.investors.

 

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 failare currently a “smaller reporting company”,” as of June 23, 2016, we believe meaning that we will needare not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and we either have a public float of less than $250 million or annual revenues of less than $100 million during our most recently completed fiscal year and a public float of less than $700 million. Smaller reporting companies are able to raise additional cashprovide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to continue operations and fund our planned future operations within the next twelve months. To raise capital, we may sell Common Stock, convertible securities or other equity securitiesprovide two years of audited financial statements in one or more transactions at pricesannual reports and in a manner we determine from timeregistration statement under the Exchange Act on Form 10. Decreased disclosures in our SEC filings due to time. Any such salesour status as a smaller reporting company may make it harder for investors to analyze our results 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.operations and financial prospects.

Financial Industry Regulatory Authority (

FINRA) sales practice requirements may limit a stockholder’sstockholders 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 pricedlow-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 pricedlow-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.

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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

 

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 June 23, 2016,January 18, 2023, Dr. Terrence W. Norchi, our Chairman of the Board, President and 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 19%8% of our shares of Common Stock. Accordingly, these membersthis member of our Board of Directors and management team havehas substantial voting power to approve matters requiring stockholder approval, including without limitation the election of directors, and havehas 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 thereporting 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.

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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 stockCommon 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 BoardBoard.

We are at riskThe market price of our Common Stock may be volatile which could subject us to securities class action litigation that could resultlitigation.

The market price for our Common Stock has been and may continue to be volatile and subject to wide fluctuations in substantialcosts and divert management’s attention and resources.response to factors including the following:

sales or potential sales of substantial amounts of our Common Stock;

delay or failure in initiating or completing preclinical or clinical trials or unsatisfactory results of these trials;

announcements about us or about our competitors, including clinical trial results, regulatory approvals or new product introductions;

developments concerning our product manufacturers;

litigation and other developments relating to our patents or other proprietary rights or those of our competitors;

conditions in the pharmaceutical or biotechnology industries;

governmental regulation and legislation;

variations in our anticipated or actual operating results;

change in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations; foreign currency values and fluctuations; and

overall economic conditions.

 

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.marketplace. The stock markets in general, and the market for pharmaceutical and biotechnology companies in particular, have historically experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors could reduce the market price of our Common Stock, regardless of our actual operating performance. 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 STATEMENTSRisks Related to This Offering

 

This prospectus contains forward-looking statements that involve risks, uncertaintiesManagement will have broad discretion as to the use of the proceeds from this offering, 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,” orwe may not use the negativeproceeds effectively.

Our management will have broad discretion in the application of these terms or other comparable terminology. All statements made inthe net proceeds from this prospectus other than statementsoffering, including for any 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 riskspurposes described in the section entitled “RISK FACTORSUse of Proceeds,” and could spend the risks set out below,proceeds in ways that do not improve our results of operations or enhance the value of our Common Stock. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the net proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us. Our failure to apply these funds effectively could have a material adverse effect on our business and cause the price of which may cause our or our industry’s actual results, levels of activity, performance or achievementsCommon Stock 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:decline.

 

Our ability to continue as a going concern;

You will experience immediate and substantial dilution in the net tangible book deficit per share of the Common Stock you purchase.

 

Our ability to obtain financing necessary to operate our business;

Our limited operating history;

The resultspublic offering price of the Units being offered in this offering is substantially higher than the net tangible book deficit per share of our researchCommon Stock. Investors purchasing Units in this offering may pay a price per share of Common Stock that may substantially exceed the pro forma book value of our tangible assets after subtracting our liabilities. Based on an assumed public offering price of $[●]per share (the last reported sale price of our Common Stock on the OTCQB on January [●], 2023), if you purchase shares of our Common Stock, you will suffer immediate and development activities, including uncertainties relatingsubstantial dilution of $[●] per share with respect 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;

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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 growthnet tangible book deficit 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 underCommon Stock. See the section entitled “RISK FACTORSDilution.

New risks emerge below for a more detailed discussion of the dilution you will incur if you purchase securities in our rapidly-changing industry from time to time.this offering. As a result itof the dilution to investors purchasing securities in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of a liquidation of our company.

USE OF PROCEEDS

We expect to receive net proceeds of approximately $[●] million from this offering (or approximately $[●] million if the underwriters exercise their option to purchase additional shares of Common Stock and/or Investor Warrants in full), based on an assumed public offering price of $[●] per Unit (the last reported sale price of our Common Stock on the OTCQB on January [●], 2023), after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. We currently intend to use the net proceeds we receive from this offering for product marketing, for general working capital purposes and to repay the outstanding balances under the 2022 Notes upon completion of our Uplist Transaction.

Upon completion of Uplist Transaction, the 2022 Note holders have the right to require us to immediately apply the proceeds to repay the outstanding balance of the 2022 Notes within two (2) days of receipt of such demand for repayment. The 2022 Notes are also convertible into an aggregate of 608,948 shares of Common Stock at the option of each holder of the 2022 Notes at the Conversion Price of $9.14 through the later of (i) the Maturity Date and (ii) the date of payment of the Default Amount. Further, the 2022 Notes may not be prepaid, in whole or in part, at any time without the written consent of the lead investor, with such prepayment amounts subject to adjustment as a result of certain time-based prepayment premiums set forth in the 2022 Notes; provided, that, the written consent of the lead investor is not possible forrequired in connection with a prepayment made from the proceeds of an Uplist Transaction.

Our expected use of net proceeds from this offering represents our management to predict all risks, nor can we assess the impact of all factors oncurrent intentions based upon 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 statementspresent plans 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 asbusiness condition. As of the date of this prospectus, we cannot currently allocate specific percentages of the net proceeds that we may use for the purposes specified above, and we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering, or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures will depend upon numerous factors, including our sales and marketing efforts, demand for our products, our operating costs and the other factors described under “Risk Factors” in this prospectus. Except as required by applicable law,Accordingly, our management will have flexibility in applying the net proceeds from this offering. An investor will not have the opportunity to evaluate the economic, financial or other information on which we do not intendbase our decisions on how to update any of these forward-looking statements.

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SELLING SECURITYHOLDERSuse the proceeds.

 

This prospectus covers the resale from time to time by the selling securityholders identifiedEach $0.01 increase (decrease) in the table belowassumed public offering price of up to an aggregate of 16,482,082 shares$[●] per Unit (the last reported sale price of our Common Stock that were either previously issued or are issuable uponon the exercise of our Series E Warrants. The shares of Common Stock being offeredOTCQB on January [●], 2023, would increase (decrease) the net proceeds to us from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the selling securityholders were issued in, or issuable upon the exercise of Series E Warrants issued in the 2016 Private Placement Financing, and consist of (i) 9,418,334 previously issued shares of Common Stock; and (ii) 7,063,748 shares of Common Stockus, by approximately $[●], assuming that may be issuable upon exercise of our Series E Warrants. For additional information regarding the issuance of the shares of Common Stock and the Series E Warrants, see the description under “SUMMARY | PRIVATE PLACEMENT OFFERINGS | 2016 Private Placement Financing” elsewhere in this prospectus.

We are registering the shares of Common Stock hereby pursuant to the terms of the 2016 Registration Rights Agreement among us and the 2016 Investors 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 E 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 E 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 beingUnits offered by this prospectus.

The table below (i) listsus, as set forth on the selling securityholders and other information regarding the beneficial ownership (except with respect to 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 2016 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 datecover page of this prospectus, in transactions exempt from or not subject toremains 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)
 
Anson Investments Master Fund LP (6)  3,062,500   3,062,500   3,062,500   0   0.00%
Karen Carlin (7)  349,774   349,774   122,500   227,274   0.17%
P. Timothy Connolly (8)  481,250   481,250   481,250   0   0.00%
CVI Investments, Inc.(9)  1,750,000   1,750,000   1,750,000   0   0.00%
Drake Partners Equity LLC (10)  648,990   648,990   194,444   454,546   0.34%
Empery Asset Master, Ltd (11)  666,050   666,050   666,050   0   0.00%
Empery Tax Efficient II, LP (11)  618,800   618,800   618,800   0   0.00%
Empery Tax Efficient, LP (11)  465,150   465,150   465,150   0   0.00%
Jonathan Galli (12)  1,050,000   1,050,000   350,000   700,000   0.53%
Vikas Gulati and Mirela Gulati (13)  122,500   122,500   122,500   0   0.00%
Hudson Bay Master Fund Ltd. (14)  1,137,500   1,137,500   1,137,500   0   0.00%
Intracoastal Capital, LLC (15)  3,135,099   3,135,099   2,430,554   704,545   0.53%
Keyes Sulat Revocable Trust (16)  1,376,813   1,376,813   194,444   1,182,369   0.90%
Lorraine A. Malanga (17)  349,774   349,774   122,500   227,274   0.17%
James M. McKeone (18)  1,054,926   1,054,926   145,834   909,092   0.69%
IRA FBO Ana B Parker (19)  3,888,890   2,222,223   3,888,890   0   0.00%
Dr. Stephanie Plent (20)  989,769  ��989,769   243,055   746,714   0.57%
Popham Management, LLC (21)  1,395,203   1,395,203   486,111   909,092   0.69%
Total  22,542,988   20,876,321   16,482,082   6,060,906   4.59%

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(1)Reflects the total number of shares of Common Stock held or issuable to each selling securityholder including, to the extent applicable, (a) all remaining securities issued in the 2016 Private Placement Financing, in each case without regard to ownership limitations on the exercise of certain of the Series E Warrants as described in footnote (2) below; (b) all remaining securities issued in the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part and in each case without regard to the ownership limitations on the exercise of certain of the Series D Warrants as described in footnote (2) below; (c) all shares of Common Stock underlying the remaining Series A Warrants issued in the 2014 Private Placement Financing held by such selling securityholder, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part and in each case without regard to ownership limitations on the exercise of the Series A Warrants as described in footnote (2) below; and (d) all other securities issued in transactions unrelated to the 2016 Private Placement Financing, 2015 Private Placement Financing, 2014 Private Placement Financing or Notes Offering (collectively, the “Private Placement Financings”), if any, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part and in each case without regard to any ownership limitations upon the exercise or conversion of such securities.

(2)Certain of the Series E and Series D Warrants issued in the 2016 Private Placement Financing and 2015 Private Placement Financing, respectively and all the Series A Warrants issued in the 2014 Private Placement Financing contain ownership limitations to prevent the exercise of such warrants in certain circumstances. In particular, certain of the Series E Warrants provide that they shall not be exercisable in the event and to the extent that the exercise thereof would result in the holder of the Series E Warrant, together with its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than 4.99% of the Common Stock;provided, however, the (i) holder, upon notice to us, may increase or decrease this ownership limitation so long as the maximum ownership limitation does not exceed 9.99% of the Company’s Common Stock; and (ii) any increase in the ownership limitation will not become effective until the 61st day after delivery of such notice. Similarly, certain of the Series D Warrants and all the Series A Warrants 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.

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 2016 Private Placement Financing held by such selling securityholder and/or issuable upon exercise of the Series E Warrants held by such selling securityholder which, in the case of any Series E 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 (along with any of its affiliates or any other persons whose beneficial ownership of Common Stock would be aggregated with the selling securityholder) beneficially owning more than 4.99% (or up to 9.99% at the securityholders’ discretion) of our currently outstanding Common Stock, based on 131,924,004 outstanding shares of our Common Stock as of June 23, 2016; (b) 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 131,924,004 outstanding shares of our Common Stock as of June 23, 2016; (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 131,924,004 outstanding shares of our Common Stock as of June 23, 2016; and (d) shares of our Common Stock beneficially owned by such selling securityholder that were acquired in transactions unrelated to the Private Placement Financings.

(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 2016 Registration Statement of which this prospectus forms a part including (a) the shares of Common Stock held by such selling securityholder that were issued in connection with the 2016 Private Placement Financing and/or, to the extent applicable, acquired upon the exercise of the Series E Warrants; and (b) shares of Common Stock issuable upon exercise of the Series E Warrants held by such selling securityholder, in each case without taking into account the ownership limitations set forth in the Series E 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 Series D and Series A Warrants described in footnote (2), and assume that (a) all of the shares of Common Stock to be registered by the 2016 Registration Statement of which this prospectus forms a part, including the shares of Common Stock held by such selling securityholder that were issued in connection with the closing of the 2016 Private Placement Financing and the shares of Common Stock issuable upon exercise of the Series E Warrants held by such selling securityholder (in each case without taking into account the ownership limitations set forth in certain of the Series E Warrants as described in footnote (2)), are sold in this offering; (b) the selling securityholders do not (i) sell any of the securities that have been issued to them in transactions unrelated to the 2016 Private Placement Financing (including, but not limited to, the 2015 Private Placement Financing and the 2014 Private Placement Financing) and included in Column 2; and (ii) acquire additional shares of our Common Stock after June 23, 2016 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 131,924,004 outstanding shares of our Common Stock as of June 23, 2016, and assumes that all shares underlying such selling securityholder’s Series E Warrants that are being offered by such selling securityholder by this prospectus have been issued and are outstanding.

(6)M5V Advisors Inc and Frigate Ventures LP (“M5V” and “Frigate”), the Co- Investment Advisers of Anson Investments Master Fund LP (“Anson”), hold voting and dispositive power over the Common Stock 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 these Common Shares 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 3,062,500 shares of Common Stock, which consists of the following: (i) 1,750,000 shares of Common Stock issued to Anson in connection with the 2016 Private Placement Financing; and (ii) 1,312,500 shares of Common Stock issuable upon exercise of Series E Warrants issued to Anson in connection with the 2016 Private Placement Financing.

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(7)Ms. Carlin may be deemed to have beneficial ownership of 349,774 shares of Common Stock, which consists of the following: (i) 70,000 shares of Common Stock issued to Ms. Carlin in connection with the 2016 Private Placement Financing; (ii) 52,500 shares of Common Stock issuable upon exercise of Series E Warrants issued to Ms. Carlin in connection with the 2016 Private Placement Financing; (iii) 113,637 shares of Common Stock issued to Ms. Carlin and Ronald Bryan Woodard in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (iv) 113,637 shares of Common Stock issuable upon exercise of Series D Warrants issued to Ms. Carlin and Mr. Woodard in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part.

(8)Mr. Connolly may be deemed to have beneficial ownership of 481,250 shares of Common Stock, which consists of the following: (i) 275,000 shares of Common Stock issued to Mr. Connolly in connection with the 2016 Private Placement Financing; and (ii) 206,250 shares of Common Stock issuable upon exercise of Series E Warrants issued to Mr. Connolly in connection with the 2016 Private Placement Financing.

(9)Heights Capital Management, Inc., the authorized agent of CVI Investments, Inc. (“CVI”), has discretionary authority to vote and dispose of the shares of Common Stock held by CVI and may be deemed to be the beneficial owner of these shares. Martin Kobinger, in his capacity as Investment Manager of Heights Capital Management, lnc., may also be deemed to have investment discretion and voting power over the shares held by CVI. Mr. Kobinger disclaims any such beneficial ownership of the shares.

CVI may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of 1,750,000 shares of Common Stock, which consists of the following: (i) 1,000,000 shares of Common Stock issued to CVI in connection with the 2016 Private Placement Financing; and (ii) 750,000 shares of Common Stock issuable upon exercise of Series E Warrants issued to CVI in connection with the 2016 Private Placement Financing.

(10)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 648,990 shares of Common Stock, which consists of the following:: (i) 111,111 shares of Common Stock issued to Drake in connection with the 2016 Private Placement Financing; and (ii) 83,333 shares of Common Stock issuable upon exercise of Series E Warrants issued to Drake in connection with the 2016 Private Placement Financing; (iii) 227,273 shares of Common Stock issued to Drake in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (iv) 227,273 shares of Common Stock issuable upon exercise of Series D Warrants issued to Drake in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part. Mr. Hicks disclaims beneficial ownership of the securities held by Drake that are covered hereunder except to the extent of his pecuniary interest therein.

(11)Empery Asset Management LP, the authorized agent of Empery Asset Master Ltd (“EAM”), Empery Tax Efficient, LP (“ETE”) and Empery Tax Efficient II, LP (“ETE II”, and together with EAM and ETE, the “Empery Funds”), has discretionary authority to vote and dispose of the shares held by each of the Empery Funds and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the shares held by each of the Empery Funds. Each of the Empery Funds, Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares.

EAM may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of (i) 666,050 shares of Common Stock, which consists of the following: (i) 380,600 shares of Common Stock issued to EAM in connection with the 2016 Private Placement Financing; and (ii) 285,450 shares of Common Stock issuable upon exercise of Series E Warrants issued to EAM in connection with the 2016 Private Placement Financing.

ETE may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of (i) 465,150 shares of Common Stock, which consists of the following: (i) 265,800 shares of Common Stock issued to ETE in connection with the 2016 Private Placement Financing; and (ii) 199,350 shares of Common Stock issuable upon exercise of Series E Warrants issued to ETE in connection with the 2016 Private Placement Financing.

ETE II may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of (i) 618,800 shares of Common Stock, which consists of the following: (i) 353,600 shares of Common Stock issued to ETE II in connection with the 2016 Private Placement Financing; and (ii) 265,200 shares of Common Stock issuable upon exercise of Series E Warrants issued to ETE II in connection with the 2016 Private Placement Financing.

(12)Mr. Galli may be deemed to have beneficial ownership of 1,050,000 shares of Common Stock, which consists of the following: (i) 200,000 shares of Common Stock issued to Mr. Galli in connection with the 2016 Private Placement Financing; (ii) 150,000 shares of Common Stock issuable upon exercise of Series E Warrants issued to Mr. Galli in connection with the 2016 Private Placement Financing; (iii) 350,000 shares of Common Stock issued to Mr. Galli in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (iv) 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, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part.

(13)Mr. and Ms. Gulati may be deemed to have beneficial ownership of 122,500 shares of Common Stock, which consists of the following: (i) 70,000 shares of Common Stock issued to Mr. and Ms. Gulati in connection with the 2016 Private Placement Financing; and (ii) 52,500 shares of Common Stock issuable upon exercise of Series E Warrants issued to Mr. and Ms. Gulati in connection with the 2016 Private Placement Financing.

(14)Hudson Bay Capital Management LP, the investment manager of Hudson Bay Master Fund Ltd. (“Hudson Bay”), has voting and investment power over these securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management LP. Each of Hudson Bay and Sander Gerber disclaims beneficial ownership over these securities.

Hudson Bay may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of 1,137,500 shares of Common Stock, which consists of the following: (i) 650,000 shares of Common Stock issued to Hudson Bay in connection with the 2016 Private Placement Financing; and (ii) 487,500 shares of Common Stock issuable upon exercise of Series E Warrants issued to Hudson Bay in connection with the 2016 Private Placement Financing.

(15)Mitchell P. Kopin (“Mr. Kopin”) and Daniel B. Asher (“Mr. Asher”), each of whom are managers of Intracoastal Capital LLC (“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.

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Intracoastal may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of 3,135,099 shares of Common Stock, which consists of the following: (i) 1,388,888 shares of Common Stock issued to Intracoastal in connection with the 2016 Private Placement Financing; (ii) 1,041,666 shares of Common Stock issuable upon exercise of Series E Warrants issued to Intracoastal in connection with the 2016 Private Placement Financing; (iii) 454,545 shares of Common Stock issuable upon exercise of Series D Warrants issued to Intracoastal in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; (iv) 50,000 shares of Common Stock that became issuable under the Series A Warrant assigned to Intracoastal in May 2015 by Equitec as a result of the Anti-Dilution Provisions in the Series A Warrants that were triggered by the Notes Offering, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (v) 200,000 shares of Common Stock that became issuable under the Series A Warrant originally issued to Cranshire Master Fund in the 2014 Private Placement Financing and assigned to Intracoastal in December 2015 as a result of the Anti-Dilution Provisions in the Series A Warrants that were triggered by the Notes Offering, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part.

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 ordinary shares being registered hereunder in the ordinary course of business, and at the time of the acquisition of the ordinary shares and warrants described herein, Intracoastal did not have any arrangements or understandings ·with any person to distribute such securities.

(16)James R. Sulat is a member of the Company’s Board of Directors and a co-trustee of the Keyes Sulat Revocable Trust (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 1,376,813 shares of Common Stock, which consists of the following: (i) 111,111 shares of Common Stock issued to the Trust in connection with the 2016 Private Placement Financing; (ii) 83,333 shares of Common Stock issuable upon exercise of Series E Warrants issued to the Trust in connection with the 2016 Private Placement Financing; (iii) 454,546 shares of Common Stock issued to the Trust in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; (iv) 454,546 shares of Common Stock issuable upon exercise of Series D Warrants issued to the Trust in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (v) 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 2016 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; (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; (c) a stock option award exercisable for 130,000 shares of Common Stock at an exercise price of $0.39 granted to Mr. Sulat on May 3, 2016; and (d) a stock award of 30,000 shares of Common Stock granted to Mr. Sulat on May 3, 2016.

(17)Ms. Malanga may be deemed to have beneficial ownership of 349,774 shares of Common Stock, which consists of the following: (i) 70,000 shares of Common Stock issued to Ms. Malanga in connection with the 2016 Private Placement Financing; (ii) 52,500 shares of Common Stock issuable upon exercise of Series E Warrants issued to Ms. Malanga in connection with the 2016 Private Placement Financing; (iii) 113,637 shares of Common Stock issued to Ms. Malanga in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (iv) 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, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part.

(18)Mr. McKeone may be deemed to have beneficial ownership of 1,054,926 shares of Common Stock, which consists of the following: (i) 83,334 shares of Common Stock issued to Mr. McKeone in connection with the 2016 Private Placement Financing; (ii) 62,500 shares of Common Stock issuable upon exercise of Series E Warrants issued to Mr. McKeone in connection with the 2016 Private Placement Financing; (iii) 454,546 shares of Common Stock issued to Mr. McKeone in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (iv) 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, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part.

(19)Ms. Parker may be deemed to have beneficial ownership of 2,222,223 shares of Common Stock, which consists of 2,222,223 shares of Common Stock issued to Ms. Parker in connection with the 2016 Private Placement Financing. The information presented for Ms. Parker in Column 3 of this table excludes (i) 1,666,667 shares of Common Stock issuable upon exercise of Series E Warrants issued to Ms. Parker in connection with the 2016 Private Placement Financing because of the ownership limitations set forth in the Series E Warrants as described in footnote (2); (ii) 1,500,961 shares of Common Stock acquired by Michael A. Parker, Ms. Parker’s spouse, in transactions unrelated to the Private Placement Financings, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (iii) 5,000,000 shares of Common Stock and 4,500,000 shares of Common Stock issuable upon exercise of Series D Warrants, in each case originally issued to Mr. Parker, an investor in the 2015 Private Placement Financing, and assigned in March 2016 to Tungsten III, LLC, an entity controlled by Mr. Parker, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part.

(20)Dr. Plent may be deemed to have beneficial ownership of 989,769 shares of Common Stock, which consists of the following: (i) 138,889 shares of Common Stock issued to Dr. Plent in connection with the 2016 Private Placement Financing; (ii) 104,166 shares of Common Stock issuable upon exercise of Series E Warrants issued to Dr. Plent in connection with the 2016 Private Placement Financing; (iii) 227,273 shares of Common Stock issued to Dr. Plent in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; (iv) 227,273 shares of Common Stock issuable upon exercise of Series D Warrants issued to Dr. Plent in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (v) 192,168 shares of Common Stock and a stock option exercisable for 100,000 shares of Common Stock acquired by Dr. Plent in transactions unrelated to the Private Placement Financings, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part.

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(21)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 1,395,203 shares of Common Stock, which consists of the following: (i) 277,778 shares of Common Stock issued to Popham in connection with the 2016 Private Placement Financing; (ii) 208,333 shares of Common Stock issuable upon exercise of Series E Warrants issued to Popham in connection with the 2016 Private Placement Financing; (iii) 454,546 shares of Common Stock issued to Popham in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part; and (iv) 454,546 shares of Common Stock issuable upon exercise of Series D Warrants issued to Popham in connection with the 2015 Private Placement Financing, none of which are being registered in the 2016 Registration Statement of which this prospectus forms a part. Mr. Popham disclaims beneficial ownership of the securities held by Popham that are covered hereunder except to the extent of his pecuniary interest therein.

Except for the ownership of the Common Stock and Series E Warrants issued in the 2016 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 2016 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, neither the selling securityholders nor their affiliates holds any of our securities that have been registered under the Securities Act or that are entitled to registration rights thereunder other than (i) the shares of Common Stock issuable upon the exercise of the Series A Warrants held by CVI that were originally issued in the 2014 Private Placement Financing; and (ii) Common Stock and/or shares of Common Stock issuable upon the exercise of the Series D Warrants held by Ms. Carlin, Drake, Mr. Galli, Intracoastal, the Trust, Ms. Malanga, Mr. McKeone, affiliates of Ms. Parker, Dr. Plent and Popham that were originally issued in the 2015 Private Placement Financing. 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. Connolly, who is employed by UBS as a financial advisor; (c) CVI, which is an affiliate of a broker-dealer; (d) Mr. Jonathan J. Galli, who is employed by UBS as a financial advisor; (e) Ms. Carlin, who is employed by UBS as a financial advisor; (f) Ms. Malanga, who is employed by UBS as a financial advisor; and (g) Mr. James M. McKeone, who is employed by FAS Corp. as a financial advisor. Each selling securityholder that is an affiliate of a broker-dealer has advised us that it purchased its securities in the 2016 Private Placement Financing in the ordinary course of business, and at the time of the purchase, it had no agreements or understandings, directly or indirectly, with any person to distribute such securities.

The holders of the Series E Warrants issued in the 2016 Private Placement Financing have ongoing rights to exercise those Series E Warrants. We have described the material terms of the Series E Warrants elsewhere in this prospectus. In addition, the participants in the 2016 Private Placement Financing have ongoing registration rights related to the securities issued therein pursuant to the terms of the 2016 Registration Rights Agreement, which are described in more detail elsewhere in this prospectus.

same. We may be required to make certain payments to the investors in the 2016 Private Placement Financing under certain circumstances pursuant to the terms of the 2016 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 E Warrants; and (ii) payments in respect of claims for which we provide indemnification or contribution. We intend to comply with the requirements of the 2016 Registration Rights Agreement and do not currently expect to make any such payments; however, it is possible that such payments may be required.

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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 E Warrants, in each case, issued to the selling securityholders in the 2016 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.

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The selling securityholders may pledge or grant a security interest in some or all of the Series E 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 the securities purchase agreement, the registration rights agreement, the Series E 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 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 registration rights agreements. 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 related registration rights agreements.

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USE OF PROCEEDS

We will not receive proceeds from the sale of Common Stock under this prospectus. We will, however, receive approximately $3,093,922 from the selling securityholders if they exercise all of the Series E 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 E 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.

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 from third parties other than our then-existing shareholders 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.

The holders of the Series E Warrants may exercise their Series E 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 | PRIVATE PLACEMENT OFFERINGS | 2016 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 E Warrants as of certain time periods (as provided in the Series E Warrants), then the Series E Warrant holders may choose to exercise such Series E 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 E Warrants. As a result, we cannot plan on receiving any proceeds from the exercise of any of the Series E 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 June 23, 2016 there were issued and outstanding 131,924,004 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 9,418,334 shares of Common Stock that were issued in connection with the 2016 Private Placement Financing.

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Description of Securities

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 (the “Common Stockholders”) 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 June 23, 2016 there were issued and outstanding:

The Series E Warrants issued to the investors in the 2016 Private Placement Financing to purchase up to an aggregate of 7,063,748 shares of Common Stock at an exercise price of $0.4380 per share;

The Series D Warrants issued to the investors in the 2015 Private Placement Financing to purchase up to an aggregate of 11,200,163 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 5,100,275 shares of Common Stock which include (i) Series A Warrants to purchase 4,000,000 shares issuable thereunder at an exercise price of $0.20 per share; and (ii) Series C Warrants to purchase 1,100,275 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 12,772,964 shares of Common Stock at exercise prices ranging from $0.17 to $0.43 per share and with a weighted average exercise price of $0.32 per share.

Description of Series E Warrants Whose Underlying Common Stock is Registered Hereby

Each of the 2016 Investors was issued a Series E Warrant to purchase up to a number of shares of our Common Stock equal to 75% of the shares of Common Stock purchased by such 2016 Investor in the 2016 Private Placement Financing. The Series E Warrants had an initial exercise price of $0.4380 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 Common Stock into which each of the Series E Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series E Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, (i) at any time during the term of the Series E Warrants, we may reduce the then-current exercise price to any amount and for any period of time deemed appropriate by our Board; and (ii) certain of the Series E Warrants provide that they shall not be exercisable in the event and to the extent that the exercise thereof would result in the holder of the Series E Warrant, together with its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than 4.99% of the Common Stock;provided, however, the holder, upon notice to us, may increase or decrease the ownership limitation,provided that any increase is limited to a maximum of 9.99% of the Company’s Common Stock, and any increase in the ownership limitation will not become effective until the 61st day after delivery of such notice. In addition, if there is no effective registration statement registering the resale of the shares of Common Stock underlying the Series E Warrants as of certain time periods (as provided in the Series E Warrants), the Series E Warrant holders may choose to exercise such Series E Warrants on a “cashless exercise” or “net exercise” basis.

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Description of Series D Warrants

Each of the 2015 Investors was issued a Series D Warrant to purchase up to a number of sharesUnits we are offering. An increase (decrease) of our Common Stock equal to 100% of the shares of Common Stock purchased by such 2015 Investor1,000,000 in the 2015 Private Placement 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 any time 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.

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 2014 Investor 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 2014 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 2014 Registration Statement Effective Date. 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 2014 Registration Statement Effective Date. 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 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 exerciseUnits we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $[●], assuming the public offering price stays the same. We do not expect that a change in the offering price or the number of Units by these amounts would have a material effect on our intended uses of the 2014 Warrants would be adjusted accordingly so thatnet proceeds from this offering, although it may impact the aggregate exercise price upon full exerciseamount 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 2014 Warrants. 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.

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2016 Registration Rights Agreement

On May 26, 2016, we entered into the 2016 Registration Rights Agreement pursuantprior to which we became obligated, subjectmay need to certain conditions, to file with the SEC within 45 days after the closing of the 2016 Private Placement Financing one or more registration statements to register the shares of Common Stock issued in the 2016 Private Placement Financing and the Series E Warrant Shares for resale under the Securities Act. As a result, we are registering for resale under this registration statement an aggregate of 16,482,082 shares of Common Stock, representing the 9,418,334 shares issued in the 2016 Private Placement Financing and the 7,063,748 shares underlying the Series E Warrants. Pursuant to our filing of this registration statement, we are in compliance with such filing obligation under the 2016 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 2016 Registration Rights Agreement may require us to pay monetary penalties to the 2016 Investors and/or their assignees. Because the Series E 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. Under the 2016 Registration Rights Agreement, subject to exception in certain circumstances, we have agreed to keep the 2016 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 2016 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 E Warrants issued in the 2016 Private Placement Financing, then the selling securityholders will be entitled to exercise their Series E Warrants on a “cashless exercise” or “net exercise” basis during the period when the shares issuable upon exercise of such Series E Warrants are not so registered.seek additional capital.

 

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.

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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.

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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.system under the stock symbol “ARTHD”. 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 havehas been few tradeslimited trading activity in our Common Stock to date. Because our Common Stock is thinly traded on the OTCQB, (i) any reported sale prices may not be a true market-based valuation of our Common Stock.

The table below sets forth reported highStock; and low closing bid quotations for our Common Stock for the fiscal quarters indicated as reported on the OTCQB. The(ii) such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

  High  Low 
       
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 
Fourth Quarter ended September 30, 2015 $0.39  $0.23 
         
Fiscal Year Ending September 30, 2016        
First Quarter ended December 31, 2015 $0.27  $0.17 
Second Quarter ended March 31, 2016 $0.32  $0.18 

We have applied to list our Common Stock and Investor Warrants on the Nasdaq Capital Market under the symbols “ARTH” and “ARTH.W”, respectively. There is no assurance that our listing application will be approved by the Nasdaq Capital Market, or, if successful, that an active trading market for our Common Stock or Investor Warrants will develop or be sustained. If we are unable to list our Common Stock on the Nasdaq Capital Market or an Alternate Exchange, we will not consummate this offering.

 

Dividends

 

We have never declared or paid any cash dividends or distributions on our capital stock.Common 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 termsAny future payment of the MLSC Loan Agreement, we must obtain MLSC’s prior consent before declaring or paying any dividends during the termwill depend upon our results of the MLSC Loan Agreement.operations, financial condition, cash requirements and other factors deemed relevant by our Board.

 

Holders

 

As of June 23, 2016,January 18, 2023, there were approximately 100 holders of record of our Common Stock.

 

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Transfer Agent and Registrar

 

The transfer agent and warrant agent for our Common Stock and Investor Warrants, respectively, is Empire Stock Transfer. Our transfer agent’s address is 1859 Whitney Mesa Drive, Henderson, Nevada 89014.

 

MANAGEMENT’SCAPITALIZATION

The following table sets forth our cash and capitalization as of September 30, 2022:

on an actual basis;

on a pro forma basis to give effect to the Second Closing; and

on a pro forma, as adjusted basis, to give effect to the issuance and sale by us of Units in this offering based on the public offering price of $[●] per Unit, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the receipt by us of the proceeds of such sale.

You should read this table together with “Use of Proceeds,” “Managements Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and related notes thereto included elsewhere in this prospectus.

As of September 30, 2022

Actual

Pro Forma

Pro Forma As Adjusted

(unaudited)

(unaudited)

(unaudited)

(1)

Cash 

$

[●]

$

[●]

$

[●]

Stockholders’ deficit:

Common stock, $0.001 par value, 12,000,000 shares authorized as of September 30, 2022 and 2021, 1,249,432 and 1,185,849 shares issued as of September 30, 2022 and 2021, and 1,249,682 and 1,183,599 outstanding as of September 30, 2022 and 2021

[●]

[●]

[●]

Additional paid-in capital 

$

[●]

$

[●]

$

[●]

Accumulated deficit

$

[●]

$

[●]

$

[●]

Total stockholders’ (deficit) equity

$

[●]

$

[●]

$

[●]

Total capitalization 

$

[●]

$

[●]

$

[●]

(1) A $0.01 increase or decrease in the assumed public offering price of $[●] per Unit (the last reported sale price of our Common Stock on the OTCQB on January [●], 2023), would increase or decrease the pro forma as adjusted amount of each of cash, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $[●] million, assuming that the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the Investor Warrants issued as part of the Units. An increase or decrease of 1,000,000 in the number of Units offered by us, as set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted amount of each of cash, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $[●], assuming no change in the assumed public offering price per Unit and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the Investor Warrants issued as part of the Units.

The total number of shares reflected in the discussion and tables above is based on 1,249,682 shares of our Common Stock outstanding as of September 30, 2022, and excludes, in each case:

806,437 shares of Common Stock issuable upon the exercise of outstanding warrants, having a weighted average exercise price of $29.33 per share, consisting of:

o

Series G Warrants to purchase up to an aggregate of 34,013 shares of Common Stock at an exercise price of $140.00 per share;

o

Series H Warrants to purchase up to an aggregate of 43,077 shares of Common Stock at an exercise price of $80.00 per share;

o

Series I Warrants to purchase up to an aggregate of 71,429 shares of Common Stock at an exercise price of $44.00 per share;

o

2019 Placement Agent Warrants to purchase up to an aggregate of 5,358 shares of Common Stock at an exercise price of $43.75 per share;

o

Series J Warrants to purchase up to an aggregate of 16,875 shares of Common Stock at an exercise price of $50.00 per share (the “Series J Warrants”);

o

Series K Warrants to purchase up to an aggregate of 161,719 shares of Common Stock at an exercise price of $34.00 per share;

o

2021 Placement Agent Warrants to purchase up to an aggregate of 16,172 shares of Common Stock at an exercise price of $40.00 per share;

o

MLSC Warrant to purchase up to an aggregate of 730 shares of our Common Stock at an exercise price of $54.80 per share;

o

First Warrants to purchase up to an aggregate of 425,554 shares of our Common Stock at an exercise price of $9.94 per share;

o

First Placement Agent Warrants to purchase up to an aggregate of 31,510 shares of our Common Stock at an exercise price of $10.06 per share;

579,481 shares of Common Stock issuable upon the conversion of outstanding convertible notes, having a weighted average conversion price of $12.12, consisting of

o

Series 1 Convertible Notes convertible into 21,302 shares of Common Stock at a conversion price of $54.00 per share;

o

Series 2 Convertible Notes convertible into 18,815 shares of Common Stock at a conversion price of $50.00 per share;

o

First Notes convertible into up to 462,801 shares of our Common Stock at a conversion price of $9.14 per share;

o

Exchanged Notes convertible into up to 76,563 shares of our Common Stock at a conversion price of $9.14 per share; and

Options granted to employees, directors and consultants under the 2013 Plan to purchase up to an aggregate of 98,626 shares of Common Stock at exercise prices ranging from $4.00 to $130.00 per share and with a weighted average exercise price of $52.00 per share;

 [●] shares of Common Stock issuable upon the exercise of Investor Warrants to be issued in this offering; and

[●] shares of Common Stock issuable upon exercise of the Underwriter Warrants to be issued to the Representative, or its designees, upon the completion of this offering in an amount equal to 9% of the number of Units sold in this offering, including any shares sold in the over-allotment option, if any, as described in “Underwriting.” 

Except as indicated otherwise, the discussion and table above assume no exercise of the underwriters’ option to purchase additional shares of Common Stock and/or Investor Warrants.

DILUTION

If you invest in our securities in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of Common Stock included in each Unit (attributing no value to the Investor Warrants) and the as adjusted net tangible book deficit per share of our Common Stock after this offering. We calculate net tangible book deficit per share by dividing the net tangible book deficit (tangible assets less total liabilities) by the number of outstanding shares of our Common Stock.

The net tangible book deficit of our Common Stock as of September 30, 2022, was approximately $[●], or approximately $[●] per share of Common Stock. Net tangible book deficit per share represents the amount of our total tangible assets less total liabilities divided by the total number of our shares of Common Stock outstanding as of September 30, 2022.

Our pro forma net tangible book deficit as of September 30, 2022 was $[●], or $[●] per share of Common Stock. Pro forma net tangible book deficit represents the amount of our total tangible assets less our total liabilities, after giving effect to our receipt of an estimated $465,000 in net proceeds from the issuance and sale of (i) the Second Notes in the aggregate principal amount of $636,000 that are convertible into 69,585 shares of Common Stock; (ii) the Second Warrants that are exercisable into 127,968 shares of Common Stock. Pro forma net tangible book deficit per share represents the pro forma net tangible book deficit divided by the total number of shares outstanding as of September 30, 2022, after giving effect to the pro forma adjustment described above.

After giving further effect to the sale of shares of Common Stock included in the Units in this offering at a public offering price of $[●] per share of Common Stock included in each Unit, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and assuming no exercise of the Investor Warrants issued as part of the Units, our pro forma, as adjusted net tangible book deficit as of September 30, 2022 would have been approximately $[●] million, or approximately $[●] per share of Common Stock. This amount represents an immediate increase in actual book deficit of $[●] per share to our existing stockholders and immediate dilution of approximately $[●] per share to new investors in this offering (attributing no value to the Investor Warrants). We determine dilution by subtracting the as adjusted net tangible book deficit per share after this offering from the amount of cash that a new investor paid for a share of Common Stock included in each Unit in this offering. The following table illustrates this dilution:

Assumed public offering price per Unit 

$

[●]

Net (deficit) tangible book deficit per share as of September 30, 2022 

$

[●]

Pro forma net tangible book deficit per share after giving effect to the Second Closing 

[●]

Increase in pro forma net tangible book deficit per share after giving effect to this offering (excluding the Second Closing) 

[●]

Pro forma, as adjusted net tangible book deficit per share as of September 30, 2022 after giving effect to this offering and the Second Closing

[●]

Dilution per share to new investors in this offering 

​[●]

If the underwriters exercise their option to purchase additional shares of our Common Stock in full, the pro forma, as adjusted net tangible book deficit after this offering would be approximately $[●] per share, the increase in pro forma net tangible book deficit per share would be approximately $[●] and dilution per share to new investors would be approximately $[●] per share.

Each $0.01 increase (decrease) in the assumed public offering price of $[●] per Unit (the last reported sale price of our Common Stock on the OTCQB on January [●], 2023), would increase (decrease) the net proceeds to us from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $[●], assuming that the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same and assuming no exercise of the Investor Warrants issued as part of the Units. We may also increase or decrease the number of Units we are offering. An increase (decrease) of 1,000,000 in the number of Units we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $        , assuming the public offering price stays the same and assuming no exercise of the Invest Warrants issued as part of the Units. We do not expect that a change in the offering price or the number of Units by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.

The total number of shares reflected in the discussion and tables above is based on 1,249,682 shares of our Common Stock outstanding as of September 30, 2022, and excludes, in each case:

806,437 shares of Common Stock issuable upon the exercise of outstanding warrants, having a weighted average exercise price of $29.33 per share, consisting of:

o

Series G Warrants to purchase up to an aggregate of 34,013 shares of Common Stock at an exercise price of $140.00 per share;

o

Series H Warrants to purchase up to an aggregate of 43,077 shares of Common Stock at an exercise price of $80.00 per share;

o

Series I Warrants to purchase up to an aggregate of 71,429 shares of Common Stock at an exercise price of $44.00 per share;

o

2019 Placement Agent Warrants to purchase up to an aggregate of 5,358 shares of Common Stock at an exercise price of $43.75 per share;

o

Series J Warrants to purchase up to an aggregate of 16,875 shares of Common Stock at an exercise price of $50.00 per share;

o

Series K Warrants to purchase up to an aggregate of 161,719 shares of Common Stock at an exercise price of $34.00 per share;

o

2021 Placement Agent Warrants to purchase up to an aggregate of 16,172 shares of Common Stock at an exercise price of $40.00 per share;

o

MLSC Warrant to purchase up to an aggregate of 730 shares of our Common Stock at an exercise price of $54.80 per share;

o

First Warrants to purchase up to an aggregate of 425,554 shares of our Common Stock at an exercise price of $9.94 per share;

o

First Placement Agent Warrants to purchase up to an aggregate of 31,510 shares of our Common Stock at an exercise price of $10.06 per share;

579,481 shares of Common Stock issuable upon the conversion of outstanding convertible notes, having a weighted average conversion price of $12.12, consisting of:

o

Series 1 Convertible Notes convertible into 21,302 shares of Common Stock at a conversion price of $54.00 per share;

o

Series 2 Convertible Notes convertible into 18,815 shares of Common Stock at a conversion price of $50.00 per share;

o

First Notes convertible into up to 462,801 shares of our Common Stock at a conversion price of $9.14 per share;

o

Exchanged Notes convertible into up to 76,563 shares of our Common Stock at a conversion price of $9.14 per share.

Options granted to employees, directors and consultants under the 2013 Plan to purchase up to an aggregate of 98,626 shares of Common Stock at exercise prices ranging from $4.00 to $130.00 per share and with a weighted average exercise price of $52.00 per share;

[●] shares of Common Stock issuable upon the exercise of Investor Warrants to be issued in this offering; and

[●] shares of Common Stock issuable upon exercise of the Underwriter Warrants to be issued to the Representative, or its designees, upon the completion of this offering in an amount equal to 9% of the number of Units sold in this offering, including any shares sold in the over-allotment option, if any, as described in “Underwriting.” 

Except as indicated otherwise, the discussion and table above assume no exercise of the underwriter’s option to purchase additional shares of Common Stock and/or Investor Warrants.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the other sections of this prospectus, including our unaudited interimaudited annual consolidated financial statements and related notes included inbeginning on pageF-1 of this prospectusprospectus. This discussion and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2015 filed with the Securities and Exchange Commission (“SEC”).

This prospectusanalysis contains forward looking statements. We make forward-looking statements, as defined by the “safe harbor” provisionsincluding information about possible or assumed results of the Private Securities Litigation Reform Act of 1995,our financial condition, operations, plans, objectives and in some cases, you can identify these statements by forward-looking words 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 and other comparable terminology. Such forward-looking statements contained in this prospectus are based on various underlying assumptions and expectations and are subject toperformance that involve risks, uncertainties and other unknown factors, may include projections of our future financial performance basedassumptions. See Cautionary Note Regarding Forward-Looking Statements beginning 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. Copies of Arch’s filings with the SEC may be obtained from the SEC internet site athttp://www.sec.gov. We undertake no duty to update any of these forward-looking statements after the date of filingpage2 of this prospectus to conform such forward-looking statements toprospectus. Our actual results may differ materially from those anticipated or revised expectations, except as otherwise required by law.

As usedsuggested in this prospectus unless otherwise indicated, the “Company”, “we”, “us”, “our”, and “Arch” refer to Arch Therapeutics, Inc. and its consolidated subsidiary, Arch Biosurgery, Inc.any forward-looking statements.

 

Corporate Overview

 

Arch Therapeutics, Inc. (together with its subsidiary, the “Company” or “Arch”) was incorporated under the laws of the State of Nevada on September 16, 2009, withunder the name “Almah, Inc.” to pursue the business of distributing automobile spare parts online. Effective June 26, 2013, Archthe Company completed a merger, (the “or the Merger,”) with Arch Biosurgery, Inc. (formerly known as Arch Therapeutics, Inc.), a Massachusetts corporation, (“or ABS,”), and Arch Acquisition Corporation, (“or Merger Sub,”), Arch’s 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 Arch. Prior to the completion of the Merger, Arch wasCompany. As a “shell company” under applicable rules of the SEC and had no or nominal assets or operations. As partresult of the acquisition Almah management resigned and was replaced with ABS management. Upon its acquisition of ABS, Archthe Company abandoned its prior business plan and changed its operations to the business of a biotechnology 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 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 Mergerprincipal offices are located in this prospectus and will be so replaced in all future filings with the SEC that require financial statements to be included.Framingham, Massachusetts.

 

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. on April 7, 2008, andEffective upon the closing of the Merger, ABS changed its name from Arch Therapeutics, Inc. to Arch Biosurgery, Inc. upon

The Company only recently commenced commercial sales of our first product, AC5® Advanced Wound System, and has recently devoted substantially all of our operational effort to continue the closingongoing commercialization and market adoption of the MergerCompany’s first product. To date, the Company has principally raised capital through debt borrowings, the issuance of convertible debt, and the issuance of units consisting of shares of the Company’s Common Stock, $0.001 par value per share (“Common Stock”), and warrants.

The Company expects to incur substantial expenses for the foreseeable future relating to research, development and commercialization of its potential products. However, there can be no assurance that the Company will be successful in securing additional resources when needed, on June 26, 2013.terms acceptable to the Company, if at all. Therefore, there exists substantial doubt about the Company’s ability to continue as a going concern for one year past the issuance of the financial statements. 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 September 30, 2022, we had a net loss of $5,275,854 versus a net loss of $6,240,482 in the prior year. The losses for each of the years ended September 30, 2022 and 2021 can be attributable to research and development expense, including regulatory approval and product research, and general and administrative costs, primarily relating to legal costs associated with intellectual property and patent application, general corporate legal expense all of which were partially offset by adjustments to the derivative liabilities and, for the fiscal year ended September 30, 2021, a gain on the forgiveness of the loan issued by First Republic Bank under the Paycheck Protection Program, established under the Coronavirus Aid, Relief, and Economic Security Act. Cash used in operating activities decreased $1,502,553 during the year ended September 30, 2022 to $4,456,075, compared to $5,958,628 for the year ended September 30, 2021. Cash at September 30, 2022 decreased by $1,519,699 to $746,940 compared to $2,266,639 as of September 30, 2021.

 

 

 

Business Overview

 

We are a biotechnology company in the development stage with limited operations to date. We aim to developmarketing and developing a number of 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 aour innovative AC5® 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.technology platform. We believe our technology could support an innovative platform of potentialthese products can be important advances in the field of stasis and barrier applications.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 recently devoted substantially all of our operational effort to continue the ongoing commercialization and market adoption of our first product. Our lead product candidate, the AC5 Surgical Hemostatic Device™ (whichgoal is to make care faster and safer for patients with products for use on external wounds, which we sometimes refer to as AC5”), is designedDermal Sciences applications, and products for use inside the body, which we refer to achieve hemostasisas 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 the United States and Europe, respectively, and which are intended for skin applications, such as management of complicated chronic wounds or acute surgical wounds. Other products are in development for use in minimally invasive andor open surgical procedures and we hopeinclude, for example, AC5-GTM for gastrointestinal endoscopic procedures and AC5-V® and AC5® Surgical Hemostat for hemostasis inside the body, all of which are currently investigational devices limited by law to develop other hemostatic or sealant product candidates in the futureinvestigational use.

Products based on our self-assemblingthe AC5 platform contain a biocompatible peptide technology platform. Our plan and business modelthat is to developsynthesized from proteogenic, naturally occurring L-amino acids. Unlike products that apply that core technology to use with human bodily fluids and connective tissues.

AC5 is designed to be a biocompatible syntheticcontain traditional peptide comprising naturally occurring amino acids. Whensequences, when applied to a wound, AC5 intercalatesAC5-based products intercalate into the interstices of the connective tissue where it self-assemblesand self-assemble into a physical, mechanicalprotective physical-mechanical nanoscale structure that providescan provide a barrier to leaking substances, such as blood.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.

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 designedself-healing, in that it can dynamically self-repair around migrating cells. For instance, AC5® Advanced Wound System, which is indicated for direct applicationthe 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, which we believe will make it user-friendly and able tocan conform to irregular wound geometry. Additionally, AC5 isgeometry, self-assembles into a wound care matrix that can provide clinicians with multi-modal support, and does not possess sticky or glue-like which wehandling characteristics. We believe willthese properties enhance its utility in the setting of minimally invasiveseveral settings and laparoscopic surgeries. Further, in certain settings, AC5contribute to its user-friendly profile.

We believe that our technology lends itself to a conceptrange 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 call Crystal Clear Surgery™ becausehave 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 (“TTH”) is comparable among test subjects regardless of whether such test subject had or had not been treated with therapeutic doses of anticoagulant or antiplatelet medications, commonly called “blood thinners.” Furthermore, the transparency and physical properties of certain AC5 Devices may enable a surgeon to operate through it in order to maintain a clearer field of vision and prophylactically stop or lessen bleeding as it starts.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.

Marketing

Sales and marketing efforts for our AC5 Advanced Wound System, which has received 510(k) marketing clearance from the FDA, address the demand for improved solutions to treat challenging chronic and acute surgical wounds, with a particular early focus on diabetic foot ulcers, venous leg ulcers and pressure ulcers. Chronic wounds are typically defined as wounds that have not healed after four weeks of standard care. Approximately 4 million to 6.5 million new onset chronic wounds are estimated to occur in the U.S. annually, including approximately 700,000 to 2 million diabetic foot ulcers, 2.5 million pressure ulcers, and 1.2 million venous leg ulcers. If untreated, improperly treated or unresponsive to treatment, these wounds can ultimately lead to amputation. The 5-year mortality rate among patients with chronic wounds, especially after an amputation, is significant.

Published data on AC5 Advanced Wound System shows encouraging outcomes, including limb salvage (avoided limb loss), among patients with multiple co-morbidities and challenging chronic wounds that failed to heal despite treatment with either traditional or other advanced wound care modalities over prolonged periods of time. 

 

We currently maintain an internal commercial team focused on driving awareness and adoption of AC5 Advanced Wound System in several targeted channels with a particular focus on physician offices and government channels, such as Veterans Health Administration hospitals (“VA Hospitals”) and military treatment facilities (“MTFs”). We anticipate that material growth in the physician office setting will require product reimbursement. To that end, we submitted an application to the Centers for Medicare and Medicaid Services (“CMS”) in July 2022 for a unique product reimbursement code. If approved, we would expect a final decision from CMS in February 2023 with a go-live date of April 1, 2023. In the meantime, we have devoted muchlaunched a temporary reimbursement support program in line with CMS guidance to support commercial use and adoption of AC5 Advanced Wound System while awaiting the decision by CMS on the unique product code. In support of the VA and MTF market, we partnered with Lovell Government Services (“LGS”), a Service-Disabled Veteran-Owned Small Business, as its distributor in the government channel. As a direct result of its relationship with LGS, AC5 Advanced Wound System is listed on the four major government supply schedules (ECAT, DAPA, FSS and GSA) in order to allow doctors in any VA or MTF to order AC5 Advanced Wound System. We have also established and will continue to seek partnerships with reputable, value-added independent sales distributors on a case-by-case basis to expand the overall reach and footprint of its total sales organization. Presently, our commercialization efforts and resources remain dedicated to the U.S. market for advanced wound care.

Operations

Much of our operationsoperational efforts to date, to the researchwhich we often perform in collaboration with partners, have included selecting compositions and development of our core technology, including selectingformulations for our initial product composition,products; conducting initialpreclinical studies, including safety and other related tests, generatingtests; conducting a human trial for safety and performance of AC5; developing and conducting a human safety study to assess for irritation and sensitization potential; securing marketing authorization for our first product in the United States and in Europe; developing, optimizing, and validating manufacturing methods and formulations, which are particularly important components of self-assembling peptide development; developing methods for manufacturing scale-up, reproducibility, and manufacturingvalidation; engaging with regulatory authorities to seek early regulatory guidance as well as marketing authorization for our products; sourcing and formulation methods,evaluating commercial partnering opportunities in the United States and abroad; 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 ability to conduct clinical trials and our subsequent commercialization timeline.

 

Our long-term business plan includes the following goals:

·

conducting additional successful biocompatibility, studiespre-clinical, and clinical trialsstudies on AC5;our products and product candidates;

·

expanding, maintaining

obtaining additional marketing authorization for products in the United States, Europe, and protecting of our intellectual property portfolio;other jurisdictions as we may determine;

·

developing appropriate

continuing to develop third party relationships to manufacture, distribute, market and otherwise commercialize AC5;our products;

·

obtaining regulatory approval or certification of AC5 in the EU, the U.S., and other jurisdictions as we may determine;
·developing

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 the hemostatic, sealant, and/orDermal Sciences, BioSurgery, and other fields.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 milestones described abovepreviously 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 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 advance toward, enter into,guide activities related to expanded and if successful, subsequently increase commercialization activities;new product marketing authorizations;

·

complete clinical trial protocols and Clinical Investigational Plans with principal investigators for AC5 and submit applications to Ethics Committee and required authoritative agencies for initiation of additional initial clinical trials;
·commence additional and complete our current 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;

·

pursue commercial partnerships; and

expand and enhance our intellectual property portfolio by filing new patent applications, obtaining allowances on currently filed patent applications, andand/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; andportfolio.

·assess our self-assembling peptide platform in order to identify and select product candidates for advancement into development.

 

-45- 

In addition to capital required for operating expenses, depending upon input from regulatory authorities, authorized representatives, patent and trademark offices, or other agencies in the US, EU or elsewhere, as well as for potential additional regulatory filings and approvals during the approximately next two years, additional capital will be required.

 

We believe that the Company currently has adequate capitalhave no commitments for any future capital. We will require significant additional financing to supportfund our planned operations, through the initialincluding further research and development relating to AC5®, seeking regulatory approval process in Europe. Ifof 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 regulatory authorities request additional clinical or non-clinical data prior to approval additional capital may be required. Additional European regulatory approvals could require an additional $2,000,000-$3,000,000. We further expect that the Company will require an additional $6,000,000 - $9,000,000 or more related to the initial regulatory process in the U.S. Theseinvestor 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 FACTORSRisk Factors” in this filing.prospectus. We anticipate that our operating and other expenses will continue to increase as we continue to implement our business plan and pursue and achieve these goals. After giving effect to the funds received in past equity and debt financings and assuming our use of that funding at the rate we presently anticipate, as of December 28, 2022, we believe that our current cash on hand will meet our anticipated cash requirements into the second quarter of fiscal 2023. We could spend our financial resources much faster than we expect, in which case we would need to raise additional capital as our current funds may not be sufficient to operate our business for the entire duration of that period.

Preclinical Testing

We have engaged and continue to engage third parties in the United States 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 United States and AC5 Topical Hemostat in Europe, and such test results support that the products are biocompatible. We will perform further biocompatibility testing that we deem necessary for additional indications, classifications, jurisdictions, and/or as required by regulatory authorities.

Acute and survival animal studies assessing the safety and performance of our technology have also demonstrated favorable outcomes in Dermal Sciences and BioSurgical applications.

Clinical Testing

We have engaged and continue to engage third parties in the United States 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 United States and AC5 Topical Hemostat in Europe.

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 the United States and AC5 Topical Hemostat in Europe, and the indication for use, or purpose, for each product follows, respectively:

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.

In practice, we envision that both products will be used in comparable wounds, including, in particular, acute or chronic wounds that require surgical intervention. Examples include, surgical excision of dead, contaminated, or damaged tissue, otherwise known as debridement, in chronic wounds; complicated wounds created during an acute surgical procedure; failed acute surgical wounds; wounds requiring wound bed preparation in advance of other procedures; wounds in need of an advanced dressing that incorporates an initial protective barrier function followed by a scaffolding or lattice function that enables healing.

We announced receipt of 510(k) premarket notification clearances for AC5 Advanced Wound System on December 17, 2018, providing marketing authorization, and on March 23, 2020, clearing use of an additional supplier and additional manufacturing processes. We announced receipt of the CE mark for AC5 Topical Hemostat on April 13, 2020.

The COVID-19 pandemic environment has introduced new challenges related to product launch, marketing and sales, as clinicians and facilities are increasingly focused on managing resources, the disease, or its potential spread. We believe that these challenges may present an opportunity for our new technology to address certain poorly met needs.

Wound interventions are too often considered to be elective procedures instead of being treated essentially or emergently as National Pressure Ulcer Advisory Panel guidelines and others recommend, resulting in a projected increased risk to limb and life while elective procedures are delayed and not prioritized. Furthermore, the implications of these delays are a growing backlog of chronic wounds awaiting care and a worsening of such wounds, leading to greater morbidity, such as infection, necrosis, and amputation, and potentially mortality.

We expect our Dermal Sciences product commercialization to be gradual, initially, and moderately accelerate into new market channels. In addition to identifying and encouraging product use by key opinion leaders and early adopters, we will prioritize our focus on private and government facilities. VA Hospitals, for example, tend to have many patients whose needs we believe we can help address. We prioritized the launch of AC5 Advanced Wound System in the United States over that of AC5 Topical Hemostat in Europe to maximize operational efficiencies in light of the COVID-19 pandemic.

On December 13, 2021, we announced that in partnership with Lovell Government Services, our AC5® Advanced Wound System has been added to the Federal Supply Schedule and General Services Administration contracts, and is approved for purchase by all federal government agencies, including the Department of VA, Indian Health Services, and Department of Defense Medical Treatment Facilities effective December 15, 2021.

On March 14, 2022, we announced the Company had entered into a distribution agreement with Centurion Therapeutics Inc. (“Centurion”), an exclusive strategic partner to the world’s largest tissue bank, to expand sales opportunities for AC5® Advanced Wound System. Centurion distributes a comprehensive portfolio of aseptically processed human tissues to support surgeons in a broad array of specialties through over a hundred contracted wound care distributors nationwide. AC5® Advanced Wound System will be added to their advanced wound care product line as part of this distribution agreement.

We have engaged and continue to engage third parties in the United States and abroad to advise on and perform certain sales and marketing activities, typically with assistance from our team. These third parties can include contract organizations, consultants, advisors, scientists, clinicians, and/or other collaborators.

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.

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 National Pressure Ulcer Advisory Panel guidelines and others recommend, resulting in a projected increased risk to limb and life while elective procedures are delayed and not prioritized. Furthermore, the implications of these delays are a growing backlog of chronic wounds awaiting care and a worsening of such wounds, leading to greater morbidity, such as infection, necrosis, and amputation, and potentially mortality.

While highlighted by the COVID-19 pandemic, we also believe that these challenges reveal an underlying problem in the healthcare system–clinicians and other providers are being asked to accomplish more in less time with fewer resources. These resources may include higher acuity settings, such as operating rooms; expensive wound care products that may not work as well as desired; nursing time to change wound dressings; and surgeon time for managing wounds during debridement; repeat patient visits over months and often years, and others. Our 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 the United States and abroad to advise on and perform certain manufacturing and related activities, typically with assistance from our team. These third parties include academic institutions, consultants, advisors, scientists, and/or other collaborators. The activities include development of our primary product candidates, as well as generation of appropriate analytical methods, scale-up, and other procedures for use by manufacturers and/or other members of our supply chain to produce or process our products at current and/or larger scale quantities for preclinical and clinical testing and ultimately, as required marketing authorizations are obtained, commercialization.

Our products are regulated as medical devices, and as such, many of our activities have focused on optimizing traditional parameters to target specifications, biocompatibility, physical appearance, stability, and handling characteristics, among other metrics, in order to achieve the desired product. We and our partners intend to continue to monitor manufacturing processes and formulation methods closely, as success or failure in establishing and maintaining appropriate specifications may directly impact our ability to conduct additional preclinical and clinical trials and/or deliver commercial product.

 

Merger with ABS and Related Activities

 

As noted earlier in this document, onOn 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 (“shares of Common Stock”), from 75,000,000375,000 shares to 300,000,0001,500,000 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 itsour Common Stock trades on the OTC Bulletin Board from “AACH” to “ARTH”.

Liquidity

We are in In connection with the development stage and have generated no operating revenuesReverse Stock Split, the Company changed its ticker symbol 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 March 31, 2016 and 2015 of $1,253,056 and $833,966, respectively. For the six months ended March 31, 2016 and 2015, we have net losses of $2,409,711 and $454,821, respectively. The net losses for the three and six months ended March 31, 2016 and 2015 can be attributed to general and administrative costs and research and development expenses associated with pre-clinical development expenses, manufacturing and quality management system consulting and advisory related expenses. We devote a significant amount of our efforts towards fundraising and product research.“ARTHD”.

 

Recent Developments

 

DuringOn July 6, 2022, or the three months ended March 31, 2016,First Closing Date, we entered into the Company announced that (i) it had initiated patient enrollmentSPA with certain institutional and treatment in its first clinical trial in Western Europe, (ii) it had received an internationally recognized ISO quality certification,accredited individual investors providing for the issuance and (iii) it had obtained favorable results from a broad panelsale of preclinical biocompatibility tests that were performed on AC5 in support of Arch’s planned filing of a CE Mark application that indicate that AC5’s peptide structure and mechanism of action, which is based on the formation of a local physical-mechanical barrier at the wound site, does not promote toxicity to the overall biological system following exposure to AC5. In addition, on April 5, 2016, April 11, 2016, and May 16, 2016, the Company announced that notices of allowance from the U.S. Patent Office had been received on two broad composition-of-matter patents and a broad method of use patent that are assigned to the Massachusetts Institute of Technology (MIT) and Versitech Limited and which are exclusively licensed worldwide to Arch. The broad composition claims of the composition-of-matter patents cover Arch’s present and proposed products, which contain peptides and peptidomimetics, respectively, that self-assemble into barrier structures on tissue and inhibit or prevent the passage of bodily fluids. The broad method claims of the method of use patent cover techniques for preventing the loss or unwanted movement of body fluids. Further, on May 10, 2016, the Company announced that a notice of allowance from the U.S. Patent Office had been received for a broad composition of matter and method of use patent that covers solid forms of the Company’s self-assembling technology. In addition, the Company has initiated the FDA regulatory process.

From October 1, 2015 through April, 2016, $605,000 of principal on the Company’s outstanding convertible notes and $39,900 of associated accrued interest were converted into an aggregate of 3,224,494(i) 63,833 First Inducement Shares, (ii) First Notes in the aggregate principal amount of $4.23 million, which included an aggregate $0.705 million original issue discount in respect of the First Notes, convertible into 462,801 First Conversion Shares; (iii) First Warrants to purchase an aggregate of 425,554 First Warrant Shares; and (iv) First Placement Agent Warrants to purchase 31,510 shares of common stock. In addition, through June 23, 2016 Series C Warrants had been exercised on a cash basisCommon Stock. On January 18, 2023, or the Second Closing Date, we entered into an amendment to the SPA with certain investors providing for the issuance and sale of (i) 9,598 Second Inducement Shares; (ii) Second Notes in the aggregate principle amount of $636,000, which included an aggregate $106,000 original issue discount in respect of the Second Notes, convertible into 69,585 Second Conversion Shares; (iii) Second Warrants to purchase up to 127,968 shares of Common Stock; and (iv) Second Placement Agent Warrants to purchase 6,565 shares of Common Stock. In connection with the 2022 Private Placement Financing, we issued to certain investors Exchanged Notes convertible into 76,563 Exchanged Conversion Shares. We refer to the First Notes, Second Notes and Exchange Notes as the “2022 Notes”.

The 2022 Notes may be prepaid by the Company, in whole or in part, at any time with the written consent of the lead investor, with such prepayment amounts subject to adjustment as a result of certain time-based prepayment premiums set forth in the 2022 Notes; provided, that, the written consent of the lead investor is not required in connection with a prepayment made from the proceeds of an Uplist Transaction (as defined below). The First Notes bear interest on the unpaid principal balance at a rate equal to ten percent (10%) (computed on the basis of the actual number of days elapsed in a 360-day year) per annum accruing from the First Closing Date until the First Notes become due and payable at maturity or upon their conversion, acceleration or by prepayment, and may become due and payable upon the occurrence of an event of default under the First Notes. Any amount of principal or interest on the First Notes which is not paid when due shall bear interest at the rate of the lesser of (i) eighteen percent (18%) per annum or (ii) the maximum amount allowed by law from the due date thereof until payment in full. The terms of the Exchanged Notes and the Second Notes are substantially the same terms as the First Notes, except that the Second Notes are unsecured.

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 $9.14 (the “Conversion Price”) through the later of 2,299,725(i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined in the 2022 Notes); provided, however, certain 2022 Notes include a provision preventing such conversion if, as a result, the holder, together with its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than 4.99% of the outstanding shares of the Company’s Common stock resulting in gross proceedsStock (as applicable, the “Ownership Limitation”) immediately after giving effect to the CompanyConversion; and provided further, the holder, upon notice to us, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of $459,945, Series A Warrants had been exercised on a cash basis for an aggregate issuance9.99% of 2,900,000the outstanding shares of the Company’sCommon Stock; and (ii) any increase in the Ownership Limitation will not become effective until the 61st day after delivery of such waiver notice. The Conversion Price is subject to adjustment as set forth in the 2022 Notes.

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 six (6) months after the First Closing Date or the Second Closing date, as applicable; (ii) our failure to deliver the shares of Common Stock resulting in gross proceeds to the Company2022 Note holder upon exercise by such holder of $580,000 and Series D Warrants had been exercised on a cash basis for an aggregate issuance of 3,190,591 sharesits conversion rights under the 2022 Note; (iii) our loss of the Company’s“bid” price for our Common Stock resulting in gross proceedsand/or a market and such loss is not cured during the specified cure periods; and (iv) our failure to the Companycomplete an uplisting of $797,648.

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In addition, 2,450,000 of Series A Warrants had been exercised on a cashless basis for an aggregate of 1,279,688 sharesour Common Stock to any of the Company’s Common Stock.Nasdaq Global Market, Nasdaq Capital Market, New York Stock Exchange or NYSE American by February 15, 2023 (an “Uplist Transaction”).

 

On May 3, 2016, pursuantThe First Warrants (i) have an exercise price of $9.94 per share; (ii) have a term of exercise equal to 5 years after their issuance date; (iii) became exercisable immediately after their issuance; and (iv) have a provision preventing the approvalexercisability of such First Warrant if, as a result of the exercise of the First Warrant, the holder, together with its affiliates and any other persons whose beneficial ownership of our Board, we issued an aggregateCommon Stock would be aggregated with the holder’s, would be deemed to beneficially own more than the Ownership Limitation. The holder, upon notice to us, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of 2,000,0009.99% of the outstanding shares of our Common Stock; and (ii) any increase in the Ownership Limitation will not become effective until the 61st day after delivery of such waiver notice. The number of shares of Common Stock into which each of the First Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the First Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). The Second Warrants have substantially the same terms as the First Warrants.

Pursuant to an engagement agreement that we entered into with Maxim Group LLC (the “2022 Placement Agent”), we agreed, among other things, to (i) pay the 2022 Placement Agent 10% of the gross proceeds in the 2022 Placement Agent from certain institutional investors in the 2022 Private Placement Financing, or $290,000, and (ii) issue the 2022 Placement Agent, or its designees, warrants to purchase up to 10% of the aggregate number of shares sold to the institutional investors in the 2022 Private Placement Financing, or First Placement Agent Warrants to purchase up to 31,510 shares of Common Stock and Second Placement Agent Warrants to purchase up to 6,565 shares of Common Stock. The First Placement Agent Warrants have substantially the same terms as the First Warrants, except that the exercise price of the First Placement Agent Warrants is $10.06 per share and are not exercisable until six (6) months from the date of issuance. The Second Placement Agent Warrants have substantially the same terms as the Second Warrants, except that the exercise price of the Second Placement Agent Warrants is $10.06 per share and are not exercisable until six (6) months from the date of issuance. We also reimbursed the 2022 Placement Agent approximately $58,000 for non-accountable banking fees, legal fees and other expenses.

On the Second Closing Date, the Company entered into the A&R Registration Rights Agreement, pursuant to restricted stock awards granted outsidewhich we are obligated, subject to certain conditions, to file with the SEC one or more Resale Registration Statements to register the Second Inducement Shares, the Second Conversion Shares and the Second Warrant Shares for resale under the Securities Act within the earlier of (i) the date that is 45 days following the Uplist Transaction, and (ii) the date that is 90 days following the Second Closing Date. Our failure to satisfy certain filing and effectiveness deadlines with respect to a Resale Registration Statement and certain other requirements set forth in the A&R Registration Rights Agreement may subject us to payment of monetary penalties. 

On September 29, 2022, the Company held its Annual Meeting. At the Annual Meeting, the stockholders approved a proposal authorizing our Board, in its sole and absolute discretion, without further action by the stockholders, to amend the Company’s Charter to (i) effect the Reverse Stock Split of our 2013issued and outstanding and authorized shares of Common Stock Incentive Planat a specific ratio, ranging from 1-for-100 to (i) Dr. Avtar Dhillon,1-for-200, at any time prior to September 29, 2023, with the Chairman ofexact ratio to be determined by our Board, (737,000 shares);and (ii) James R. Sulat,increase the number of authorized shares of Common Stock following consummation of the Reverse Stock Split by 300%. On January 6, 2023, the Board approved a memberreverse split ratio of our Board (30,000 shares); (iii) Dr. Terrence W. Norchi, our President, Chief Executive Officer1-for-200 to be effective prior to the pricing of this offering. The Reverse Stock Split and a member of our Board (1,130,000 shares); and (iv) Richard Davis, our Chief Financial Officer (103,000 shares).authorized share increase were effected on January 17, 2023.

 

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During the month of September 2022, the Company launched and announced a reimbursement support program designed to help drive increased commercial use of the company’s FDA-approved AC5® Advanced Wound System. During the fiscal year ended September 30, 2022, the Company invoiced and shipped a total of 33 units, of which 23 units were shipped in connection with the launch of the Company’s reimbursement support program. Under the terms of the program, the invoice amount may be adjusted through full or partial write-offs based on actual reimbursement amounts paid by Centers for Medicare and Medicaid Services (“CMS”) for AC5 units applied and billed by doctors. As such, revenue, if any, for the units shipped in connection with the Company’s reimbursement support program will be booked in future periods when all conditions have been satisfied.

 

Results of Operations

 

The following discussion of our results of operations should be read together with the unaudited interim consolidated financial statements and audited financial statements included in this prospectus. The period to periodprospectus and the notes thereto. Our historical results of operations and the period-to-period comparisons of our interim results and annual results of operations that follow are not necessarily indicative of future results.

 

Three MonthsYear Ended March 31, 2016September 30, 2022 Compared to Three MonthsYear Ended March 31, 2015September 30, 2021

 

 March 31, March 31, Increase 
 2016 2015 (Decrease)  

September 30,

2022

 

September 30,

2021

 

Increase

(Decrease)

 
 ($) ($) ($)   ($)   ($)   ($) 
Revenue  -   -   -  15,652  11,565  4,087 
Operating Expenses                  
General and administrative  868,433   853,177   15,256 

Cost of revenues

 51,489  26,282  25,207 

Selling, general and administrative

 4,519,636  5,009,323  (489,687)
Research and development  386,285   402,495   (16,210)  1,153,333   1,353,084   (199,751)
Loss from operations  (1,254,718)  (1,255,672)  (954)

Loss from Operations

  (5,708,806)  (6,377,124

)

  668,318 
Other income  1,662   421,706   (420,044)  432,952   136,642   296,310 
Net loss  (1,253,056)  (833,966)  419,090   (5,275,854)  (6,240,482)  964,628 

Revenue

 

We did not generate revenue in eitherRevenue for the year ended September 30, 2022 was $15,652, an increase of $4,087 compared to $11,565 for the three monthsyear ended March 31, 2016September 30, 2021. Revenue for the year ended September 30, 2022 was the result of four transactions into multiple VA Hospitals consisting of ten (10) total units through our distribution partner, LGS. Revenue for the year ended September 30, 2021 was $11,565, which was the result of a single transaction with an established key opinion leader and 2015.a single transaction into the Veterans Administration of one (1) unit through our distribution partner, LGS.

 

Cost of revenues

Cost of revenues during the year ended September 30, 2022 was $51,489, an increase of $25,207 compared to $26,282 for the year ended September 30, 2021. Cost of revenue includes product costs, third party warehousing, overhead allocation, royalty and shipping costs.

Selling, General and Administrative Expense

 

General and administrative expensesexpense during the three monthsyear ended March 31, 2016September 30, 2022 were $868,433, an increase$4,519,636 a decrease of $15,256$489,687 compared to $853,177$5,009,323 for the three monthsyear ended March 31, 2015.September 30, 2021. The increasedecrease in selling, general and administrative expense for the year ended September 30, 2022 is primarily attributable to decrease in legal and consulting costs partially offset by an increase in patent-related expenses partially offset by a decrease in stock based compensation and payroll expenses.

Research and Development Expense

Research and development expenses during the three months ended March 31, 2016 were $386,285, a decrease of $16,210 compared to $402,495 for the three months ended March 31, 2015. The decrease in research and development expense is primarily attributablecosts attributed to an increase in expenses associated with pre-clinical development expenses and manufacturing and quality management system consulting and advisory related expenses offset primarily by a decrease in stock based compensation expenses. Research and development expenses are expected to increase as a result of our plans to expand clinical programs and clinical studies as resources permit. The Company has initiated patient enrollment and treatment in its first clinical trial in Western Europe.

Other Income (Expense)

Other income during the three months ended March 31, 2016 was $1,662 a decrease of $420,044 compared to other income of $421,706 for the three months ended March 31, 2015. This decrease resulted from a change in adjustments to derivative liabilities of $403,777 during fiscal 2016 as compared to fiscal 2015. Other income during the three months ended March 31, 2016 was attributed primarily to a net gain on adjustments of derivative liabilities related to our outstanding warrants of $68,485, partially offset by interest expense of $66,823.

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Six Months Ended March 31, 2016 Compared to Six Months Ended March 31, 2015

  March 31,  March 31,  Increase 
  2016  2015  (Decrease) 
  ($)  ($)  ($) 
Revenue  -   -   - 
Operating Expenses            
General and administrative  1,733,946   1,723,533   10,413 
Research and development  800,288   802,230   (1,942)
Loss from operations  (2,534,234)  (2,525,763)  8,471 
Other income  124,523   2,070,942   (1,946,419)
Net loss  (2,409,711)  (454,821)  1,954,890 

Revenue

We did not generate revenue in either of the six months ended March 31, 2016 and 2015.

General and Administrative Expense

General and administrative expenses during the six months ended March 31, 2016 were $1,733,946, an increase of $10,413 compared to $1,723,533 for the six months ended March 31, 2015. The increase in general and administrative expense is primarily attributable to an increase in patent-related expenses partially offset by a decrease in stock based compensation.

Research and Development Expense

Research and development expenses during the six months ended March 31, 2016 were $800,288, a decrease of $1,942 compared to $802,230 for the six months ended March 31, 2015. The decrease in research and development expense is primarily attributable to an increase in expenses associated with pre-clinical development expenses and manufacturing and quality management system consulting and advisory related expenses offset primarily by a decrease in stock based compensation expenses. Research and development expenses are expected to increase as a result of our plans to expand clinical programs and clinical studies as resources permit. The Company has initiated patient enrollment and treatment in its first clinical trial in Western Europe.

Other Income (Expense)

Other income during the six months ended March 31, 2016 was $124,523 a decrease of $1,946,419 compared to other income of $2,070,942 for the six months ended March 31, 2015. This decrease resulted from a change in adjustments to derivative liabilities of $1,814,170 during fiscal 2016 as compared to fiscal 2015. Other income during the six months ended March 31, 2016 was attributed primarily to a net gain on adjustments of derivative liabilities related to our outstanding notes of $335,092 partially offset by interest expense of $210,569.

Year Ended September 30, 2015 Compared to Year Ended September 30, 2014

  September  30,  September 30,  Increase 
  2015  2014  (Decrease) 
Revenue $-  $-  $- 
Operating Expenses            
General and Administrative  3,700,477   3,134,285   566,192 
Research and Development  1,760,037   1,477,479   282,558 
Loss from Operations  5,460,514   4,611,764   848,750 
Other Income (Expense)  2,512,988   (3,531,059)  6,044,047 
Net Loss $2,947,526  $8,142,823  $5,195,297 

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Revenue

We did not generate any revenue in either of the years ended September 30, 2015 or 2014.

General and Administrative Expense

General and administrative expenses during the fiscal year ended September 30, 2015 were $3,700,477, an increase of $566,192 compared to $3,134,285 for the fiscal year ended September 30, 2014. The increase in general and administrative expense is primarily attributable to increased legal costs associated with intellectual property, patent application and prosecution costs, and general corporate legal expenses. General and administrative expenses are generally expected to increase as a result of additional staffing, increased stock based compensation as well as increased costs associated with the company’s fundraising efforts.headcount.

 

Research and Development Expense

 

Research and development expense during the fiscal year ended September 30, 20152022 was $1,760,037, an increase$1,153,333, a decrease of $282,558$199,751 compared to $1,477,479$1,353,084 for the fiscal year ended September 30, 2014.2021. The increasedecrease in research and development expense is primarily attributable to a decrease in compensation costs, partially offset by an increase in expenses associated with pre-clinical development expenses and manufacturing and quality management system consulting and advisory related expenses. Researchinventory obsolescence charge of approximately $248,000 for shelf-life, research and development expenses are expected to increase as a result of our plans to commence clinical studies and establish our ISO certification and move forward with the CE Mark approval process. We have submitted an application to a European regulatory authority to commence our first clinical trial of AC5, and we have received preliminary comments from such regulatory authority on our application. We have responded to those comments, and we expect to receive approval to proceed with our first clinical trial of AC5 during the first calendar quarter of 2016.product samples.

 

OOther Income/(Expense)ther Income

 

Other income during the year ended September 30, 20152022 was $2,512,988,$432,952, an increase of $6,044,047$296,310 compared to total other expenseincome of $3,531,059$136,642 for the year ended September 30, 2014.2021. The increase in other income was the resultis attributable to a change in fair market value of the change in derivative liabilities partially offset by an increase in interest expense.expense and the gain on the forgiveness of PPP loan recorded in the year ended September 30, 2021.

 

Liquidity and Capital Resources

 

To date, we have not generated revenues fromIn the salefirst quarter of any products2021, 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. At March 31, 2016, we had cash of $1,669,249 and positive working capital of $1,360,367.

Cash Used in Operating Activities

Working Capital

 

At March 31, 2016,September 30, 2022, we had total current assets of $1,759,368$2,598,195 (including cash of $1,669,249)$746,940) and negative working capital of $1,360,367.$722,299. Our working capital as of March 31, 2016September 30, 2022 and September 30, 20152021 is summarized as follows:

 

 

September 30,

 

September 30,

 
 March 31,
2016
 September 30,
2015
  

2022

  

2021

 
Total Current Assets $1,759,368  $4,003,019  $2,598,195  $3,667,745 
Total Current Liabilities  399,001   1,286,078   3,320,494   1,727,547 
Working Capital $1,360,367  $2,716,941  $(722,299) $1,940,198 

 

Total current assets as of March 31, 2016September 30, 2022 were $1,759,368,$2,598,195, a decrease of $2,243,651$1,069,550 compared to $4,003,019$3,667,745 as of September 30, 2015.2021. The decrease in current assets is primarily attributable to selling, general and administrative expenses resulting from intellectual property costsexpense and research and development expensesexpense incurred in connection with activities to develop our primary product candidate.candidate, which was partially offset by our net proceeds from our 2022 Private Placement Financing. Our total current assets as of March 31, 2016September, 2022 and September 30, 20152021 were comprised primarily of cash, inventory and prepaid expenses and other current assets.expense.

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Total current liabilities as of March 31, 2016September 30, 2022 were $399,001, a decrease$3,320,494, an increase of $887,077$1,592,947 compared to $1,286,078$1,727,547 as of September 30, 2015.2021. The decreaseincrease is primarily due to the conversion of $505,000 of convertible notes into equity and an adjustment to the fair valueincrease in accounts payable, current portion of the derivative liabilities associatedSeries 1 Convertible Notes, current portion of the Series 1 accrued interest and the amount owed in connection with these Notes, partially offset by the timingfinancing of payments in accounts payable. Our total current liabilities as of March 31, 2016certain insurance premiums and September 30, 2015 were comprised primarily of the current portion of the derivative liability, the convertible notes, accounts payable and accrued expenses.liability.

CaCashsh Flow for the Six MonthsYear Ended September 30, 2022 Compared to the Year Ended September 30, 2021

 

 March 31, March 31,  

September 30,

 

September 30,

 
 2016 2015  

2022

  

2021

 
Cash Used in Operating Activities $(2,330,851) $(1,809,920) $(4,456,075) $(5,958,628)
Cash Used in Investing Activities  -   -    (3,275)
Cash Provided by Financing Activities  40,000   1,550,000   2,936,376   7,269,233 
Net decrease in cash $(2,290,851) $(259,920)

Net Increase (decrease) in Cash

 $(1,519,699) $1,307,330 

Cash Used in Operating Activities

 

Cash used in operating activities increased $520,931decreased $1,502,553 to $4,456,075 during the six monthsfiscal year ended March 31, 2016 to $2,330,851September 30, 2022 compared to $1,809,920 during$5,958,628 for the six monthsfiscal year ended March 31, 2015.September 30, 2021. The increase wasdecrease in cash used in operating activities is primarily dueattributable to an increase in general and administrative expenseaccounts payable, primarily attributable to increased intellectual propertylegal fees, product costs and researchconsulting fees, and development expenses incurredaccrued interest, which was partially offset by an increase in connection with activities to develop our primary product candidate.inventory.

Cash Used in Investing Activities

 

There was noCash used in investing activities decreased $3,275 to $0 during the fiscal year ended September 30, 2022, compared to $3,275 during the fiscal year ended September 30, 2021. For the fiscal year ended September 30, 2021, cash used in investing activities during the six months ended March 31, 2016 and 2015, respectively.is attributed to computer hardware purchases.

Cash Provided by Financing Activities

 

Cash provided by financing activities decreased $1,510,000$4,332,857, to $40,000$2,936,376 during the six monthsfiscal year ended March 31, 2016,September 30, 2022, compared to $1,550,000 during$7,269,233 the six monthsfiscal year ended March 31, 2015.September 30, 2021. For the six monthsyear ended March 31, 2016,September 30, 2022, the cash provided by financing activities resulted from net proceeds of $2,969,586 raised from the exerciseissuance of the Series C Warrants to purchase 200,000senior secured convertible notes, warrants and inducement shares partially offset by repayment of our Common Stock.financed insurance premium. For the six monthsyear ended March 31, 2015,September 30, 2021, the cash provided by financing activities resulted from net proceeds of $6,219,233 raised from issuance of common stock and warrants in the $800,000 in proceeds received by us from the exercise of Series B Warrants to purchase 4,000,000 shares of our Common Stock2021 Financing and proceeds received of $750,000$1,050,000 from the issuance of the 8%Series 2 Convertible Note.Notes.

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. We estimateAs of December 28, 2022, we believe that our current cash on hand will meet our anticipated cash requirements for ourinto the second quarter of fiscal year ending September 30, 2016 will be approximately $5,500,000. As of June 23, 2016,2023. Depending upon additional input from EU and US regulatory authorities, however, we estimate thatdo not expect to generate sufficient revenues from operations before we will need to raise additional cash within the next twelve months. 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.capital. Further, our estimates regarding our use of cash could change if we encounter unanticipated difficulties or other issues arise, including without limitation those set forth under the heading “Risk Factorsin which casethis prospectus.

In the first quarter of 2021, the Company commenced commercial sales of our current funds mayfirst product, AC5® Advanced Wound System. That revenue will 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 we will need to obtain all of our necessaryadditional 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 principalpotential new product candidate,candidates, seeking regulatory approval of that or any other product candidatecandidates we may choose to develop, commercializing any product candidatecandidates 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 MLSC Loan Agreement (i)2018 SPA (See Note 6) and the 2022 SPA (See Note 10) restricting our ability to incur certain typeseffect or enter into an agreement to effect any issuance by the Company or any of additional indebtedness, and (ii) that would cause all amounts underits 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 MLSC Loan Agreement2018 SPA) including, but not limited to, become immediately due and payable if we receive net proceedsan equity line of $5,000,000credit or more“At-the-Market” financing facility until the three lead investors in one or more financing transactions in any 12-month period from third parties otherthe 2018 Financing collectively own less than our then existing shareholders.20% of the Series G Warrants 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.

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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.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, through March 31, 2016 we have not earned operating revenues from sales of products or services, and havehad recurring losses from operations. TheWhile 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 March 31, 2016,September 30, 2022, there is substantial doubt about the Company’s ability to continue as a going concern. The unaudited interim consolidated financial statements and audited 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 unaudited interim consolidated financial statements and audited financial statements included in this prospectus include the accounts of Arch Therapeutics, Inc. and its wholly owned subsidiary, Arch Biosurgery, Inc., a biotechnology company. All intercompany accounts and transactions have been eliminated in consolidation.

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.

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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 March 31, 2016 and September 30, 2015.

Accounting for Stock-Based Compensation

The Company accounts for employee stock-based compensation in accordance with ASC 718,Compensation-Stock Compensation (“ASC 718”) which 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 its Common Stock, and as such volatility is estimated in accordance with ASC 718-10-S99 and Staff Accounting Bulletin (“SAB”) No. 107,Share-Based Payment (“SAB No. 107”), using historical volatilities of similar public entities. For the life term for awards, the Company 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 the Financial Accounting Standards Board Accounting Standards Code ASC Topic 815,Derivatives and Hedging. Warrants classified as equity are recorded at fair value as of the date of issuance on the Company’s consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as liabilities are recorded on the Company’s consolidated balance sheets at their fair value on the date of issuance and will be revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. Management estimates the fair value of these liabilities using option pricing models and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for future financings, expected volatility, expected life, yield, and risk-free interest rate.

 

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 Monte-Carlo simulations. Derivative instruments are valued at inception, upon events such as an exercise of the underlying financial instrument, and at subsequent reporting periods. The classification of derivative instruments, including whether such instruments should be recorded as liabilities, is re-assessed at the end of each reporting period.

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

 

Accounting Standards Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting” wasIn August 2020, the FASB issued by the Financial Accounting Standards Board (FASB)ASU 2020-06, “Debt with Conversion and other Options (subtopic 470-20) and Derivatives and Hedging-Contracts in March 2016.Entitys Own Equity (Subtopic 815-40)” (“ASU 2020-06”). The purpose of this amendmentASU 2020-06 is to simplify several aspectsaddress issues identified as a result of the complexity associated with applying generally accepted accounting principles (“GAAP”) for share-based payment transactions, including the income tax consequences, classificationcertain financial instruments with characteristics of awards as either equity or liabilities and classification on the statement of cash flows.equity. The amendments in this UpdateASU 2020-06 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016.2023. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations, financial position or disclosures.

ASU 2016-02, “Leases (Topic 842)” was issued by the FASB in February 2016. The purpose of this amendment requires the recognition of lease assets and lease liabilities by lessees for those leases previously classified as operating leases. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within thosepermitted but no earlier than fiscal years beginning after December 15, 2018. Early adoption is permitted.2020. The Company does not believe that this guidance will have a material impact on its consolidated resultsadopted ASU 2020-06 during our first quarter of operations, financial position or disclosures.

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ASU 2015-17, “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes” was issued by the FASB in November 2015. The purpose of this amendment requires deferred tax assetsfiscal year 2022, and liabilities to be classified as noncurrent in a classified statement of financial position. 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, 2017. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations, financial position or disclosures.

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 adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations, financial position or disclosures.

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 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 2014-16, “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 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. The Company is currently assessing the impact of this guidance, but does not believe that it will have a material impactwas considered immaterial on itsour consolidated results of operations, financial position or disclosures.statements.

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.

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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 wereArch Therapeutics, Inc., (together with its subsidiary, the “Company” or “Arch”) was incorporated under the laws of the State of Nevada on September 16, 2009, withunder the name “Almah, Inc.” to pursue the business of distributing automobile spare parts online. Effective June 26, 2013, wethe 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”), ourthe 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 ourthe wholly owned subsidiary. Prior to the completionsubsidiary of the Merger, we wereCompany. As a “shell company” under applicable rules of the SEC and had no or nominal assets or operations. As partresult of the acquisition Almah management resigned and was replaced with ABS management. Upon our acquisition of ABS, wethe Company abandoned ourits prior business plan and changed ourits operations to the business of a biotechnology company.

For financial reporting purposes, the Merger represented a “reverse merger”. ABS was deemed to be the accounting acquirer Our principal offices are located in the transaction and our predecessor. Consequently, the assets, liabilities, accumulated deficit and the historical operations that are reflected in our consolidated financial statements are those of ABS. All share information has been restated to reflect the effects of the Merger. Our financial information was consolidated with that of ABS after consummation of the Merger on June 26, 2013, and our historical financial statements before the Merger have been replaced with the historical financial statements of ABS before the Merger in this prospectus and will be so replaced in all future filings with the SEC that require financial statements to be included.Framingham, Massachusetts.

 

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. on April 7, 2008, andEffective upon the closing of the Merger, ABS changed its name from Arch Therapeutics, Inc. to Arch Biosurgery, Inc. upon the closing of the Merger on June 26, 2013.

 

Our Current Business

OurThe Company is in the development stage,only recently commenced commercial sales of our first product, AC5® Advanced Wound System, and has generated no operating revenues to date, and is devotingrecently devoted substantially all of itsour operational effortseffort to the developmentto continue the ongoing commercialization and market adoption of our core technology. 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.

Company’s first product. To date, the Company has principally raised capital through debt borrowings, and the issuance of convertible debt, and the issuance of units consisting of Common Stock and warrants.

The Company expects to incur substantial expenses for the foreseeable future relating to the research, development clinical trials, and commercialization of its potential products. As of June 23, 2016, the Company believes that it will need to raise additional cash within the next twelve months. The Company will be required to raise the additional capital 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.concern for one year past the issuance of the financial statements. The consolidated financial statements do not include any adjustments related to the recoverability of assets that might be necessary despite this uncertainty.

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Our Current Business

We are a biotechnology company marketing a number of products based on our innovative AC5® self-assembling technology platform. We believe these products are 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 recently devoted substantially all of our operational effort to continue the ongoing commercialization and market adoption of our first product. 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.

To date, the Company has principally raised capital through debt borrowings, the issuance of convertible debt and the issuance of units consisting of its common stock, par value $0.001 per share (“Common Stock”), and warrants. The Company expects to incur substantial expenses for the foreseeable future relating to the research, development, clinical trials, and commercialization of its current and potential products. As of December 28, 2022, we believe that our cash on hand will meet our anticipated cash requirements into at least the second quarter of fiscal 2023. The Company will be required to raise additional capital, obtain alternative means of financial support, or both, in order to continue to fund operations. There can be no assurance that the Company will be successful in securing additional resources when needed on terms acceptable to the Company, if at all. Therefore, there exists substantial doubt about the Company’s ability to continue as a going concern.

Core Technology

 

Our primaryflagship products and product candidates are derived from our AC5 Surgical Hemostatic Device™ (which weself-assembling peptide (“SAP”) technology platform and are sometimes referreferred to as AC5or AC5™the “AC5 Devices.,AC5 Surgical Hemostat”or “AC5 Surgical Hemostat™”), relies on our self-assembling peptide technology These include AC5® Advanced Wound System and is designed to achieve hemostasisAC5® Topical Hemostat, which have received marketing authorization as medical devices in the United States and Europe, respectively, and which are intended for skin applications, such as the management of complicated chronic wounds and acute surgical wounds. Other products are in development for use in minimally invasive andor open surgical procedures. We intendprocedures, and include, for example, AC5-GTM for gastrointestinal endoscopic procedures and AC5-V and AC5 Surgical Hemostat for hemostasis inside the body, all of which are currently investigational devices limited by law to develop other product candidatesinvestigational use.

Products based on our technologyAC5 platform for use incontain a range of indications. AC5biocompatible peptide that is a synthetic peptide comprising L amino acids, commonly referred to assynthesized from proteogenic, naturally occurring aminoL-amino acids. WhenUnlike products that contain traditional peptide sequences, when applied to a wound, AC5 intercalatesAC5-based products intercalate into the interstices of the connective tissue where it self-assemblesand self-assemble into a physical, mechanicalprotective physical-mechanical nanoscale structure that providescan provide a barrier to leaking substances, such as blood. 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.

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 additional 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 early data fromcertain preclinical testsand 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 relative to that reported with other types of hemostatic agents,SAP technology, and that time to hemostasis (“TTH”) is comparable among test subjects regardless of whether such test subject had or had not been treated with therapeutic doses of anticoagulant or antiplatelet medications, commonly called “blood thinners”. Based on testing results 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™;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 it starts.surgery starts, a concept that we call Crystal Clear Surgery™. An example of a product that contains related features and benefits is AC5 Topical Hemostat, which is indicated for use as a dressing and to control mild to moderate bleeding, each during the management of injured skin and the micro-environment of an acute surgical wound.

 

We have devoted muchOperations

Much of our operational effortefforts to date, to the researchwhich we often perform in collaboration with partners, have included selecting compositions and development of our core technology, including selectingformulations for our initial product composition,products; conducting initialpreclinical studies, including safety and other related tests, generatingtests; conducting a human trial for safety and performance of AC5; developing and conducting a human safety study to assess for irritation and sensitization potential; securing marketing authorization for our first product in the United States and in Europe; developing, optimizing, and validating manufacturing methods and formulations, which are particularly important components of self-assembling peptide development; developing methods for manufacturing scale-up, reproducibility, and manufacturingvalidation; engaging with regulatory authorities to seek early regulatory guidance as well as marketing authorization for our products; sourcing and formulation methods,evaluating commercial partnering opportunities in the United States and abroad; 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 have recently completed the components of our planned preclinical program for AC5 that were requried before we started our first human safety and performance trial, which was initiated in early 2016. We are focused on scale-up of selected manufacturing methods and formulation optimization. In parallel, we are conducting furtherin vivo andin vitro tests, while additional testing will continue after completion of manufacturing scale-up and formulation optimization steps and the clinical trial. Self-assembling peptide manufacturing and formulation optimization are challenging, and any delays could negatively impact anticipated clinical trial and subsequent commercialization timelines. 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 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 the Company’s core technology (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 for an exclusive license to such Non-Derivative IP on customary terms for agreements of that nature including royalties on net sales in the low single-digits, in each case 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 abroad 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 preclinical tests conducted to date, AC5 has 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 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 conducting clinical trial testing of AC5. On December 16, 2015, we announced that we had received clearance from a regulatory authority in Western Europe to initiate a human clinical trial to assess the safety and performance of AC5 in humans. The initial patient was treated in the first quarter of 2016 and on June 6, 2016, we announced that we had completed patient enrollment in this study.

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 the U.S. and abroad to perform both research and preclinical and clinical 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.

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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 use to produce AC5 and other potential future product candidates rely on detailed, complex and difficult to manage synthetic organic chemistry processes. Although use of those methods requires that we engage manufacturers that possess the expertise, skill and know-how involved with those methods, the required equipment to use those methods is widely available. Furthermore, improvements in relevant synthetic manufacturing techniques over the past 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 their natural state in humans. That type of ingredient may be more likely to be categorized as “generally recognized as safe”, or “GRAS”, by the 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 our European or most other human clinical trials, we are required to have completed the biocompatibility assessment of AC5. Standard required tests to assess biocompatibility, as set forth in ISO 10993 issued by the International Organization for Standardization, may include:

in vitro cytotoxicity;

in vitro blood compatibility;

in vitro Ames assay (mutagenic activity);

irritation/intracutaneous reactivity;

sensitization (allergenic reaction);

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implantation (performed on devices that contact the body’s interior);

pyrogenicity (causing fever or inflammation);

systemic toxicity; and

in vitro chromosome aberration assay (structural chromosome changes).

We have completed the biocompatibility studies required to initiate our first human trial of AC5 in Western Europe, for which we announced on June 6, 2016, that enrollment is complete. Assuming successful trial results, we expect that we will pursue a CE mark, which is required in order to market and commercialize a medical device such as AC5 in Europe, prior to pursuing approval by the U.S. FDA. In addition, we will continue biocompatibility tests for AC5, as necessary, for additional indications, classifications, and/or jurisdictions.

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 required biocompatibility studies and, subsequently, clinical trials on AC5;

educating the wound care field and growing commercial sales;

 

expanding and maintaining protection of our intellectual property portfolio;

conducting biocompatibility, pre-clinical, and clinical studies on our products and product candidates;

 

developing appropriate third party relationships to manufacture, distribute, market and otherwise commercialize AC5;

obtaining additional marketing authorization for products in the United States, Europe, and other jurisdictions as we may determine;

 

obtaining regulatory approval or certification of AC5 in the EU, the U.S., and other jurisdictions as we may determine;

continuing to develop third party relationships to manufacture, distribute, market and otherwise commercialize our products;

 

continuing or developing academic, scientific and institutional relationships to collaborate on product research and development; and

continuing to develop academic, scientific and institutional relationships to collaborate on product research and development;

 

developing additional product candidates in the hemostatic, sealant, and/or other fields.

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 milestones described previously and our operations generally;

seek additional funding as required to support the previously described milestones necessary to support operations;

 

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;

work with our manufacturing partners to scale up production of product compliant with cGMP, which activities will be ongoing and tied to our development and commercialization needs;

 

complete our first human clinical trial for AC5, which is currently underway;

further clinical development of our product platform;

 

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assess our technology platform in order to identify and select product candidates for potential advancement into development;

 

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;

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/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; and

pursue commercial partnerships; and

 

assess our self-assembling peptide platform in order to identify and select product candidates for advancement into development.

We believe that the Company currently has adequate capital to support operations through the initial regulatory approval process in Europe. If the regulatory authorities request additional clinical or non-clinical data prior to approval additional capital may be required. Additional European regulatory approvals could require an additional $2,000,000-$3,000,000. We further expect that the Company will require an additional $6,000,000 - $9,000,000 or more related to the initial regulatory process in the U.S. 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 June 23, 2016, we believe that we will need to raise additional cash within the next twelve months. 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.

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.

 

We have no commitments for any future capital. As indicated above, weWe will require significant additional financing to fund our planned operations, including further research and development relating to AC5,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 docorporation

Further, in connection with the 2022 Private Placement Financing, we expect inare required to complete an Uplist Transaction by February 15, 2023 under the near futureterms of the 2022 Notes. If we are unable to have, revenue to fund our business from operations,complete an Uplist Transaction, then the 2022 Notes will become immediately due and payable and we will needbe obligated to obtain allpay to each 2022 Note holder an amount equal to 125%, multiplied by the sum of our necessary funding from external sources for the foreseeable future. We may not be ableoutstanding principal amount of the 2022 Notes plus any accrued and unpaid interest on the unpaid principal amount of the 2022 Notes to obtain additional financing on commercially reasonablethe date of payment, plus any default interest and any other amounts owed to the holder, payable in cash 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 allshares 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.Common Stock.

 

Since inception, we have funded our operations primarily through debt borrowings and the issuance of convertible debt and units consisting of Common Stock and warrants, and we may continue to seek to do so in the future. If we obtain additional financing by issuing equity securities, our existing stockholders’ ownership will be diluted. The terms of securities we may issue in future capital-raising transactions may be more favorable for our new investors. Further, newly issued securities may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have additional dilutive effects. If we obtain additional financing by incurring debt, we may become subject to significant limitations and restrictions on our operations pursuant to the terms of any loan or credit agreement governing the debt. Further, obtaining any loan, assuming a loan would be available when needed on acceptable terms, would increase our liabilities and future cash commitments. We may also seek funding from additional collaboration or licensing arrangements in the future, which may require that we relinquish potentially valuable rights to our product candidates or proprietary technologies or grant licenses on terms that are not favorable to us. Moreover, regardless of the manner in which we seek to raise capital, we may incur substantial costs in those pursuits, including investment-banking fees, legal fees, accounting fees, printing and distribution expenses and other related costs.

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 Company has cash on hand is sufficient to meet its anticipated cash requirements into at least the second quarter of fiscal 2023. Notwithstanding this, depending upon additional input from EU and US regulatory authorities, we may need to raise additional capital before then. In addition to the foregoing, our 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 prospectus.

Research and Development

Preclinical and clinical testing of our product candidates is required in order to receive regulatory marketing authorizations and to support products upon commercialization, and we anticipate that such testing will continue as deemed appropriate.

Preclinical Testing

We have engaged and continue to engage third parties in the United States and abroad to advise on and/or perform certain preclinical bench-top and animal research and development studies, typically with assistance from our team. These third parties include contract research organizations, academic institutions, consultants, advisors, scientists, clinicians, and/or other collaborators.

We have conducted and anticipate continuing to conduct in vivo and in vitro research and development studies on our products and product candidates. A co-founding inventor of certain of our technology, Dr. Rutledge Ellis-Behnke, performed a significant portion of the early preclinical animal experiments conducted with our technology. Some of the most significant findings from Dr. Ellis-Behnke’s studies have been published. Additionally, through collaborations with the National University of Ireland system and related parties, preclinical bench-top and animal research and development studies were performed in Dublin, Cork and Galway, Ireland over an approximately eight-year period that concluded in the third quarter of fiscal 2018.

Before initiating our clinical trials and submitting marketing applications for a given product in most jurisdictions, we are required to have completed a biocompatibility assessment, which typically consists of a battery of in vitro and in vivo tests. Standard biocompatibility tests, as set forth in ISO 10993 issued by the International Organization for Standardization, may include:

in vitro cytotoxicity;

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);

systemic toxicity; and

in vitro chromosome aberration assay (structural chromosome changes).

We completed the biocompatibility studies required to receive marketing authorizations for AC5® Advanced Wound System in the United States and AC5 Topical Hemostat in Europe, and such test results support that the products are biocompatible. We will perform further biocompatibility testing that we deem necessary for additional indications, classifications, jurisdictions, and/or as required by regulatory authorities.

Acute and survival animal studies assessing safety and performance of our technology have also demonstrated favorable outcomes in Dermal Sciences and BioSurgery applications.

Porcine studies, also known as swine or pig studies, are often selected due to the morphological, physiological, and biochemical similarities between porcine skin and human skin and are very useful to assess the performance of AC5® Advanced Wound System or AC5 Topical Hemostat as a barrier and advanced wound dressing, as well as their safety and effects on healing.

In an assessment versus saline in a porcine partial thickness excision wound model, tissue response to AC5® Advanced Wound System over a 28-day follow-up period was consistent with normal wound healing and included complete re-epithelialization, normal collagen organization, and minimal inflammation and TTH was faster.

In an assessment versus both minimally invasivea market leading skin substitute and traditional surgeriessaline in a porcine full thickness 10 mm punch biopsy wound model, AC5® Advanced Wound System was solely associated with complete epithelialization by the end of the 11-day study.

In an assessment versus each a market leading antimicrobial burn dressing, a hydrogel, and saline in a porcine second degree burn wound model, AC5® Advanced Wound System was associated with less progression of thermal damage and less inflammation over three days.

Arch Therapeutics’ technology has also demonstrated hemostasis in liver and other procedures could benefit from newerorgans in in vivo surgical models, including rapid hemostasis within 15 seconds. In a range of small and large animal models, our compositions have been shown to stop bleeding, seal leaking, allow for normal healing, and mitigate inflammation while being biocompatible.

AC5 Surgical Hemostat demonstrated rapid average TTH when applied to a range of animal tissues. Certain surgical procedure studies have assessed TTH when using AC5 Surgical Hemostat as well as using an active control, a saline control, a peptide control, and a cautery control. The results of those tests have shown a TTH of approximately 10 – 30 seconds when AC5 Surgical Hemostat was applied, compared to 80 seconds to significantly more than 300 seconds when various control substances were applied, depending on the nature of the control substance and procedure performed. In several studies comparing AC5 Surgical Hemostat to popular commercially available branded hemostatic agents (absorbable cellulose, flowable gelatin with and sealants, because surgicalwithout thrombin, and trauma patients are at significant risk for morbidity and mortalityfibrin) applied to stop the bleeding from bleeding and/or leaking body fluid.full thickness penetrating wounds surgically created in rat livers, AC5 Surgical Hemostat achieved hemostasis in significantly less than 30 seconds, whereas control products took from over 50% - 400% longer to achieve hemostasis.

 

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AC5 Surgical Hemostat was also demonstrated in preclinical tests to stop surgically induced liver bleeding in animals that had been treated with therapeutic amounts of anticoagulant and antiplatelet medications, collectively known as antithrombotic medications and commonly called “blood thinners.” In one preclinical study, an independent third-party research group obtained positive data assessing the use of AC5 Surgical Hemostat in animals that had been treated with therapeutic doses of the antiplatelet medications Plavix® (clopidogrel) and aspirin, alone and in combination. The results of the study were consistent with data obtained from two prior preclinical studies, in which AC5 Surgical Hemostat quickly stopped bleeding from surgical wounds created in rats following treatment with clinically relevant doses of the anticoagulant medication heparin. In these studies, the average TTH after AC5 Surgical Hemostat was applied to bleeding liver wounds in animals that had received anticoagulant medication was comparable to the average TTH as measured in their non-anticoagulated counterparts.

 

Additional trendsAC5-V was assessed for its ability to provide hemostasis after bleeding was intentionally created at vascular reconstruction sites in preclinical studies. In an acute study in swine that supporthad been premedicated with therapeutic doses of heparin before undergoing end-to-end femoral artery anastomosis and synthetic graft to vessel anastomosis in carotid and femoral arteries, AC5-V promoted effective hemostasis at the vascular anastomotic site and allowed for clear visualization of the surgical site.

In a demand14-day survival study in sheep that had been premedicated with therapeutic doses of heparin before undergoing end-to-side anastomosis between synthetic vascular grafts and carotid arteries, AC5-V promoted effective hemostasis at the vascular anastomotic site, the graft remained patent during the study as assessed by angiography and ultrasound, clinical observations were normal during the study, and tissue response as assessed by histopathological examination at the end of the study was consistent with expectations for a biodegrading implant.

AC5-G was studied in swine to assess visualization, submucosal lift generation and durability, and hemostatic and sealant products includeperformance when used during endoscopic mucosal resections and endoscopic submucosal dissections as well as hemostatic performance during endoscopic management of gastrointestinal bleeding. AC5-G was easily delivered through a 25G endoscopic injection needle into the following:tissue and provided a durable submucosal lift in the gastric antrum that lasted beyond 2 hours. When delivered with the visualizing agent prior to tissue dissection, AC5-G allowed for easy visualization with both snare and electrosurgical knives, and no visible bleeding was observed following polyp removal. AC5-G was also shown to provide hemostasis in actively bleeding lesions when applied with or without the visualizing agent either topically to a bleeding site or when injected into the nearby mucosa. AC5-G was found to be useful in conjunction with clips as a potential sealant when applied following application of clips to a post-polypectomy site for the purpose of mitigating leaks and potentially enabling healing.

The AC5 self-assembling peptide was studied in an experimental intraocular inflammation model of injected Lipopolysaccharide (“LPS”), in which an intraocular application of the peptide with LPS was associated with a marked reduction in retinal inflammation. The density of activated retinal microglial cells was significantly lower in the eyes of the study animals with LPS and AC5 than in the eyes of the LPS-only control group. The results suggest that the AC5 self-assembling peptide may reduce inflammation and may represent a new class of devices that act as anti-inflammatory agents to control ocular inflammation.

 

overall procedure volume growth;
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ambulatory same day surgery volume growth;

minimally invasive surgery procedure volume growth;

 

As a result of this demand, use of hemostatic agents

Clinical Testing

We have engaged and sealants is increasing. Accordingcontinue to MedMarket Diligence,engage third parties in the market for these products achieved approximately $3.4 billion in worldwide sales in 2010United States and is projectedabroad to reach $5.5 billion in 2015advise on and surpass $6.5 billion in 2017. Over two-thirds of those sales are for hemostats. Further, the projected growth rateperform certain clinical studies and incremental demand for sealants may be even higher than that for hemostats due to a general lack of available productsrelated activities, typically with assistance from our team. These third parties include contract research organizations, academic institutions, consultants, advisors, scientists, clinicians, and potentially larger unmet need.other collaborators.

 

In spiteorder to complete a clinical trial, we are required to enroll a sufficient number of patients to conduct the large size of the market for these products, many available hemostatic agentstrial after obtaining each patient’s informed consent in a form and sealants possess a combination of limitations, including slow onset of action, general unreliability, user-unfriendliness, and risk for adverse effects, such as healing problems, adhesion formation, infection and other safety concerns. Many of the deficiencies of currently available hemostatic agents and sealants are comparable to those of their earlier-generation counterparts, as revolutionary advances in underlying technologies have been elusive.

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 discoveredsubstance 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:

laparoscopic friendly;

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);

permits normal healing;

indifferent to status of coagulation cascade or “blood thinning” drugs;

non-toxic; and

contains neither blood nor tissue components from either humans complies with FDA and/or other animals.

We anticipate that AC5 will meet these particular market demands, and we anticipate its use in minimally invasive or laparoscopic surgeryregulatory authority requirements as well as open surgery. While open surgery representsstate 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 more established marketheading “Risk Factors” in this prospectus. Further, we, the FDA or an institutional review board (“IRB”) could suspend a clinical trial at any time for hemostatic agents,various reasons, including a belief that the number of surgeries performed by minimally invasive techniques, including laparoscopic surgery, has been growing overrisks to the past two decades and is significant. Less invasive laparoscopic procedures tend to result in shorter recovery times, faster discharges, less scarring, less pain and less need for pain medications. Manysubjects of the hemostasis products currently available do not possess certain features and handling characteristics that are ideal for use in a laparoscopic setting. For instance, many available products are difficult to use laparoscopically because they tend to be sticky, powdery, fabric-based or are otherwise difficult to control and/or insert intotrial outweigh 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.

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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 was increasing by approximately 5% annually, and a 2009 report covering U.S. surgical procedures suggests that inpatient surgery volume was declining 1% per year. We believe that a motivating factor of this trend may be the increased costs associated with hospital inpatient procedures performed in operating rooms, which, according to MedMarket Diligence, have been estimated to cost between $2,000 and $10,000 per hour. These costs likely 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 include 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,anticipated benefits. Even 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, ittrial is completed, the results of clinical testing 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,adequately demonstrate the safety and efficacy of AC5 still remainsthe device or may otherwise not be sufficient to be demonstratedobtain FDA clearance or approval to and accepted by required regulatory agencies prior to commercialization.

Research and Development Expendituresmarket the product in the U.S.

 

Our researchWe have completed two clinical studies to date. The first study, which met its primary and development expensessecondary endpoints, assessed the safety and performance of AC5® Advanced Wound System in 46 patients with bleeding skin wounds that resulted from excision of skin lesions and followed for 30 days. The second study assessed AC5® Advanced Wound System on skin, determining that it was neither an irritant nor a sensitizer, and no immunogenic response or serious or other adverse events attributable to date have primarily included labor, third party consulting costs inclusivethis product were reported in any of manufacturing process development costs relating to our core technologythe approximately 50 enrolled volunteers. AC5® Advanced Wound System subsequently received FDA marketing clearance in March 2020 and CE Mark in Europe in April 2020 for AC5 Topical Hemostat, as it is known in Europe. in the United States and AC5 and costs related to clinical development. Research and development expense during the six month period ended March 31, 2016 was $800,288, a decrease of $1,942 compared to $802,230 for the six month period ended September 30, 2015. We expect our research and development activities and expenses to increase significantly as we execute on our business plan and pursue clinical trials.Topical Hemostat in Europe.

 

Regulation byRegulatory

We have engaged and continue to engage third parties in the FDAUnited States (“U.S.”) and Similar Foreign Agenciesabroad to advise on and/or perform certain regulatory activities, typically with assistance from our team. These third parties can include contract research organizations, academic institutions, consultants, advisors, scientists, clinicians, and other collaborators.

 

Our research, development and clinical programs, as well as our manufacturing and marketing operations that may be performed by us or third partythird-party service providers on our behalf, are subject to extensive regulation in the U.S.United States and other countries. Most notably, we believe that AC5 will beNotably, for example, AC5® Advanced Wound System is subject to regulation as a medical device under the U.S. Food Drug and Cosmetic Act (the “FDCA”) as implemented and enforced by the FDA and equivalent regulations that are enforced by foreign agencies in any other countries in which we 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:

 

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product design, preclinical and clinical development and manufacture;

 

product premarket clearance and approval;

 

product design, preclinical and clinical development and manufacture;

product safety, testing, labeling and storage;

 

product premarket clearance and approval;

certain supply chain changes;

 

product safety, testing, labeling and storage;

record keeping procedures;

 

record keeping procedures;

product marketing, sales and distribution; and

 

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 byMedical Device Classification in the U.S. FDAUnited States and Europe

 

Medical Device Classification

As described previously, we expect thatAC5® Advanced Wound System in the United States and AC5 will beTopical Hemostat in Europe are classified as medical devices. Generally, a product is a medical device because its primary desired activity does not depend onif it requires neither metabolic ornor chemical activity to achieve the desired effect. Furthermore, a medical device can achieve its desired effects without requiring a body (animal/human), whereas a drug or a biologic requires a body in order to operate. Self-assembly, which is the desired effect and can occur outside of a body. The FDA classifiesbody, is accordingly consistent with the medical device definition.

Medical devices into one ofin the following three classesUnited States and Europe are classified along a spectrum on the basis of the amount of risk to the patient associated with the medical device and the controls deemed necessary to reasonably ensure their safety and effectiveness:

Class 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

effectiveness. Class III requiring general controlsstatus, which is the higher-level classification for devices compared to Classes II and approvalI, involves additional procedures and regulatory scrutiny of a premarket approval application (“PMA”), which may include post-market approval conditions and post-market surveillance.

the product candidate to obtain approvals. 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 that 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 itour products and product candidates are based, in general, we anticipate that the FDA will classify it as a Class III or Class II 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 couldthey would typically be regulated as either aClass II or Class III or a Class II medical device in these jurisdictions, depending upon the application.intended use. Specifically, AC5® Advanced Wound System is a Class II medical device in the United States, and AC5 Topical Hemostat is a Class IIb medical device in Europe.

 

In the United States, the FDA recognizes these classes of medical devices:

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.

European regulatory authorities, likewise, recognize several classes of medical devices. Classification involves rules found in the European Union Medical Device Directive and is driven in part by the device’s degree of contact with the patient, invasiveness, active nature, and indications for use. The medical device classes recognized in the EU are:

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.

United States Class III and certain Class II medical device approvals and European Union Class III and certain Class IIa and IIb medical device approvals may require the successful completion of human clinical trials.

U.S. Regulatory Marketing Authorization Process

Products that are regulated as medical devices and that require review by the FDA are subject to either a premarket notification, also known as a 510(k), which must be submitted to the FDA for clearance, or a PMA Approval Processapplication, which the FDA must approve prior to marketing in the United States. The FDA ultimately determines the appropriate regulatory path. For purposes herein, references to regulatory approval and marketing authorization may be used interchangeably.

We believe that the additional products we are currently pursuing for internal use will require a PMA approval prior to commercialization. However, we commercialized an initial product for external use that has been cleared through the 510(k) process. To obtain 510(k) marketing clearance for a medical device, an applicant must submit a premarket notification to the FDA demonstrating that the device is "substantially equivalent" to a predicate device or devices, which is typically a legally marketed Class II device in the United States. A device is substantially equivalent to a predicate device if it has the same intended use and (i) the same technological characteristics, or (ii) has different technological characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness. In some cases, the submission must include data from human clinical studies. Marketing may commence when the FDA issues a clearance letter finding substantial equivalence. Depending upon a product’s underlying technology and intended use, as well as on FDA processes and procedures, seeking and obtaining a 510(k) can be a lengthy process.

 

A PMA, which is required for most Class III medical devices, must be submitted to the FDA if a device cannot be cleared through another approval process or is not otherwise exempt from the FDA’s premarket clearance requirements. The PMA approval process can be lengthy and approval requirements. A PMA is required for most Class III medical devices.expensive. A PMA must generally be supported by extensive data, including without limitation technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. Clinical trials for a Class III medical device typically require an application for an investigational device exemption (“IDE”), which would need to be approved in advance by the FDA for a specified number of patients and study sites. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements, and must be conducted under the oversight of an institutional review board (“IRB”) for the relevant clinical trial sites and comply with applicable FDA regulations, including those relating to good clinical practices (“GCP”).

The PMA process is estimated to take from one to three years or longer, from the time the PMA application is submitted to the FDA until an approval is obtained. During the review period, the FDA will typically request additional information or clarification of the information previously provided. Also, 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.recommendations. In addition, the FDA will generally conduct a pre-approval inspection of the manufacturing facility or facilities involved with producing the device to ensure compliance with the cGMP regulations. Upon approval of a PMA, the FDA may require that certain conditions of approval, such as conducting a post-market approval clinical trial, be met.

 

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.

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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 anya PMA covering AC5 or commenced the required clinical trials. Iftrials for an internal use product. Even if we are able to conduct successful preclinical and clinical studies and submit a PMA for an approval or premarket application for clearance, the FDA may not grant PMA approvalpermit commercialization of AC5our product candidate for the desired internal use indications, of use, on a timely basis, or at all. Our inability to achieve regulatory approval for AC5 in the U.S.,United States for an internal use product, 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”).

In order to complete a clinical trial, we would be required to enroll a sufficient number of patients to conduct the trial after obtaining each patient’s informed consent in a form and substance that complies with 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.

On December 16, 2015, we announced that we had received clearance from a regulatory authority in Western Europe to initiate a human clinical trial to assess the safety and performance of AC5 in humans. The initial patient was treated in the first quarter of 2016 and on June 6, 2016, we announced we had completed patient enrollment in this study.

Pre-Marketing Regulation in the EUEuropean Union Marketing Authorization (CE Mark) Process

 

Medical Device Classification

SimilarA notified body is a private commercial entity designated by the national government of an European Union (“EU”) member state as being competent 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.

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In February of 2015, we announced that BSI confirmed that AC5 fulfills the definition ofmake independent judgments about whether a medical device withincomplies with applicable regulatory requirements in 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 ProcessEU. Our notified body is The British Standards Institution (“BSI”).

 

The EU has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices.devices, and it has further revised its rules and regulations with increasingly stringent requirements. Each EU member state has implemented legislation applying these directives and standards at a national level. Many countries outside of the EU have also voluntarily adopted laws and regulations that mirror those of the EU with respect to medical devices.devices, potentially increasing the time and cost necessary to potentially achieve an approval in different jurisdictions.

Devices that comply with the requirements of the laws of the selected member state applying the applicable EU directive are entitled to bear a CE (Conformité Européenne) mark and can be distributed throughout the member states of the EU, as well as in other countries that have mutual recognition agreements with the EU or have adopted the EU’s regulatory standards.

 

Under applicable EU medical device directives,European Medical Device Directives (MDD), a CE mark is a symbol placed on a product that declares that the product’s complianceproduct is compliant with the essential requirements of applicable EU health, safety and environmental protection legislation. In order to receive a CE mark for a product candidate, the company producing the product candidate must select a country in which to apply. Each country in the EU has one competent authority (“CA”) that implements the national regulations by interpreting the EU directives. CAs also designate and regulate Notified Bodies. An assessment by a Notified Bodynotified 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.mark. Certification to the ISO 13485 standard demonstrates the presence of a quality management system that can be used by a manufacturer for design and development, production, installation and servicing of medical devices and the design, development and provision of related services.

 

Devices that comply with the requirements

 

We have identified several potential countries through which we may pursue a CE mark for AC5.

Clinical Trials

As with U.S. Class IIIWhile there are many similarities between the processes required to obtain marketing authorization in the United States 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,Europe, there are several key differences between the jurisdictions, with respect to the approvals and processes.as well. Obtaining a CE mark is not equivalent to obtaining FDA clearance or approval. For instance, FDA requirements for products typically vary based on whether the submission is for a premarket notification (510(k)) or a premarket approval in that a CE mark confirms(PMA) whereas EU requirements for product submissions are primarily based on class. Furthermore, EU submissions must meet precise essential requirements, although the safety, but not the effectiveness,data demonstrating such compliance can vary by class of a product. Furthermore,device. Additionally, a CE mark affixed to a product serves as a declaration by the responsible party that the product conforms to applicable provisions and that relevant conformity assessment procedures have been completed with respect to the product. Accordingly, we anticipate that

In 2017, the required EUEuropean Union regulatory bodies implemented a new Medical Device Regulation (“MDR”). The MDR changes several aspects of the existing regulatory framework, such as clinical trial(s) for AC5data requirements, and introduces new ones, such as Unique Device Identification (“UDI”). We, and the Notified Bodies who will be smaller, faster, and less expensive than what we expect would be required for AC5oversee compliance to obtain equivalent approvalsthe new MDR, face uncertainties in the U.S.upcoming years as the MDR is rolled out and enforced, creating risks in several areas, including the CE mark process, data transparency and application review timetables.

 

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 inamong the U.S.United States and inEU member states of the EU, and include:

 

product listing and establishment registration;

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;

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;

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;

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-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;

post-market surveillance regulations, which apply, when necessary, to protect the public health or to provide additional safety and effectiveness data for the device;

 

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the recall authority of the applicable government agency and regulations pertaining to voluntary recalls; and

 

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.

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 andor our other suppliers to comply with applicable regulatory requirements could result in enforcement action by various regulatory authorities, which may result in monetary fines, the imposition of operating restrictions, product recalls, criminal prosecution or other sanctions.

 

Regulation by Other Foreign Agencies

 

International sales of medical devices outside the EU may be subject to government regulations in each country in which the device is marketed and sold, which vary substantially from country to country. The time required to obtain approval by a non-EU foreign country may be longer or shorter than that required for FDA or CE mark clearance or approval, and the requirements may substantially differ.

Marketing Authorization (510k) for AC5® Advanced Wound System in the United States

On July 25, 2017, we announced that we had made a 510(k) submission to the FDA for AC5 Topical Gel. On December 18, 2017, we voluntarily withdrew the application after receiving questions from the FDA for which an adequately comprehensive response could not be provided within the FDA’s congressionally-mandated 90-day review period. On October 1, 2018, we announced that we both completed the necessary steps required to file a new 510(k) submission to the FDA for AC5 Topical Gel and filed that 510(k) submission during the third calendar quarter. As previously disclosed, these steps included developing a required study protocol and submitting it to the FDA in a pre-submission letter in the first calendar quarter, completing the pre-submission process, initiating the study in the second calendar quarter of 2018 and completing the study. On December 17, 2018, we announced that the 510(k) premarket notification for AC5 Topical Gel had been reviewed and cleared by the FDA, allowing for the product to be marketed.

In line with plans to better harmonize our United States and European product supply chains by using an additional supplier and additional manufacturing processes in the production of AC5 Topical Gel, Arch filed documentation with the FDA seeking such clearance in the United States for these additions, each of which had been incorporated into the technical documentation for the European CE mark filing. On March 23, 2020, we announced that the 510(k) premarket notification for AC5 Topical Gel had been reviewed and cleared by the FDA, allowing for the product to be marketed in the United States with the aforementioned additions. AC5 Topical Gel was subsequently renamed to AC5® Advanced Wound System in the United States.

Marketing Authorization (CE mark) for AC5 Topical Hemostat in Europe

During November 2018 we submitted the required documents for AC5 Topical Hemostat to its notified body seeking a CE mark. During August 2019, we received and responded to customary written and verbal questions related to the technical file, and that BSI had provided and assessed during the review period were acceptable so far. In that announcement, we further expressed our belief that the delay by the regulatory authority in completing the CE mark technical file review appeared to be due to a backlog of work for EU notified bodies related to both Brexit and the implementation of the new EU Medical Devices Regulation.

During April 2020, we received the CE (Conformité Européenne) mark for AC5 Topical Hemostat, allowing for commercialization in Europe as a dressing and to control bleeding in external skin wounds in both outpatient and in-patient settings.

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 the United States and AC5 Topical Hemostat in Europe, and the indication for use, or purpose, for each product follows, respectively:

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 the United States over that of AC5 Topical Hemostat in Europe, where we have not launched, for the foreseeable future to maximize operational efficiencies considering the COVID-19 pandemic.

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 Veterans Health Administration (“VA Hospitals”) and Medical Treatment Facilities. These settings tend to have many patients whose needs we believe can be addressed by AC5® Advanced Wound System because it is a synthetic self-assembling wound care product that provides clinicians with multi-modal support and utility across all phases of wound healing. Numerous published case studies and accolades highlight the efficacy and safety of AC5 in the treatment of challenging chronic and acute surgical wounds, including limb salvage and healing after other modalities have failed.

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 Centers for Medicare and Medicaid Services (“CMS”) for a dedicated Healthcare Common Procedure Coding System (“HCPCS”) Level II billing code specific to AC5® Advanced Wound System on June 29, 2022, which if granted, would better enable providers to bill third party payors for AC5 that is used in doctors’ offices. We believe that there is a growing trend toward the use of synthetic wound care products, including those that have been commonly referred to as synthetic skin substitutes. 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 April 1, 2023. In the meantime, CMS has established a new and temporary coding option to facilitate the reimbursement of doctor’ s offices and wound clinics, and certain providers have begun to submit claims under this new code as we pursue a dedicated HCPCS code.

To support commercialization in government facilities, AC5® Advanced Wound System has been added to the Federal Supply Schedule (FSS), General Services Administration (GSA) schedule and the Defense Logistics Agency’s Medical Electronic Catalog Program (ECAT) and Distribution and Pricing Agreement (DAPA), enabling purchase by federal government agencies, including the Department of Veterans Affairs (VA), Indian Health Services (IHS), and Department of Defense (DOD) Medical Treatment Facilities effective December 15, 2021.

We envision hiring additional internal sales representatives to help commercialize the Dermal Sciences products.

We have engaged and continue to engage third parties in the United States and abroad to advise on and perform certain sales and marketing activities, typically with assistance from our team. These third parties can include contract organizations, consultants, advisors, scientists, clinicians, and/or other collaborators.

While our core team oversees initial inventory distribution from the warehouse to the customer, our 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.

We received the CE mark for AC5 Topical Hemostat in April 2020. We announced receipt of 510(k) premarket notification clearances for AC5 Advanced Wound System in December 2018, providing marketing authorization, and on March 23, 2020, clearing use of an additional supplier and additional manufacturing processes.

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.

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 National Pressure Ulcer Advisory Panel guidelines and others recommend, resulting in a projected increased risk to limb and life while elective procedures are delayed and not prioritized. Furthermore, the implications of these delays are a growing backlog of chronic wounds awaiting care and a worsening of such wounds, leading to greater morbidity, such as infection, necrosis, and amputation, and potentially mortality.

While highlighted by the COVID-19 pandemic, we also believe that these challenges reveal an underlying problem in the healthcare system–clinicians and other providers are being asked to accomplish more in less time with fewer resources. These resources may include higher acuity settings, such as operating rooms; expensive wound care products that may not work as well as desired; nursing time to change wound dressings; and surgeon time for managing wounds during debridement; repeat patient visits over months and often years, and others. Our 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 current good manufacturing practices (“cGMP”), as is required by applicable regulatory agencies for production of product that can be used for preclinical and human testing as well as for commercial use. We also have engaged and continue to engage other third parties in the United States and abroad to advise on and perform certain manufacturing and related activities, typically with assistance from our team. These third parties include academic institutions, consultants, advisors, scientists, and/or other collaborators. The activities include development of our primary product candidates, as well as generation of appropriate analytical methods, scale-up, and other procedures for use by manufacturers and/or other members of our supply chain to produce or process our products at current and/or larger scale quantities for preclinical and clinical testing and ultimately, as required marketing authorizations are obtained, commercialization.

Our products are regulated as medical devices, and as such, many of our activities have focused on optimizing traditional parameters to target specifications, biocompatibility, physical appearance, stability, and handling characteristics, among other metrics, to achieve the desired product. We and our partners intend to continue to monitor manufacturing processes and formulation methods closely, as success or failure in establishing and maintaining appropriate specifications may directly impact our ability to conduct additional preclinical and clinical trials and/or deliver commercial product.

We believe that the manufacturing methods used for a product, including the type and source of ingredients and the burden of waste byproduct elimination, are important determinants of its opportunity for profitability. Industry participants are keenly aware of the downsides of products that rely on expensive biotechnology techniques and facilities for manufacture, onerous and expensive programs to eliminate complex materials, or ingredients that are sourced from the complicated process of human or other animal plasma separation, since those products typically are expensive, burdensome to produce, and at greater risk for failing regulatory oversight.

The manufacturing methods that we use and intend to use to produce our current products and potential future product candidates rely on detailed, complex and difficult to manage synthetic organic chemistry processes. Although use of those methods requires that we engage manufacturers that possess the expertise, skill and know-how involved with those methods, the required equipment to use those methods is widely available. Furthermore, improvements in relevant synthetic manufacturing techniques over the past two decades have reduced their complexity and cost, while increasing large-scale cGMP capacity. Moreover, our current products and currently planned product candidates will be synthesized from naturally occurring ingredients that are not sourced from humans or other animals but do exist in their natural state in humans. That type of ingredient may be more likely to be categorized as “generally recognized as safe”, or “GRAS”, by the FDA.

Industry and Competition

Arch is developing technology for Dermal Sciences and BioSurgery applications, including wound care, surgical procedures on and in the body, and endoscopic gastrointestinal procedures. We seek to provide a product set with broad utility in external and internal applications. Features of the technology highlight its potential utility in a range of settings, including traditional open procedures and the often more challenging minimally invasive surgeries.

Common features of our current and planned products, as described herein, are driven by the mechanism of action, which itself is derived from the underlying physicochemical properties or our self-assembling peptide technology and our product safety and performance specifications. Those features, which include, among others, that they possess barrier properties and can create an environment permissive to healing, can deliver a benefit in the treatment of external and internal wounds that are open, exposed, bleeding, leaking, and/or at risk for excessive inflammation or contamination.

Dermal Sciences

We have received marketing authorizations for AC5® Advanced Wound System in the United States and AC5 Topical Hemostat in Europe. Compared to most other advanced wound dressings on the market, ours can be used throughout all phases of wound healing (i.e., inflammatory, proliferative, and remodeling).

Wounds can vary widely in terms of degree of bleeding and oozing, chronicity, acuity, complications, anatomic location, biochemistry, micromilieu, bioburden and other factors that may inhibit an ideal response. Patients can also vary widely in terms of co-morbidities, compliance, setting of their care, ability to contribute to their own care, and other risk factors. And the approach by surgeons to clinical practice can vary widely in terms of debridement strategy, timing and/or use of advanced modalities, choice and use of consumables, follow-up, and dressing change frequency, and more. Our products are designed to self-assemble on the wound site in response to locally present stimuli (ions), despite these diverse situations, with the objective of providing greater utility to clinicians and enabling better outcomes for patients.

The incidence and prevalence of both acute surgical and chronic wounds is noteworthy. According to a 2020 report by Steiner et al for The Healthcare Cost and Utilization Project, approximately 17 million hospital visits (inpatient and ambulatory) in 2014 resulted in almost 22 million invasive therapeutic surgeries. While more acute surgical wounds occur per year versus chronic wounds, the nature of chronic wounds provides addition greater challenges due to the prolonged duration of the healing period, the frequency of interventions needed to help the wound heal, and the often-underlying medical problem that placed the patient at risk for the wound in the first place, which is itself a hindrance to the healing process.

Chronic wounds affect approximately 2% of the United States Population, accounting for an estimated 6-7 million people.

Diabetic foot ulcers develop in approximately 2 million Americans each year, according to The Health Innovation Program, University of Wisconsin, while the annual incidence across developed countries is estimated to be 2-4%, according to Woods et al in 2020. Pressure ulcers develop in over 2.5 million Americans each year, according to the United States Agency for Healthcare Research & Quality.

Venous leg ulcers, representing the most common chronic wounds, occur in approximately 2.2% of Americans over age 65 each year, according to Rice et al in 2014, which equates to roughly 1.2 million new wounds per year among just that population, while Qiu et al in 2021 provided an estimated prevalence of 2-4%. The Centers for Disease Control and Prevention estimates that approximately 56 million Americans are over age 65. Additional chronic wounds not accounted for above can include, among others, surgical wounds that become chronic wounds, typically in patients with co-morbidities.

The morbidity and mortality associated with wounds, and particularly chronic wounds, is problematic. A 2017 article by Järbrink et al noted that chronic wounds may not heal for several years or, in some cases, decades, during which time the patient may suffer from severe pain, emotional and physical distress, less mobility and greater social isolation, while the family may suffer from other stresses and challenges. Woods et al in 2020 stated that only 2/3 of diabetic foot ulcers heal within 12 months. Some wounds just do not heal, remaining stagnant or progressing to limb loss or worse. Järbrink et al noted in 2017 that ulcers precede 85% of all amputations.

The Health Innovation Program, Universality of Washington, cited that of patients with diabetic foot ulcers in the United States, more than 50% will die within five years and 5% will have an amputation (https://hip.wisc.edu/DiabeticFootUlcers). A common phrase in medicine, which we often cite, is, “Save a limb, save a life.” Even the amputations that are required to save a patient from a non-healing, progressing chronic wound are associated with additional significant morbidity and mortality. In an examination of mortality rates after amputations from a chronic wound, Meshkin et al performed a systematic literature review and found that of the sixty-one studies yielding approximately 36,000 patients who previously received a nontraumatic major lower extremity amputation, approximately 34% died by year one, 55% died by year two, and 64% died by year five. Stern et al in 2017 reported an even higher mortality rate one year after amputation of approximately 48%.

According to the US Market Report for Wound and Tissue Management, 2018 by iData Research, advanced wound dressings account for approximately $2 billion in annual revenues while the overall wound care market is projected to surpass $10 billion in the United States, yet this represents a relatively small percentage of the overall cost to care for wounds, including chronic wounds, such as venous leg ulcers, diabetic foot ulcers, and pressure ulcers.

As such, the total expenditure required to treat wounds is an important consideration in assessing market opportunity, product need, industry dynamics, and needs of insurers. Several wound related phenomenon influence the overall cost and challenge of wound care. For instance, many surgeons believe that a chronic wound is essentially a chronic infection, which raises costs and complicates treatment plans, and that healing requires aggressive debridement (surgical removal of damaged, dead, lacerated, devitalized, or contaminated tissue), which narrows the scope of which wound care products can be used at the time of the procedure as a useful tool to support healing.

According to a 2018 report by Nussbaum et al., data from calendar year 2014 estimated that Medicare alone spent between $28.1 to $96.8 billion for all wound care types, and that nearly 15% (8.2 million) of Medicare beneficiaries were diagnosed with at least one type of wound or wound-related infection. Furthermore, a 2017 report by Chan et al indicated that the mean one-year cost of care from the perspective of a health-care public payer was $44,200 for a diabetic foot ulcer, $15,400 for a pressure ulcer and $11,000 for a leg ulcer. Woods et al in 2020 estimated that the cost per admission among patients with diabetic foot ulcers was $8,145 if the wound was not infected and $11,290 if the wound was infected. Han et al noted in 2017 that lessening a hospital admission by just one day represents an enormous cost savings and is separately beneficial to the patient.

A common wound care topic, which has been further highlighted during the COVID-19 pandemic, is how to provide high quality care in lower acuity settings. It is less expensive, more convenient, and potentially better for the patient if a wound care procedure, such as debridement, can be safely performed in a doctor’s office or wound clinic in lieu of a hospital operating room. For example, a report by Rogers et al in 2020 discussed changing sites of service to the lowest acuity setting in which care could be safely delivered. As such, we believe that wound care products should be designed to enable clinicians to “do more with less”, such as debride in a clinic or office a wound that otherwise may have required an operating room visit.

While the wound care opportunity is large for safe, efficacious, and novel products, the competitive landscape is also crowded and challenging. For instance, while many of the commercially marketed advanced wound care dressings or other products, may provide utility in certain situations and possess some novel features, surgeons often describe an inability to differentiate one from the other. In addition, many advanced products are expensive when accounting for wound surface area coverage, are not user friendly, and/or may need to rely on the passage of several weeks of time for the wound bed to adequately be prepared before they can be used, which itself adds burden to their use.

We believe that the aforementioned elevated wound incidence and prevalence, consequential morbidity and mortality, prolonged healing times and exorbitant cost of overall care underscores the potential opportunity for the overall market and for our products. We believe that the addressable market opportunity for advanced wound care products in the US alone can exceed $20 billion if improvements enable the best products to increase penetration at the expense of less effective wound care products and categories, lessen expensive non-product-related treatment costs for insurers (e.g., skin grafts, dressing changes, etc.), and deliver improved outcomes more quickly and in lower acuity settings.

We believe that AC5 Advanced Wound System® is sufficiently differentiated to replace certain competitive products, complement other products and procedures by potentially enabling the wound bed to be ready sooner, and enable more procedures to be done sooner and/or in settings where they could not be performed easily before.

Features and benefits of AC5® Advanced Wound System may include that it:

is a self-assembling wound care matrix and may provide better outcomes across all phases of wound;

conforms to irregularly shaped wound geometry;

may be used in either lower acuity (e.g., clinics) or higher acuity (e.g., operating rooms) settings;

can be used in conjunction with aggressive surgical debridement;

can be used on a wound whether or not it is bleeding;

is agnostic to the presence of anti-thrombotic therapy (aka, blood thinners);

can be used on a chronic, stalled wound that has been previously unresponsive to or failed other treatment regimens;

provides a protective barrier to mitigate contamination and modulating inflammation;

donates moisture to the wound;

can create wound microenvironment conducive to healing;

aids in epithelial cell migration;

creates an extracellular matrix-like structure to enable cell and tissue growth;

is self-healing, in that it can dynamically self-repair around migrating cells;

may reduce healing time and patient burden;

is user-friendly, easy to prepare, and easy to apply;

may be stored at ambient temperature; and

may reduce treatment costs while improving outcomes in certain patients.

BioSurgery

We are developing BioSurgery products for internal use, including for hemostasis and sealant applications, and gastrointestinal endoscopic surgical procedures, and we believe that our technology will be useful in addressing the constant demand for better performance and safety in minimally invasive surgery (“MIS”), traditional surgery, Natural Orifice Translumenal Endoscopic Surgery, commonly referred to as “NOTES', and other procedures.

While developing our products, we engaged commercial strategy and marketing consultants and communicated directly with care providers to understand the needs of potential customers and to assess product feature preferences.

Surgeons, operating room managers, sales representatives and hospital decision-makers identified several characteristics deemed desirable, including that a product is:

reliable;

able to protect the wounds in tissues and organs where used;

laparoscopic friendly;

easily handled and applied;

able to promote a clear field of vision and not obstruct view;

sufficiently flowable;

non-sticky (to tissue or equipment);

permits normal healing;

agnostic to the presence of antithrombotic medications (“blood thinners”) to whether the patient has bleeding abnormalities;

non-toxic; and

not sourced from human or other animal blood or tissue components.

We believe that long-term trends, which support a need for products to better support clinicians in surgical procedures, include:

a persistent drive to migrate the site of surgical care from inpatient hospital operating room to progressively lower acuity same-day ambulatory settings due to cost and other potential negative impacts of unnecessary hospitalizations, such as infection risk or occupying scares resources that may be more usefully deployed elsewhere;

increased use of anticoagulants and other anti-thrombotic agents (also known as blood thinners) due to co-morbidities, but which predispose patients to bleeding;

the increasingly difficult nature of procedures expected to be performed by surgeons with the least invasive method feasible in the less expensive settings accessible; and

the desire to lower procedure time to increase operating room through-put, increase shift volume, and lessen in-procedure time for patient’s well-being;

We believe that a motivating factor for some of these trends may be the increased costs associated with procedures performed in hospital operating rooms, which have been estimated to cost between $2,000 and $10,000 per hour, according to MedMarket Diligence and others.

These costs likely drive the desire for increased operating room throughput and increased volume of procedures performed in outpatient settings. Both of those trends highlight the need for highly effective products that can decrease operating room time for inpatient procedures and help to increase the safety of performing more types of procedures in less expensive outpatient settings.

Since the early days of modern MIS in the 1990s, the percent of surgeries performed minimally invasively has increased significantly, such that it is now widespread and common. Laparoscopic surgery is among the most recognized types of MIS, although there are many additional types. Advantages of MIS tend to include less scarring, less post-operative pain, less need for pain medications, shorter recovery times, and faster discharge times. However, such procedures often present the surgeon with less margin for error and less capacity to deal with certain risks, such as excessive bleeding, without having to convert the surgery to a traditional open procedure.

A trend to make traditional minimally invasive surgery even less invasive is known NOTES. In NOTES procedures, an endoscope is passed through a natural orifice, such as the mouth, urethra, anus, or vagina, and then through an internal incision in the stomach, vagina, bladder or colon. NOTES advantages include those of MIS to a potentially even greater degree, as well as the lack of external incisions and external scars, improved visibility, and the possibility to avoid managing potential obstacles to surgery, such as extensive adhesions from prior procedures. However, compared to MIS, margin for error in NOTES is even less. NOTES may be performed by surgeons or endoscopists, yet the techniques can be challenging to learn and are in their early stages of development. Practitioners may seek additional tools, including BioSurgery products where relevant, to enable them to operate efficiently, effectively, and safely.

We consider these items while developing our BioSurgery products with the objective of meeting these needs.

We are developing products for hemostasis and sealant applications. Many of the hemostasis products currently available do not possess certain features and handling characteristics that are ideal for use in a laparoscopic setting. For instance, many available products are difficult to use in MIS or NOTES because they tend to be sticky, powdery, fabric-based or are otherwise difficult to insert into and control through the small gauge, yet long, catheters used during these procedures. We believe that the novel features and differentiating characteristics of our BioSurgery products will make them more suitable for such surgeries compared to many or most of the presently available alternatives.

According to a 2015 MedMarket Diligence, LLC report, the market for hemostatic agents and sealants achieved approximately $4.2 billion in worldwide sales in 2015 and was projected to reach $4.8 billion in 2017 and surpass $7.5 billion in 2022. While the majority of those sales are for hemostats, we believe that the projected growth rate for sealants in multiple applications, such as the gastrointestinal track, could become greater as additional products become available.

In spite of the large size of the market for these products, many available hemostatic agents and sealants possess a combination of limitations, including slow onset of action, general unreliability, user-unfriendliness, and risk for adverse effects, such as healing problems, adhesion formation, infection and other safety concerns. Many of the deficiencies of currently available hemostatic agents and sealants are comparable to those of their earlier-generation counterparts, as revolutionary advances in underlying technologies have been elusive.

Participants in the hemostatic and sealant market include large medical device and biopharmaceutical companies, as well as various smaller companies. Commercially available hemostatic agents can cost between $50 and $500 per procedure, with the higher value-added products generally priced at the upper end of that range. We believe, however, that approaches to many surgical problems have evolved and will continue to do so, such that what may recently appeared to be an interesting market may be less so in the future if the required tools also evolve. For instance, the endovascular approach to vascular reconstruction may lessen the need for hemostatic agents in certain procedures.

We are also developing products for gastrointestinal and NOTES procedures, endoscopic mucosal resections (“EMR”) and endoscopic submucosal dissections (“ESD”). Surgical endoscopists are removing more complicated tumors and lesions from the gastrointestinal tract via EMR and ESD, which are endoscopic techniques to remove early-stage cancer and precancerous growths from the lining of the digestive tract through long narrow equipment, which consist of ports, catheters, lights, monitors, and video cameras. This represents the least invasive interventional approach known.

The EMR/ESD market is immature and growing, we believe, because of an increasing elderly population and incidence of gastrointestinal malignancies. The opportunity is noteworthy in North America, Europe, and Asia, where a higher prevalence of certain gastrointestinal malignancies and lower screening rates leads to later discovery and removal of tumors than would be desired. We believe that overall costs of care associated with these procedures, when compared to that of more invasive alternatives, and potentially faster recovery times will encourage a growth trend. It should be noted that these procedures do require that the doctor possess additional non-routine skill and equipment thereby tempering potential adoption curves.

A particular need for which we are developing AC5-G is a product that provides both a durable and safe lift while being inherently hemostatic. The concept is to inject AC5-G beneath a polyp or tumor to be resected or dissected, thus creating separation between the lesion and the underlying healthy tissue.

Incomplete lesion removal, bleeding and perforation are known challenges and risks of EMR/ESD. The objective of a lift is to minimize the risk for perforation into the peritoneum, which can cause significant morbidity and mortality, and increase the probability of visualizing and removing the entire desired lesion. The lift should also be durable, potentially lasting at least two hours, such that the frequency of repeat injections and perforation risk is minimized. Normal and abnormal tissues can also bleed during these procedures, and it can be challenging and time consuming to stop. Surgeons have expressed a desire for an improved agent that can prophylactically or actively address such bleeding. Surgeons have further expressed interest in sealant properties in the event that a perforation occurs during the procedure.

Several companies have products that provide either a lift or are hemostatic. Based on early indicators, we believe that AC5-G provides properties for both lift and hemostasis. AC5-G was featured in a video presentation during the Emerging Technology Session of the Society of American Gastrointestinal and Endoscopic Surgeons (SAGES) 2020 Annual Meeting, which took place from August 11-13, 2020.

Potential Disadvantages of our Current and Planned Products Compared to the Competition

Some potential disadvantages of our products compared to currently marketed products follow:

The favorable handling characteristics of AC5 Devices result, in part, from their non-sticky and non-glue-like nature. However, if a surgeon or healthcare provider requires a product to adhere tissues together, or provide similar glue-like action, then AC5 Devices in their current form would not achieve that effect.

While we project that our products will be sufficiently economical to manufacture at scale, they may not be able to compete from a price perspective with inexpensive products.

We have generated less data in humans compared to many successful products in the Dermal Sciences or BioSurgery categories.

While we believe that the flowable nature of our products before they assemble into a dense nanofiber network can provide a meaningful advantage, some surgeons may prefer a solid product in certain applications.

 

Other Governmental Regulations and Environmental Matters

 

We are or may become subject to various laws and regulations regarding laboratory practices and the use of animals in testing, as well as environmental laws and regulations governing, among other things, any use and disposal by us of hazardous or potentially hazardous substances in connection with our research. At this time, costs attributable to environmental compliance are not material. In each of these areas, applicable U.S. and foreign government agencies have broad regulatory and enforcement powers, including, among other things, the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have a material adverse effect on our business. Additionally, if we are able to successfully obtain approvals for, and commercialize our product candidates, then the Company and our products may become subject to various federal, state and local laws targeting fraud, abuse, privacy and security in the healthcare industry.

 

Intellectual Property

 

We are focused on the development of self-assembling compositions, particularly self-assembling peptide compositions, and methods of making and using such compositions primarily in medical and non-medicalhealthcare applications. Suitable applications of these compositions include limiting or preventing the movement of bodily fluids and contaminants within or on the human body, preventing adhesions, treatment of leaky or damaged tight junctions, and reinforcement of weak or damaged vessels, such as aneurysms. Our strategy to date has been to develop an intellectual property portfolio in high-value jurisdictions that tend to uphold intellectual property rights.rights and apply business judgment rules to determine which patent applications to pursue and, if granted, which patents to maintain.

 

OurAs of January 18, 2023, we either own or license from others several of U.S. patents, U.S. patent portfolio, which coversapplications, foreign patents and foreign patent applications.

Six patent portfolios assigned to Arch Biosurgery, Inc. include a total of 43 patents and pending applications in a total of nine jurisdictions, including twelve patents and pending applications in the US. These portfolios cover self-assembling peptides, formulations and methods of use thereof includes fourand self-assembling peptidomimetics and methods of use thereof, including eight issued US patents (US 9,415,084; US 9,162,005; US 9,789,157; US 9,821,022; US 9,339,476; US 10,314,886; US 10,682,386, and 10,869,907) that expire between 2026 and 2034 (absent patent term extension), as well as sixteen patents that have been either allowed, issued or granted patents, and eighteen pending applications in nineforeign jurisdictions.

 

We have also entered into a license agreement with Massachusetts Institute of Technology and Versitech Limited (“MIT”) pursuant to which we have been granted exclusive rights under one portfoliotwo portfolios of patents and non-exclusive rights under another portfoliothree portfolios of patents.

The portfoliotwo portfolios exclusively licensed from MIT include a total of 22 patents and Versitech Limited includes thirteenpending applications drawn to self-assembling peptides, formulations and methods of use thereof and self-assembling peptidomimetics and methods of use thereof in a total of nine jurisdictions. The portfolios include five issued US patents (US 9,511,113; US 9,084,837; US 10,137,166; US 9,327,010; and US 9,364,513) that expire between 2026 and 2027 (absent patent term extension), as well as fifteen patents that have been either allowed, issued or granted and nine applications that are pending in nineforeign jurisdictions.

The portfoliothree portfolios non-exclusively licensed from MIT includesinclude a number of PCTUS and foreign applications, which have now entered the nationalincluding three issued US patents (US 7,846,891; US 7,713,923; and regional phases outside of the US including nine issued patents in three jurisdictions8,901,084) that expire between 2016 and 2027not before 2024 (absent patent term extension), and two pending patent applicationsas well as four patents that have been either allowed, issued or granted in twoforeign 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. One of our licensed MIT European patents was recently opposed, however this patent was maintained in amended form following an administrative hearing.

 

Our license agreement with MIT imposes or imposed certain diligence, capital raising, and other obligations on us, including obligations to raise certain amounts of capital by specific dates. Additionally, we are responsible for all patent prosecution and maintenance fees under that agreement. Our breach of any material terms of our license agreement with MIT could permit the counterparty to terminate the agreement, which could result in our loss of some or all of our rights to use certain intellectual property that is material to our business and our lead product candidate. Our loss of any of the rights granted to us under our license agreement with MIT could materially harm our product development efforts and could cause our business to fail.

 

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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™,AC5-G, AC5-V, AC5-P, Crystal Clear Surgery™, NanoDrape™Surgery, NanoDrape and NanoBioBarrier™.NanoBioBarrier and associated logos are trademarks and/or registered trademarks of Arch Therapeutics, Inc. and of Arch Biosurgery, Inc.

 

Employees

 

We presently have sixeight employees, all of whom are full-time, employees and one part-time employee, and make extensive use of third partythird-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. WeIn July 2017, we entered into a month-to-monththree-year operating lease 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 forcommencing October 1, 2017 and ending on September 30, 2020 at our current and planned near-term operations.location. During August 2020, we extended the lease through September 30, 2021 at our current location. During October 2021, we extended the lease through March 31, 2022 at our current location. Effective April 1, 2022, our lease is month to month at our current location.

 

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.

 

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Dr. Avtar Dhillon served as our Chairman of the Board from April 2013 through July 2018, and as an advisor to us from July 2018 until termination on August 6, 2021. As previously disclosed, in August 2021, the U.S. Department of Justice (the “DOJ”) filed a criminal complaint against Dr. Avtar Dhillon, alleging, among other things, his participation in a securities fraud scheme whereby he concealed his ownership of millions of shares of two microcap companies (including the Company) and then secretly directed the shares’ sale, generating approximately $2.19 million in proceeds. On December 7, 2022, Dr. Avtar Dhillon pleaded guilty to one count of conspiracy to commit securities fraud, one count of securities fraud, and two counts of obstructing a proceeding of the SEC. Sentencing is scheduled for April 18, 2023.  At the same time, the SEC charged Dr. Avtar Dhillon with violations of the antifraud and certain other provisions of federal securities laws in connection with the sales of securities of certain public companies, including his sale of shares of the Company.  The SEC is seeking against Dr. Avtar Dhillon permanent injunctions, conduct-based injunctions, disgorgement of allegedly ill-gotten gains plus interest, civil penalties, penny stock bars, and an officer and director bar.  The Company has fully cooperated with the DOJ and the SEC and has not been implicated in or charged with any wrongdoing.

 

 

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 DhillonTerrence W. Norchi

President, Chief Executive Officer and Chairman of the Board of Directors

58

April 2013

Michael S. Abrams

Chief Financial Officer

52

May 2021

Daniel M. Yrigoyen

Vice President of Sales

53

July 2021

Punit Dhillon

Director

42

July 2018

Laurence Hicks

 55

Director

57

 April 2013

September 2021

James R. Sulat

Dr. Guy L. Fish

 

Director

 65

63

 August 2015

December 2021

Dr. Terrence W. NorchiPresident, Chief Executive Officer and Director51April 2013
Richard E. DavisChief Financial Officer58July 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 also currently serves as a member of the Board of Directors of Valneva SE, AMAG Pharmaceuticals, Inc. and DiaDexus, 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.

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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 BoardChairman of Directors.the Board. 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 OverseersAdvisors of the Boston Museum of Science.

Richard E. Davis.Michael S. Abrams.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, heAbrams 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 andserved as the Chief Financial Officer at NMT Medical,of the Company since May 2021. Prior to joining the Company, Mr. Abrams was the turnaround Chief Financial Officer for RiseIT Solutions, Inc. from February 2019 to April 2021, where he helped return the business to profitability. Prior to RiseIT Solutions, from August 2009 to February 2019, Mr. Abrams served as the Chief Financial Officer and director of FitLife Brands, Inc., a NASDAQ-traded medical devicepublicly traded entity focused on the development of functional nutritional supplements that promote an active, healthy lifestyle.  From August 2004 to December 2016, Mr. Abrams served as Partner and Managing Director of Burnham Hill Capital Group, a private privately held financial services holding company. Mr. Davis also served on its BoardAbrams graduated with an MBA with Honors from the Booth School 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 positionsBusiness at the Coleman Company, The TJX Companies, Inc.University of Chicago and Wang Laboratories. He holds a Master of Business Administration degreereceived his BBA with a Finance concentration from Babson College and a Bachelor of Business Administration degreeHonors from the University of Massachusetts Amherst.at Amherst as a William F. Field Alumni scholar, an award given annually to the top finance student in the class.

Daniel M. Yrigoyen. Mr. Yrigoyen has served as the Vice President of Sales of the Company since July 2021. Prior to joining the Company, Mr. Yrigoyen was Vice President, Sales & Channel Distribution for Medela, Inc. from April 2016 to July 2021. Prior to Medela, Mr. Yrigoyen served as General Manager for multiple business units at Hollister, Inc., where he was responsible for the expansion of the wound care product portfolio and led the effort to launch several new and innovative wound care products into the US market. Following these efforts, Mr. Yrigoyen joined the Hollister Global Marketing Organization, where he led similar expansion efforts within key markets of Hollister’s international business. Mr. Yrigoyen was an employee at Hollister for over 20 years and brings significant healthcare and distribution experience to the Company. Yrigoyen graduated with an MBA from the Kellogg School of Management at Northwestern University.

Punit Dhillon. Mr. Dhillon joined our Board of Directors in July 2018. Mr. Dhillon was appointed CEO and Chair of Skye Bioscience, Inc. (OTCQB: SKYE) in August 2020 and brings over 20 years of global industry experience to Arch's Board. He is the co-founder and former President & CEO of OncoSec Medical Incorporated (NASDAQ: ONCS), a leading biopharmaceutical company developing cancer immunotherapies for the treatment of solid tumors, where he served as an executive until March 2018 and a director until February 2020. Prior to that, Mr. Dhillon served as the Vice President of Finance and Operations at Inovio Pharmaceuticals, Inc. (NASDAQ: INO), a DNA vaccine development company, from September 2003 until March 2011. Mr. Dhillon is also a director and Audit Committee Chair of Emerald Health Therapeutics, Inc. (CSE: EMH). Mr. Dhillon also co-founded and is the director of YELL Canada, a registered Canadian charity that partners with schools to support entrepreneurial learning. Mr. Dhillon has a Bachelor of Arts with honors in Political Science and a minor in Business Administration from Simon Fraser University. Mr. Dhillon’s experience in the medical device and life sciences industry provides value to his role as a member of the Board.

Laurence Hicks. Mr. Hicks joined our Board of Directors in September 2021. He has been the chief executive officer of Healthcare Components Group, a global manufacturer of OEM and replacement parts used for the manufacture and repair of medical devices, since 2021. From 2016 until 2021, when it merged into Healthcare Components Group, Mr. Hicks was chief executive officer of 2506052 Ontario Inc., a holding company for American Optics, Endoscopy Replacement Parts and Micro Optics Europe, which sell components used in the manufacturing and repair of endoscopes worldwide. He has held medical device leadership roles at ACMI, Karl Storz Endoscopy and NeuroTherm. Mr. Hicks’ experience in the medical device industry provides value to his role as a member of the Board.

Dr. Guy L. Fish. Dr. Fish joined our Board of Directors in December 2021. He is currently employed by the Greater Lawrence Family Health Centers, a nationally recognized Federally Qualified Health Center, where he has served as the Chief Executive Officer since 2021. Dr. Fish is also the President and Co-Founder of Ivy Consulting Partners, Inc., a boutique consultancy focused on healthcare, corporate and leadership development, and business strategy, a role he has held since 1999. Dr. Fish served as the Chief Executive Officer at Cellanyx LLC, a cancer diagnostic company, from 2019 to 2020. From 2002 to 2021, Dr. Fish served in various executive positions at Fletcher Spaght, Inc., a strategy management firm focused on health care innovator companies. From 2006 to 2019, Dr. Fish served as an investor and Senior Vice President at Fletcher Spaght Ventures. Dr. Fish has served as a member of the board of directors of Etiometry, Inc. since 2019, PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS) from 2009 to 2018, and Metabolon, Inc. from 2010 to 2017. Dr. Fish holds an MBA degree from Yale University School of Management and a M.D. degree from Yale University School of Medicine. Dr. Fish holds a bachelor’s degree in biochemistry from Harvard University. The Company believes that Dr. Fish is qualified to serve on the Board as a result of his extensive leadership experience in the medical field, as well as his record of accomplishment in business strategy and operations.

Board of Director Composition

Our Board currently consists of four members. We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.

 

Term of Office of Directors

 

Our directors are elected at each annual meeting of stockholdersappointed and serve until the next annual meeting of stockholders or until their successor has been duly elected and qualified, or until the earlier of their 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.

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EXECUTIVE COMPENSATION

The following table summarizes all compensation recorded by us in each of the fiscal years ended September 30, 2015 and September 30, 2014 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 2015  325,000   77,000   138,865       540,865 
President and Chief Executive Officer (1) 2014  308,333   82,500   157,475      548,308 
                       
William M. Cotter, 2015  230,000             230,000 
Chief Operating Officer (2) 2014  218,333   35,000   110,232      363,565 
                       
Richard E. Davis 2015  212,500   55,000   117,205       384,705 
Chief Financial Officer (3) 2014  87,199      94,168      181,367 

(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.

(2)Mr. Cotter was appointed as our Chief Operating Officer on July 2, 2013, and resigned as both an employee of the Company and as its Chief Operating Officer on June 15, 2015. 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, 2015 and 2014 and, for the fiscal year ended September 30, 2015, $60,000 paid to Mr. Cotter in connection with his Separation Agreement.

(3)Effective July 7, 2014, Mr. Davis was appointed as the Company’s Chief Financial Officer. Salary amounts reflected for the fiscal year ended September 30, 2014 include $45,833 earned by Mr. Davis in connection with his service as an executive officer of the Company and $41,366 for consulting services provided prior to his appointment as Chief Financial Officer.

(4)Represents the aggregate grant date fair values of awards granted during the fiscal years ended September 30, 2015 and 2014 under ASC Topic 718, which is calculated as of the grant date using a Black-Scholes option-pricing model. Accordingly, the dollar amounts listed do not necessarily reflect the dollar amount of compensation that may be realized by our executive officers. For information on the valuation assumptions with respect to option grants made during the fiscal years ended September 30, 2015 and 2014, refer to Note 9 “Stock-Based Compensation” in our consolidated financial statements included in this filing. In its prior filings, the Company reported the value of the option awards for the fiscal year ended September 30, 2014 based on the fair value of the option grants that were recognized during such fiscal year, which were as follows: $56,412, $260,777 and $29,019 for Dr. Norchi, Mr. Cotter and Mr. Davis, respectively.

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.

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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.

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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 was paid 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.

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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, 2015:

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  312,500   187,500(1)  0.35  03/22/2024
   100,000   300,000(2)  0.19  01/21/2025
   96,146   258,854(3)  0.28  08/17/2025
               
William M. Cotter  171,875   78,125(4)  0.40  09/09/2023
   189,583   160,417(5)  0.35  03/22/2024
               
Richard E. Davis  171,875   328,125(6)  0.22  07/06/2024
   125,000   375,000(7)  0.19  01/21/2025
   47,396   127,604(8)  0.28  08/17/2025

(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 400,000 shares of Common Stock with a grant date of January 22, 2015. 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 February 22, 2016.

(3)Represents an option to purchase 355,000 shares of Common Stock with a grant date of June 18, 2015. 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 1/36th of the remaining shares shall vest on each of the monthly anniversaries of the grant date, commencing September 18, 2015.

(4)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.

(5)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.

(6)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.

(7)Represents an option to purchase 500,000 shares of Common Stock with a grant date of January 22, 2015. 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 February 22, 2015.

(8)Represents an option to purchase 175,000 shares of Common Stock with a grant date of June 18, 2015. 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 1/36th of the remaining shares shall vest on each of the monthly anniversaries of the grant date, commencing September 18, 2015.

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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, 2015:

Director Compensation Table

  Fees Earned or
Paid In Cash
($)
  Stock
Awards
($)
  Option
Awards
($)(1)
  All other
Compensation
($)
  Total
($)
 
Dr. Avtar Dhillon (2)  190,000      138,865      328,865 
Dr. Arthur Rosenthal (3)  33,333      16,099      49,432 
James R. Sulat (4)  5,972      40,456      46,428 

(1)The values listed represent the fair value of the option grants that was recognized during the fiscal year ended September 30, 2015 under ASC Topic 718, which is calculated as of the grant date using a Black-Scholes option-pricing model. Accordingly, the dollar amounts listed do not necessarily reflect the dollar amount of compensation that may be realized by our non-employee directors. For information on the valuation assumptions with respect to option grants made during the fiscal year ended September 30, 2015, refer to Note 9 “Stock-Based Compensation” in our consolidated financial statements included in this filing.

(2)The aggregate number of shares of Common Stock underlying stock options outstanding as of September 30, 2015 held by Mr. Dhillon was 955,000.

(3)Dr. Rosenthal resigned as a director effective May 28, 2015, but continues to provide consulting services to the Company as a scientific advisor. The aggregate number of shares of Common Stock underlying stock options outstanding as of September 30, 2015 held by Dr. Rosenthal was 800,000.

(4)Mr. Sulat was appointed as a member of the Board on August 19, 2015. The aggregate number of shares of Common Stock underlying stock options outstanding as of September 30, 2015 held by Mr. Sulat was 230,000.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Party Transactions

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 26.3% of our shares on a fully diluted basis and approximately 31.6% of our outstanding Common Stock. As of June 23, 2016, Dr. Norchi and Dr. Dhillon collectively held or otherwise controlled approximately24,736,449 shares of our Common Stock or securities convertible into our Common Stock, or 14.7% of our shares on a fully diluted basis and approximately 18.8% 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.

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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 (i) $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; and (ii) $40,000, the Trust received 111,111 shares of our Common Stock upon the closing of the 2016 Private Placement Financing on May 26, 2016, and a Series E Warrant exercisable for 83,333 shares at an exercise price of $0.4380. Regarding the latter and as noted elsewhere in this prospectus, Mr. Sulat disclosed his interest in the 2016 Private Placement Financing to the Disinterested Directors in accordance with the Company’s policies governing related party transactions (which is described below), and recused himself from discussing or voting on matters related to the 2016 Private Placement Financing. The Disinterested Directors unanimously approved the 2016 Private Placement Financing.

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Upon his resignation from our Board of Directors on May 28, 2015, the Company and Dr. Arthur Rosenthal entered into an oral agreement pursuant to which Dr. Rosenthal agreed to continue providing services to the Company as a scientific advisor. On October 15, 2015, the Company and Dr. Rosenthal entered into a written agreement to memorialize this agreement.

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 Mr. Punit Dhillon, Mr. Laurence Hicks and Dr. Avtar Dhillon and Mr. James R. SulatGuy Fish would qualify as “independent” as that term is defined by Nasdaq Listing Rule 5605(a)(2). Further, althoughOn August 15, 2022, we have not established separately designated audit, corporate governance and nominating, orand compensation board committees,committees. Mr. Dhillon, Mr. Hicks, and Dr. Dhillon and Mr. Sulat wouldFish all 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.

 

 

Committees of the Board of Directors

Our Board has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. Our Board may establish other committees to facilitate the management of our business. The composition and functions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our Board. Each of these committees operate under a charter that has been approved by our Board, which will be available on our website.

Audit Committee

On August 15, 2022, our Board of Directors established a separate standing audit committee within the meaning of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The audit committee consists of Mr. Punit Dhillon, serving as the Chairman of the audit committee, Mr. Laurence Hicks, and Dr. Guy Fish. Our Board has determined that the three directors currently serving on our Audit Committee are independent within the meaning of the Nasdaq Marketplace Rules and Rule 10A-3 under the Exchange Act. Our Board of Directors has determined that Mr. Dhillon is an “audit committee financial expert” as defined by applicable Securities and Exchange Commission (“SEC”) rules.

The Audit Committee oversees and monitors our financial reporting process and internal control system, reviews and evaluates the audit performed by our registered independent public accountants and reports to our Board any substantive issues found during the audit. The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of our registered independent public accountants. The Audit Committee reviews and approves all transactions with affiliated parties.

Compensation Committee

Our Compensation Committee consists of Dr. Fish, Mr. Hicks and Mr. Dhillon, with Mr. Hicks serving as the Chairman of the Compensation Committee. Our Board has determined that the three directors currently serving on our Compensation Committee are independent under the listing standards, are “non-employee directors” as defined in rule 16b-3 promulgated under the Exchange Act and are “outside directors” as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended.

The Compensation Committee provides advice and makes recommendations to the Board in the areas of employee salaries, benefit programs and director compensation. The Compensation Committee also reviews and approves corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other officers and makes recommendations in that regard to the Board as a whole.

Nominating and Corporate Governance Committee

Our Nominating and Corporate Governance Committee will consist of Dr. Fish, Mr. Hicks and Mr. Dhillon, with Dr. Fish serving as the Chairman of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee nominates individuals to be elected to the Board by our stockholders. The Nominating and Corporate Governance Committee considers recommendations from stockholders if submitted in a timely manner in accordance with the procedures set forth in our bylaws and will apply the same criteria to all persons being considered. All members of the Nominating and Corporate Governance Committee are independent directors as defined under the Nasdaq listing standards.

Board Leadership Structure and Role in Risk Oversight

Currently, Dr. Norchi serves as the Company’s Chief Executive Officer and Chairman of the Board. Periodically, our Board will assess the roles of Chairman and Chief Executive Officer and the Board leadership structure to ensure the interests of the Company and our stockholders are best served. Our Board believes the current combination of the two roles is satisfactory at present. Dr. Norchi, as our Chief Executive Officer and Chairman, has extensive knowledge of all aspects of the Company and its business. We have no policy requiring the combination or separation of leadership roles and our governing documents do not mandate a particular structure. This has allowed, and will continue to allow, our Board the flexibility to establish the most appropriate structure for the Company at any given time.

While management is responsible for assessing and managing risks for the Company, our Board is responsible for overseeing management’s efforts to assess and manage risk. This oversight is conducted primarily by our full Board, which has responsibility for general oversight of risks. Our Board satisfies this responsibility through regular reports directly from officers responsible for oversight of particular risks within the Company. Our Board believes that full and open communication between management and the Board is essential for effective risk management and oversight.

Code of Ethics

We have adopted a written code of business conduct and ethics that applies to our directors, principal executive officer, principal financial officer, principal accounting officer and all of our other officers and employees and can be found on our website, http://www.archtherapeutics.com on our “Corporate Governance” webpage, which can be accessed from the “Investors” tab of our website. We will also provide a copy of our code of business conduct and ethics to any person without charge upon his or her request. Any such request should be directed to our Chief Financial Officer at 235 Walnut Street, Suite 6, Framingham, Massachusetts 01702. We intend to make all required disclosures concerning any amendments to or waivers from our code of business conduct and ethics on our website.

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.

EXECUTIVE COMPENSATION

The following table summarizes all compensation recorded by us in each of the fiscal years ended September 30, 2022, and September 30, 2021 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

($)

  

Stock Awards

($)

  

Option Awards

($)(1)

  

All other Compensation

($)

  

Total

($)

 

Dr. Terrence W. Norchi,

2022

  450,500   -   -   -   -   450,500 

President and Chief Executive Officer

2021

  450,500   27,030   -   157,400   -   634,930 
  2022   325,000   -   -   -       325,000 

Michael S. Abrams, Chief Financial Officer

 

2021

  135,417   -   -   66,895   -   202,312 
  

2022

  316,667   -   -   9,075       325,742 

Daniel Yrigoyen, VP of Sales

 

2021

  64,299   -   13,500   27,545   -   105,344 

(1)

Represents the aggregate grant date fair values of awards granted during the fiscal year ended September 30, 2021 under ASC Topic 718, which is calculated as of the grant date using a Black-Scholes option-pricing model. Accordingly, the dollar amounts listed do not necessarily reflect the dollar amount of compensation that may be realized by our executive officers. For information on the valuation assumptions with respect to option grants made during the fiscal year ended September 30, 2021 refer to Note 14 “Stock-Based Compensation” in our consolidated financial statements in this prospectus.

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, 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. In addition, Dr. Norchi’s employment agreement provides that his annual base salary will be reviewed from time to time in accordance with the established procedures of the Company for adjusting salaries for similarly situated employees. Annual bonuses are awarded at the sole discretion of our Board. 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, Dr. Norchi’s employment agreement was amended to increase his annual base salary 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. In connection with the Board’s annual review of Dr. Norchi’s base salary, Dr. Norchi’s annual base salary was increased to $425,000 effective July 1, 2017. In connection with the Board’s annual review of Dr. Norchi’s base salary, Dr. Norchi’s annual base salary was increased to $450,500 effective August 1, 2019.

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.

Michael S. Abrams

On March 31, 2021, we entered into an executive employment agreement with Mr. Abrams, our Chief Financial Officer and Treasurer. The agreement continues until terminated by us or by Mr. Abrams. Pursuant to the terms of the agreement, Mr. Abrams is entitled to an initial annual base salary of $325,000 and is eligible to receive an annual cash bonus in an amount of up to 30% of Mr. Abrams’ then-current annual base salary. Annual bonuses are awarded at the sole discretion of our Board of Directors. In addition, Mr. Abrams’ employment agreement provides that his annual base salary will be reviewed by the Board (or any committee thereof), with such input as it may request from the Company’s Chief Executive Officer, from time to time but at least on an annual basis, in accordance with the established procedures of the Company for adjusting salaries for similarly situated employees. If Mr. Abrams’ employment is terminated by us at any time after 30 days after the start date (unless such termination is “For Cause” (as defined in his employment agreement)), or by Mr. Abrams for “Good Reason” (as defined in his employment agreement), then Mr. Abrams, upon signing a release in favor of the Company, would be entitled to severance in an amount equal to six months of Mr. Abrams’ then-current annual base salary, payable in the form of salary continuation, plus, if Mr. Abrams elects and subject to certain other conditions, payment of Mr. Abrams’ 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. Abrams becomes covered under another employer’s health plan. In addition, Mr. Abrams’ 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. Abrams, if any, shall automatically accelerate and become fully vested.

The agreement provides the following definitions of “For Cause” and “Good Reason”: (a) “For Cause” is (i) Mr. Abrams commits a crime involving dishonesty, breach of trust, or physical harm to any person; (ii) Mr. Abrams willfully engages in conduct that is in bad faith and materially injurious to the Company, including without limitation misappropriation of trade secrets, fraud or embezzlement; (iii) Mr. Abrams commits a material breach of this Agreement or the Proprietary Information Agreement, which breach is not cured within twenty calendar days after written notice to Executive from the Company (to the extent curable); (iv) Mr. Abrams willfully refuses to implement or follow a lawful policy or directive of the Company, which breach is not cured within twenty calendar days after written notice to Executive from the Company; or (v) Mr. Abrams engages in misfeasance or malfeasance demonstrated by a pattern of failure to perform job duties diligently and professionally. The Company may terminate Mr. Abrams’ employment For Cause at any time, without any advance notice. The Company shall pay Mr. Abrams all compensation to which Mr. Abrams is entitled up through the date of termination, subject to any other rights or remedies of the Company under law, and thereafter all obligations of the Company under this Agreement shall cease.

Daniel M. Yrigoyen

On July 12, 2021, we entered into an executive employment agreement with Mr. Yrigoyen, our Vice President of Sales. The agreement continues until terminated by us or by Mr. Yrigoyen. Pursuant to the terms of the agreement, Mr. Yrigoyen is entitled to an initial annual base salary of $225,000 and is eligible to receive regular commission payments of up to $8,333.33 per month, depending on the achievement of established objectives; provided, however, that for the first nine (9) months of employment, Mr. Yrigoyen shall be entitled to receive the full commission of $8,333.33 per month regardless of whether the applicable performance objectives are met; this provision was subsequently extended indefinitely pending review from time to time in connection with the Company’s ongoing commercialization effort.

In addition, Mr. Yrigoyen’s employment agreement provides that his annual base salary will be reviewed by the Board (or any committee thereof), with such input as it may request from the Company’s Chief Executive Officer, from time to time but at least on an annual basis, in accordance with the established procedures of the Company for adjusting salaries for similarly situated employees. If Mr. Yrigoyen’s employment is terminated by us at any time after 30 days after the start date (unless such termination is “For Cause” (as defined in his employment agreement)), or by Mr. Yrigoyen for “Good Reason” (as defined in his employment agreement), then Mr. Yrigoyen, upon signing a release in favor of the Company, would be entitled to severance in an amount equal to six months of Mr. Yrigoyen’s then-current annual base salary, payable in the form of salary continuation, plus, if Mr. Yrigoyen elects and subject to certain other conditions, payment of Mr. Yrigoyen’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 Mr. Yrigoyen becomes covered under another employer’s health plan. In addition, Mr. Yrigoyen’s 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. Yrigoyen, if any, shall automatically accelerate and become fully vested.

The agreement provides the following definitions of “For Cause” and “Good Reason”: (a) “For Cause” is (i) Mr. Yrigoyen commits a crime involving dishonesty, breach of trust, or physical harm to any person; (ii) Mr. Yrigoyen willfully engages in conduct that is in bad faith and materially injurious to the Company, including without limitation misappropriation of trade secrets, fraud or embezzlement; (iii) Mr. Yrigoyen commits a material breach of this Agreement or the Proprietary Information Agreement, which breach is not cured within twenty calendar days after written notice to Executive from the Company (to the extent curable); (iv) Mr. Yrigoyen willfully refuses to implement or follow a lawful policy or directive of the Company, which breach is not cured within twenty calendar days after written notice to Mr. Yrigoyen from the Company; or (v) Mr. Yrigoyen engages in misfeasance or malfeasance demonstrated by a pattern of failure to perform job duties diligently and professionally. The Company may terminate Mr. Yrigoyen’s employment For Cause at any time, without any advance notice. The Company shall pay Mr. Yrigoyen all compensation to which Mr. Yrigoyen is entitled up through the date of termination, subject to any other rights or remedies of the Company under law, and thereafter all obligations of the Company under this Agreement shall cease.

Outstanding Equity Awards At Fiscal Year-End

The following table summarizes the aggregate number of option and stock awards held by our named executive officers at September 30, 2022:

  

Option Awards

 Stock Awards 

 

  

  

 

 

  

Market

 

  

Number of

  

Number of

  

 

 

 

Number of

  

Value

 

  

Securities

  

Securities

  

 

 

Shares or

  

of Shares

 

  

Underlying

  

Underlying

  

 

 

 

Units of

  

or Units of

 

  

Unexercised

  

Unexercised

  

 

Option

 

 

 

Stock That

  

Stock That

 

  

Options

  

Options

  

 

Exercise

 

Option

 

Have Not

  

Have Not

 

  

(#)

  

(#)

  

 

Price

 

Expiration

 

Vested

  

Vested

 

Name

  

Exercisable

  

Unexercisable

      ($) 

Date

 

(#)

   ($) 

Dr. Terrence W. Norchi

  2,500   -   (1)  70.00 03/23/2024   

     

  2,000   -   (2)  38.00 

01/21/2025

 

  

 

  1,775   -   (3)  56.00 

08/17/2025

 

  

 

  6,250   -   (4)  78.00 

05/02/2026

 

  

 

  3,250   -   (5)  130.00 

02/02/2027

 

  

 

  1,800   -   (6)  85.00 

07/18/2028

 

  

 

  4,688   771   (7)  45.84 

12/19/2029

 

  

 

  

​3,325

   1,675   (8)  20.56 

09/26/2031

 

  

 

  

​1,667

   3,334   (9)  20.56 

09/26/2031

 

  

 

  

  

  

 

 

 

  

 

Michael S. Abrams

  

​1,250

   1,250   (10)  26.58 

05/02/2031

 

  

 

  

​584

   1,167   (11)  20.56 

09/26/2031

 

  

 

  

  

  

 

 

 

  

 

Daniel M. Yrigoyen

  

​292

   459   (12)  18.00 

07/29/2031

 

  

 
   334   667   (14)  20.56 

 

 750 (13) 19,500 
    84   667   (15)  12.10 

05/23/2032

          

(1)

Represents an option to purchase 2,500 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 2,000 shares of Common Stock with a grant date of January 22, 2015. 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 February 22, 2016.

(3)

Represents an option to purchase 1,775 shares of Common Stock with a grant date of August 18, 2015. 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 1/36th of the remaining shares shall vest on each of the monthly anniversaries of the grant date, commencing September 18, 2015.

(4)

Represents an option to purchase 6,250 shares of Common Stock granted on May 3, 2016. The vesting period of the shares underlying the option commenced on the date of grant, with 25% of the shares vesting immediately, the remaining unvested Shares subject to the Option shall vest on each of the next thirty-six (36) monthly anniversaries of the date of grant.

(5)

Represents an option to purchase 3,250 shares of Common Stock granted on February 3, 2017. The vesting period of the shares underlying the option commenced on the date of grant, with 25% of the shares vesting immediately, the remaining unvested Shares subject to the Option shall vest on each of the next thirty-six (36) monthly anniversaries of the date of grant.

(6)

Represents an option to purchase 1,800 shares of Common Stock with a grant date of July 19, 2018. 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 1/36th of the remaining shares shall vest on each of the monthly anniversaries of the grant date, commencing August 19, 2018.

(7)

Represents an option to purchase 5,000 shares of Common Stock with a grant date of December 20, 2019. 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 1/36th of the remaining shares shall vest on each of the monthly anniversaries of the grant date, commencing January 20, 2019.

(8)

Represents an option to purchase 5,000 shares of Common Stock with a grant date of September 27, 2021. The vesting period of the shares underlying the option commenced on the date of grant, with 33% 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.

(9)

Represents an option to purchase 5,000 shares of Common Stock with a grant date of September 27, 2021. The vesting period of the shares underlying the option commenced on the date of grant, with shares to vest in 36 equal installments commencing on the first anniversary on the date of grant.

(10)

Represents an option to purchase 2,500 shares of Common Stock with a grant date of May 3, 2021. The vesting period of the shares underlying the option commenced on the date of grant, with 30% 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.

(11)

Represents an option to purchase 1,750 shares of Common Stock with a grant date of September 27, 2021. The vesting period of the shares underlying the option commenced on the date of grant, with shares to vest in 36 equal installments commencing on the first anniversary on the date of grant.

(12)

Represents an option to purchase 750 shares of Common Stock with a grant date of July 30,2021. 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.

(13)

Represents a stock award to receive 750 shares of Common Stock granted on July 30, 2021. The stock award vests as follows; 250 shares on January 12, 2022, 250 shares on July 12, 2022 and 250 shares on January 12, 2023.

(14)

Represents an option to purchase 1,000 shares of Common Stock with a grant date of September 27, 2021. The vesting period of the shares underlying the option commenced on the date of grant, with shares to vest in 36 equal installments commencing on the first anniversary on the date of grant.

(15)

Represents an option to purchase 750 shares of Common Stock with a grant date of May 24, 2022. The vesting period of the shares underlying the option commenced on the date of grant, with shares to vest in 36 equal installments commencing on the first anniversary on the date of grant.

Compensation of Directors

On March 23, 2014, our Board 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 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.

The following table summarizes all compensation paid to our non-employee directors during the fiscal year ended September 30, 2022:

Director Compensation Table

  

Fees

 

 

 

 

 

 

 

 

 

 

Earned

 

 

 

 

 

 

 

 

 

 

or

 

 

 

 

 

 

 

 

 

 

Paid In

 

 

Stock

 

 

Option

 

 

All other

 

 

 

 

Cash

 

 

Awards

 

 

Awards

 

 

Compensation

 

 

Total

 

  ($) 

  ($) 

  ($) 

  ($) 

  ($) 

Punit Dhillon (1)

  25,000 

  - 

  - 

  - 

  25,000 

 

 

 

 

 

 

 

 

 

 

Laurence Hicks (2)

  -    -    -    -    - 

 

 

 

 

 

 

 

 

 

 

Guy L. Fish (3)

  - 

  - 

  18,350 

  - 

  18,350 

(1)

Mr. Dhillon was appointed as a member of the Board on July 19, 2018. The aggregate number of shares of Common Stock underlying option awards outstanding as of September 30, 2022 held by Mr. Dhillon was 5,000.

(2)

Mr. Hicks was appointed as a member of the Board on September 27, 2021. The aggregate number of shares of Common Stock underlying option awards outstanding as of September 30, 2022 held by Mr. Hicks was 1,250.

(3)

Dr. Fish was appointed as a member of the Board on December 31, 2021. The aggregate number of shares of Common Stock underlying option awards outstanding as of September 30, 2022 held by Dr. Fish was 1,250.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Party Transactions

During fiscal years 2022 and 2021, other than with respect to matters relating to the Company’s compensation arrangements with its executive officers, there were no transactions between the Company or any of its subsidiaries and any “Related Person” (as that term is defined in Item 404 of Regulation S-K) that would be required to be reported pursuant to Item 404 of Regulation S-K other than the following:

On June 22, 2020, the Company entered into a Series J Warrant Issuance Agreement (the “Keyes Sulat Agreement”) with the Keyes Sulat Revocable Trust (the “Trust”), also a holder of outstanding Series D Warrants, resulting in approximately $82,000 of proceeds as a result of the full exercise of the Trust’s Series D Warrants. Under the terms of the Keyes Sulat Agreement, in exchange for fully exercising the Trust’s remaining Series D Warrants for 2,273 shares of Common Stock on June 22, 2020, the Trust was issued Series J Warrants to purchase 1,705 shares of Common Stock at an exercise price of $50.00 over a 1 year term. James R. Sulat, a former member of the Board, is a co-trustee of the Trust, of which members of Mr. Sulat’s immediate family are beneficiaries. Mr. Sulat disclosed his interest in the Trust to the Board prior to its approval of the transaction and abstained from voting on the transaction. As of January 18, 2023, no Series J Warrants remain outstanding.

On July 6, 2022 a Board member, Laurence Hicks, and executive officers, Terrence W. Norchi and Michael S. Abrams, invested in the First Closing. The investment made in the First Closing made by the Board member and executive officers totaled $80,000.

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 to review related party transactions and identify and prevent conflicts of interest. Our Board 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 for approval before they are entered into or, if that is not possible, for ratification after the transaction has occurred. If our Board finds that a conflict of interest exists, then it will determine the appropriate remedial action, if any. Our Board 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.

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, 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 131,924,0041,259,280 shares of our Common Stock outstanding on June 23, 2016.January 18, 2023. Shares of our Common Stock subject to options, warrants, or other rights currently exercisable or exercisable within 60 days of June 23, 2016 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 Intracoastal is subject to as a result of the terms of the Series A Warrants issued in the 2014 Private Placement Financing; (b) 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 Intracoastal and Tungsten III, LLC (“Tungsten”), an entity controlled by Michael Parker, are subject to under the terms of the Series D Warrants issued to them or their affiliates in the 2015 Private Placement Financing; and (c) the 4.99% ownership limitation (which may be increased to 9.99% at the holder’s discretion,provided that such increase will not become effective until the 61st day after delivery of the notice in which the holder informs us of this increase) to which 2016 Investors are subject under the terms of the Series E Warrants issued to them in the 2016 Private Placement Financing. As a result of the foregoing ownership limitations, the table below does not include any of the investors from the Private Placement Financings other than Mr. Parker. For a further description of the Series E Warrants, the Series D Warrants and Series A Warrants, please see the disclosure under the heading “SUMMARY | PRIVATE PLACEMENT OFFERINGS | 2016 Private Placement Financing”, “SUMMARY | PRIVATE PLACEMENT OFFERINGS | 2015 Private Placement Financing”, and “SUMMARY | PRIVATE PLACEMENT OFFERINGS | 2014 Private Placement Financing”respectively.

Name of Beneficial Owner Number of Shares
Beneficially Owned
  Percentage of Shares
Beneficially Owned (1)
 
5%+ Stockholders:        
Twelve Pins Partners (2)  10,000,000   7.58%
Michael A. Parker (3)  8,723,184   6.61%
Directors and Executive Officers        
Avtar Dhillon (4)  9,129,040   6.86%
Terrence Norchi (5)  13,844,389   10.39%
James R. Sulat (6)  1,650,146   1.24%
William Cotter (7)  0   0.00%
Richard E. Davis (8)  936,854   0.71%
Current Directors and Named Executive Officers as a Group (5 persons)  25,560,429   18.79%

Shares of our Common Stock subject to options, warrants, or other rights currently exercisable or exercisable within 60 days of June 23, 2016,January 18, 2023 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 the applicable ownership limitation to which certain holders of our securities are subject to. In general, the ownership limitation prevents holders from exercising the warrant to the extent such exercise would result in the holder owning more shares than a certain ownership percentage, which is initially set below 5%, and 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.

Name of Beneficial Owner

 

Number of
Shares
Beneficially
Owned

  

Percentage
of Shares
Beneficially
Owned*
(1)

  

Percentage

of Shares

Beneficially

Owned

after the

Offering

 

5%+ Stockholders:

            
             

Michael A. Parker (2)

  112,097   8.90%  1%
             

Named Executive Officers and Directors:

            
             

Terrence Norchi (3)

  102,226   7.90%  1%
             

Punit Dhillon (4)

  4,235   *   * 
             

Laurence Hicks (5)

  10,254   *   * 
             

Michael Abrams (6)

  10,521   *   * 
             

Daniel Yrigoyen (7)

  1,876   *   * 
             

Guy Fish (8)

  660   *   * 
             

Current Directors and Executive Officers as a Group (6 persons)

  129,770   10.31%  1%
             

Maxim Partners LLC (9)

  31,510   2.50%  1%

* Less than 1%.

Shares of our Common Stock subject to options, warrants, or other rights currently exercisable or convertible or exercisable or convertible within 60 days of January 18, 2023, 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)

(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)

(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)Represents (i) 5,000,00047,443 shares of Common Stock originally issued to Mr.owned individually by Ana Parker, an investor in the 2015 Private Placement Financing, and assigned in March 2016 to Tungsten, an entity controlled by Mr. Parker;Michael A. Parker’s spouse; (ii) 2,222,22338,155 shares of Common Stock issued to Ms. Parker,owned individually by Mr. Parker’s spouse with whom he resides, in connection with the 2016 Private Placement Financing; andParker; (iii) 1,500,96125,000 shares of Common Stock acquired byowned through Tungsten, of which Mr. Parker in transactions unrelatedis the sole manager and (iv) 1,500 shares of restricted stock granted to the Private Placement Financings.Mr. Parker on September 27, 2021. Excludes (a) 4,500,00003,000 shares of our Common Stock issuablethat may be acquired upon the exercise of the Series D Warrant originally issued to Mr. Parker upon the ClosingG Warrants (which expire July 7, 2023); (b) any of the 2015 Private Placement Financing and subsequently assigned to Tungsten as a result of the ownership limitation that Tungsten is subject to under the terms of Tungsten’s Series D Warrant; and (b) 1,666,6676,154 shares of Common Stock issuablethat may be acquired upon the exercise of Series EH Warrants issued to(which expire May 14, 2024); (c) 103,559 First Conversion Shares; (d) 47,840 Warrant Shares; (e) any of the 17,143 shares of Common Stock that may be acquired upon the exercise of Series I Warrants (which expire October 18, 2024); or (f) any of the 23,438 shares that may be acquired upon the exercise of Series K Warrants (which expire on August 11, 2026), since such warrants cannot be exercised until such time as the holder would not beneficially own, after such exercise, more than 4.9% of the outstanding shares of Common Stock; 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 waiver notice. As of January 18, 2023, neither Ms. Parker in connection with the 2016 Private Placement Financing as a result of the ownership limitation that Ms.nor Mr. Parker is subject to under the terms of her Series E Warrant.

have waived such limitation.

-77- 

(4)Represents (a) 7,897,373 shares of our Common Stock; and (b) 1,231,667 shares subject to options exercisable within 60 days after June 23, 2016

 

(3)

(5)

Represents (a) 10,000,00050,000 shares of our Common Stock held by Twelve Pins Partners, LLC, with respect to which Dr. Norchi is the sole member and holds sole voting and investment control; (b) 1,419,0767,096 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; (c) 1,130,0005,650 shares of restricted stock granted to Dr. Norchi on May 3, 2016; (d) 3,250 shares of restricted stock granted to Dr. Norchi on February 3, 2017; (e) 1,800 shares of restricted stock granted to Dr. Norchi on July 19, 2018; (f) 2,626 First Conversion Shares; (g) 2,415 Warrant Shares; and (d) 1,295,313(h) 363 First Inducement Shares; and (i) 29,028 shares subject to options exercisable within 60 days after June 23, 2016.January 18, 2023. Dr. Norchi disclaims beneficial ownership of the securities held by Twelve Pins Partners, LLC except to the extent of his pecuniary interest therein.

 

(4)

(6)

Represents (a) 838,9344,235 shares of our Common Stock a Series D Warrant exercisable for 454,546 shares of our Common Stock, and a Series E Warrant exercisable for 83,333 shares of our Common Stock held by Keyes Sulat Revocable Trust; (b) 30,000 shares of our Common Stock held directly by Mr. Sulat; and (c) 243,333 shares subject to options exercisable within 60 days after June 23, 2016. Excludes 30,000 shares subject to an option granted to Mr. Sulat in his capacity as a consultant on JuneJanuary 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.2023.

 

(5)

(7)Mr. Cotter’s outstanding option grants expired unexercised effective June 15, 2016.

(8)Represents (a) 103,0002,014 shares of our Common Stock; and (b) 833,854 sharesStock subject to options exercisable within 60 days after June 23, 2016.January 18, 2023. Includes (i) 137 shares of Common Stock, (ii) 3,939 First Conversion Shares, (iii) 3,622 Warrant Shares, and (iv) 544 First Inducement Shares held by Drake Partners Equity LLC, in which Mr. Hicks has an ownership interest.

(6)

Represents (i) 3,939 First Conversion Shares; (ii) 3,622 Warrant Shares; (iii) 544 First Inducement Shares; and (iv) 2,417 shares of Common Stock subject to options exercisable within 60 days after January 18, 2023.

(7)

Represents 750 shares of restricted stock granted to Mr. Yrigoyen on July 30, 2021 and 1,126 shares of Common Stock subject to options exercisable within 60 days after January 18, 2023.

(8)

Represents 660 shares of Common Stock subject to options exercisable within 60 days after January 18, 2023.

(9)

Represents 31,510 shares of Common Stock issuable upon exercise of First Placement Agent Warrants exercisable within 60 days after January 18, 2023.

 

SHARES ELIGIBLE FOR FUTURE SALE

Overview

As of the date of this offering our Common Stock has only been traded on the OTCQB Market. In connection with this offering, we have applied to list our Common Stock on the Nasdaq Capital Market. No assurance can be given that our application will be approved. Sales of substantial amounts of our Common Stock in the public market, including shares issued upon the exercise of outstanding options or warrants, or the perception that such sales could occur, could adversely affect prevailing market prices of our Common Stock. Upon completion of this offering, we will have an aggregate of [●] shares of Common Stock issued and outstanding, assuming no exercise of outstanding options or warrants (including the Investor Warrants included in the Units sold in this offering) and the underwriter does not exercise its over-allotment option. All of the shares of Common Stock sold in this offering, including the shares of Common Stock issuable upon exercise of the Investor Warrants included in the Units sold in this offering, will be freely transferable without restriction or further registration under the Securities Act by persons other than by our affiliates. Certain of the shares of Common Stock after the offering will be held by our existing shareholders. Upon consummation of the offering, approximately [●]% of our issued and outstanding Common Stock will be subject to lock-up agreements as described below.

Lock-Up Agreements

We, our directors and executive officers, and the holder of 5% or more of the outstanding shares of our Common Stock have agreed, subject to limited exceptions, for a period of six months after the closing of this offering, not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of, or otherwise dispose of, any shares of Common Stock or any securities convertible into or exchangeable for our Common Stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of Maxim. Maxim may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.

Rule 144

In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person would be entitled to sell those shares upon expiration of the lock-up agreements described above, without complying with any of the requirements of Rule 144.

In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described below, within any three-month period, a number of shares that does not exceed the greater of:

1% of the number of shares of our Common Stock then outstanding, which will equal approximately [●] shares immediately after this offering; or

if and when our Common Stock is listed on the Nasdaq Capital Market or Alternate Exchange, the average weekly trading volume of our Common Stock on such market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

DESCRIPTION OF SECURITIES

Authorized Capital Stock

Pursuant to our amended and restated articles of incorporation, our authorized capital stock consists of 12,000,000 shares of Common Stock. The following description summarizes the material terms of our capital stock. Because it is only a summary, it may not contain all the information that is important to you. In connection with this offering, on January 17, 2023, we effected a one-for-two hundred reverse stock split pursuant to which every two hundred shares of our Common Stock were reclassified as one share of Common Stock.

Common Stock Issued and Outstanding; Common Stock Registered Hereby

As of January 18, 2023, there were issued and outstanding 1,259,280 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 [●] shares 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 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 holders of Common Stock 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 amended and restated articles of incorporation do not currently authorize us to issue any class of preferred stock. Our Common Stock is presently traded on the QB tier of the OTC Marketplace under the trading symbol “ARTHD”. We have applied to list our Common Stock on the Nasdaq Capital Market under the symbol “ARTH.” No assurance can be given that our application will be approved. If our Common Stock is not approved for listing on the Nasdaq Capital Market or an Alternate Exchange, we will not complete this offering.

Units to be Issued in this Offering

Each of the Units we are offering (subject to adjustment) consists of one share of Common Stock and one Warrant to purchase one share of our Common Stock. Each Unit will be sold at a purchase price of $[●] per Unit. Units will not be issued or certificated. The shares of Common Stock and the Investor Warrants comprising the Units are immediately separable and will be issued separately and uncertificated.

Investor Warrants to be Issued in this Offering

The following summary of certain terms and provisions of the Investor Warrants offered hereby is not complete and is subject to, and qualified in its entirety by the provisions of the form of Investor Warrant, which will be filed as an exhibit to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the form of Investor Warrant.

The Investor Warrants issued in this offering entitle the registered holders to purchase Common Stock at an exercise price equal to $[●] per share (not less than 100% of the public offering price of the Units in this offering), subject to adjustment as discussed below, immediately following the issuance of such Investor Warrants and terminating at 5:00 p.m., New York City time, five years after the date of issuance.

The exercise price and number of shares of Common Stock issuable upon exercise of the Investor Warrants may be adjusted in certain circumstances, including in the event of a stock dividend or recapitalization, reorganization, merger or consolidation. However, the Investor Warrants will not be adjusted for issuances of shares of Common Stock at prices below its exercise price.

Exercisability.    The Investor Warrants are exercisable immediately upon issuance and at any time up to the date that is five years from the date of issuance. The Investor Warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of Common Stock purchased upon such exercise. Each Investor Warrant entitles the holder thereof to purchase one share of our Common Stock. Investor Warrants are not exercisable for a fraction of a share and may only be exercised into whole numbers of shares. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price and round down to the nearest whole share. Unless otherwise specified in the Investor Warrant, the holder will not have the right to exercise the Investor Warrants, in whole or in part, if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or 9.99% at the holder’s election) of the number of our shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage is determined in accordance with the terms of the Investor Warrant. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days’ prior notice from the holder to us.

Exercise Price.    The exercise price per share of Common Stock purchasable upon exercise of the Investor Warrants is $[●] (not less than 100% of the public offering price of one Unit in this offering), and is subject to adjustments for stock splits, reclassifications, subdivisions, and other similar transactions.

Listing; Transferability.    We have applied for listing of the Investor Warrants on the Nasdaq Capital Market under the symbol “ARTH.W.” No assurance can be given that our listing application will be approved. Subject to applicable laws, the Investor Warrants may be transferred at the option of the holders upon surrender of the Investor Warrants to us, together with the appropriate instruments of transfer.

Fundamental Transactions.   If a fundamental transaction occurs, then the successor entity will succeed to, and be substituted for us, and may exercise every right and power that we may exercise and will assume all of our obligations under the Investor Warrants with the same effect as if such successor entity had been named in the Investor Warrant itself. If holders of our Common Stock are given a choice as to the securities, cash or property to be received in a fundamental transaction, then the holder shall be given the same choice as to the consideration it receives upon any exercise of the Investor Warrant following such fundamental transaction.

Rights as a Shareholder. Except by virtue of such holder’s ownership of our Common Stock, the holder of Investor Warrants does not have rights or privileges of a shareholder, including any voting rights, until the holder exercises such Investor Warrant.

Underwriter Warrants to be Issued Upon Closing of this Offering

Upon the closing of this offering, there will be up to [●] shares of Common Stock issuable upon exercise of the Underwriter Warrants. See the section entitled “Underwriting Underwriter Warrants” for a description of the Underwriter Warrants we have agreed to issue to the Representative, or its designees, in this offering, subject to the completion of the offering.

Warrants, Options and Convertible Notes Issued and Outstanding

As of January 18, 2023, there were issued and outstanding:

Warrants exercisable for 924,095 shares of Common Stock with a weighted average exercise price of $25.60 per share, consisting of:

o

Series G Warrants to purchase up to an aggregate of 34,013 shares of Common Stock at an exercise price of $140.00 per share;

o

Series H Warrants to purchase up to an aggregate of 43,077 shares of Common Stock at an exercise price of $80.00 per share;

o

Series I Warrants to purchase up to an aggregate of 71,429 shares of Common Stock at an exercise price of $44.00 per share;

o

2019 Placement Agent Warrants to purchase up to an aggregate of 5,358 shares of Common Stock at an exercise price of $43.75 per share;

o

Series K Warrants to purchase up to an aggregate of 161,719 shares of Common Stock at an exercise price of $34.00 per share;

o

2021 Placement Agent Warrants to purchase up to an aggregate of 16,172 shares of Common Stock at an exercise price of $40.00 per share;

o

MLSC Warrant to purchase up to an aggregate of 730.00 shares of our Common Stock at an exercise price of $54.80 per share;

o

First Warrants to purchase up to an aggregate of 425,554 shares of our Common Stock at an exercise price of $9.94 per share;

o

First Placement Agent Warrants to purchase up to an aggregate of 31,510 shares of our Common Stock at an exercise price of $10.06 per share;

o

Second Warrants to purchase up to an aggregate of 127,968 shares of our Common Stock at an exercise price of $9.94 per share;

o

Second Placement Agent Warrants to purchase up to an aggregate of 6,565 shares of our Common Stock at an exercise price of $10.06 per share;

Convertible notes convertible into 649,066 shares of Common Stock with a weighted average conversion price of $11.80, consisting of:

o

Series 1 Convertible Notes convertible into 21,302 shares of Common Stock at a conversion price of $54.00 per share;

o

Series 2 Convertible Notes convertible into 18,815 shares of Common Stock at a conversion price of $50.00 per share;

o

First Notes convertible into up to 462,801 shares of our Common Stock at a conversion price of $9.14 per share;

o

Exchanged Notes convertible into up to 76,563 shares of our Common Stock at a conversion price of $9.14 per share; and

o

Second Notes convertible into up to 69,585 shares of our Common Stock at a conversion price of $9.14 per share;

Options granted to employees, directors and consultants under the 2013 Plan to purchase up to an aggregate of 104,325 shares of Common Stock at exercise prices ranging from $4.00 to $130.00 per share and with a weighted average exercise price of $39.06 per share.

First Warrants

The First Warrants had an initial exercise price of $9.94 per share, were exercisable immediately upon their issuance and have a term of exercise equal to 5 years after their issuance date. The number of shares of our Common Stock into which each of the First Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the First Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, the First Warrants are not exercisable to the extent that the exercise thereof would result in the First Warrant holder, together with any person whose beneficial ownership would be aggregated with the holder, beneficially owning more than the Ownership Limitation; provided however, the holder may increase such ownership limitation to 9.99% of the outstanding shares of our Common Stock, in which case the ownership limitation increase will become effective 61 days after the holder requests such increase. In addition, if there is no effective registration statement registering the resale of the Warrant Shares as of certain time periods (as provided in the First Warrants), the First Warrant holders may choose to exercise such First Warrants on a “cashless exercise” (or “net exercise”) basis.

Second Warrants

The Second Warrants have substantially the same terms as the First Warrants.

Placement Agent Warrants

Pursuant to the 2022 Engagement Letter that we entered into with Maxim, we agreed, among other things, to issue Maxim, or its designees, warrants to purchase up to 10% of the aggregate number of shares sold to certain institutional investors in the First Closing, or warrants to purchase up to 31,510 shares of Common Stock. The First Placement Agent Warrants have substantially the same terms as the First Warrants, except that (i) the exercise price of the First Placement Agent Warrants is $10.06 per share and (ii) are not exercisable until six (6) months from the date of issuance.

In connection with the Second Closing, we (i) agreed to pay Maxim 10% of the gross proceeds in the Second Closing from the institutional investors, or $50,000, and (ii) we issued Second Placement Agent Warrants to purchase up to 6,565 shares of Common Stock to Maxim pursuant to the 2022 Engagement Letter. The Second Placement Agent Warrants have substantially the same terms as the Second Warrants, except that the exercise price of the Second Placement Agent Warrants is $10.06 per share and are not exercisable until six (6) months from the date of issuance.

First Notes

In addition to the aforementioned First Warrants, in July 2022 we issued the First Notes. The First Notes become due and payable on January 6, 2024, the Maturity Date, and may not be prepaid, in whole or in part, at any time without the written consent of the lead investor, with such prepayment amounts subject to adjustment as a result of certain time-based prepayment premiums set forth in the First Notes; provided, that, the written consent of the lead investor is not required in connection with a prepayment made from the proceeds of an Uplist Transaction. The First Notes bear interest on the unpaid principal balance at a rate equal to ten percent (10%) (computed on the basis of the actual number of days elapsed in a 360-day year) per annum accruing from July 6, 2022 until the First Notes become due and payable at maturity or upon their conversion, acceleration or by prepayment, and may become due and payable upon the occurrence of an event of default under the First Notes. Any amount of principal or interest on the First Notes which is not paid when due shall bear interest at the rate of the lesser of (i) eighteen percent (18%) per annum or (ii) the maximum amount allowed by law from the due date thereof until payment in full.

The First Notes are convertible into shares of Common Stock at the option of each holder of the First Notes from the date of issuance at the Conversion Price through the later of (i) the Maturity Date and (ii) the date of payment of the Default Amount; provided, however, certain First Notes include a provision preventing such conversion if, as a result, the holder, together with its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than the Ownership Limitation, immediately after giving effect to the Conversion; and provided further, the holder, upon notice to us, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of 9.99% of the outstanding shares of the Common Stock; and (ii) any increase in the Ownership Limitation will not become effective until the 61st day after delivery of such waiver notice. The Conversion Price is subject to adjustment as set forth in the First Notes.

The First 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 First 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 First Notes; and (v) our breach of any representations or warranties under the First Notes which cannot be cured within five (5) days. Further, events of default under the First Notes also include (i) the unavailability of Rule 144 on or after six (6) months from the First Closing Date or January 6, 2023; (ii) our failure to deliver the shares of Common Stock to the First Note holder upon exercise by such holder of its conversion rights under the First Notes; (iii) our loss of the “bid” price for our Common Stock and/or a market and such loss is not cured during the specified cure periods; (iv) our failure to complete an Uplist Transaction by February 15, 2023; and (v) upon completion of an Uplist Transaction, our failure to repay the outstanding balance of the First Notes within two days of receipt of a First Note holder’s demand for repayment.

Upon an event of default, the First Notes shall become immediately due and payable and the Company shall pay to each First Note holder an amount equal to 125%, or the Default Premium, multiplied by the sum of the outstanding principal amount of the First Notes plus any accrued and unpaid interest on the unpaid principal amount of the First Notes to the date of payment, plus any Default Interest and any other amounts owed to the Holder under the SPA, or the Default Amount; provided that, upon any subsequent event of default not in connection with the first event of default, such holder shall be entered to an additional 5% to the Default Premium for each subsequent event of default. At the election of each First Note holder, the Default Amount may be paid in cash or shares of Common Stock equal to the Default Amount divided by the Conversion Price at the time of payment.

In connection with the issuance of the First Notes, the Company entered into the Security Agreement with certain investors on July 6, 2022, pursuant to which we provided a security interest in, and a lien on, substantially all of our assets as collateral to the investors. Upon an event of default under the First Notes, each investor may exercise its rights to the collateral pursuant to the terms of the Security Agreement.

Notes Exchange and Exchanged Notes

In connection with the Notes Exchange, we issued certain investors Exchanged Notes in the aggregate principal amount of $699,780.93. The Exchanged Notes are convertible into 76,563 shares of Common Stock at a conversion price of $9.14 in exchange for a portion of the Company’s Series Convertible Notes. The terms of the Exchanged Notes are substantially similar to those of the First Notes. In connection with the issuance of the Exchanged Notes, the prior Series Convertible Notes holders entered into a subordination agreement on July 6, 2022 to subordinate their rights in respect of the Exchanged Notes to the rights of the investors respect of the First Notes. As of January 18, 2023, up to 76,563 Exchanged Conversion Shares may be acquired upon the conversion of the Exchanged Notes.

Second Notes

The Second Notes have substantially the same terms as the First Notes, except that the Second Notes are unsecured.

SeriesK Warrants and 2021 Placement Agent Warrants

Each of the investors participating in the 2021 Private Placement Financing was issued a Series K Warrant to purchase up to a number of shares of our Common Stock equal to 75% of the shares of Common Stock purchased by such investor in such financing. The Series K Warrants had an initial exercise price of $34.00 per share, were exercisable immediately upon their issuance and have a term of exercise equal to 5.5 years after their issuance date. The number of shares of our Common Stock into which each of the Series K Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series K Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, certain of the Series K 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 K Warrant, together with any person whose beneficial ownership would be aggregated with the holder, beneficially owning more than 4.99% of the outstanding shares of our Common Stock; provided however, the holder may increase such ownership limitation to 9.99% of the outstanding shares of our Common Stock, in which case the ownership limitation increase will become effective 61 days after the holder requests such increase. In addition, if there is no effective registration statement registering the resale of the shares of Common Stock underlying the Series K Warrants as of certain time periods (as provided in the Series K Warrants), the Series K Warrant holders may choose to exercise such Series K Warrants on a “cashless exercise” or “net exercise” basis.

The 2021 Placement Agent Warrants have substantially the same terms as the Series K Warrants, except that the exercise price of the 2021 Placement Agent Warrants is $40.00 per share.

SeriesI Warrants and 2019 Placement Agent Warrants

Each of the investors participating in the October 2019 Registered Direct Financing was issued a Series I 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 I Warrants had an initial exercise price of $44.00 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 I Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series I Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, the Series I 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 I Warrant, together with any person whose beneficial ownership would be aggregated with the holder, beneficially owning more than 4.99% of the outstanding shares of our Common Stock; provided however, the holder may increase such ownership limitation to 9.99% of the outstanding shares of our Common Stock, in which case the ownership limitation increase will become effective 61 days after the holder requests such increase. In addition, if there is no effective registration statement registering the resale of the shares of Common Stock underlying the Series I Warrants as of certain time periods (as provided in the Series I Warrants), the Series I Warrant holders may choose to exercise such Series I Warrants on a “cashless exercise” or “net exercise” basis.

The 2019 Placement Agent Warrants have substantially the same terms as the Series I Warrants, except that the exercise price of the 2019 Placement Agent Warrants is $43.75 per share and the term of the 2019 Placement Agent Warrants is five years from October 16, 2019.

SeriesH Warrants

Each of the investors participating in the May 2019 Registered Direct Financing was issued a Series H 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 H Warrants had an initial exercise price of $80.00 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 H Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series H Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, the Series H 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 H Warrant, together with any person whose beneficial ownership would be aggregated with the holder, beneficially owning more than 4.99% of the outstanding shares of our Common Stock;��provided however, the holder may increase such ownership limitation to 9.99% of the outstanding shares of our Common Stock, in which case the ownership limitation increase will become effective 61 days after the holder requests such increase. In addition, if (i) there is no effective registration statement registering the resale of the shares of Common Stock underlying the Series H Warrants as of certain time periods (as provided in the Series H Warrants), the Series H Warrant holders may choose to exercise such Series H Warrants on a “cashless exercise” or “net exercise” basis; and (ii) we undergo a change of control or are involved in a similar transaction, the holder may cause us or any successor entity to purchase its Series H Warrants for an amount of cash equal to $10.66 for each share of Common Stock underlying the Series H Warrants.

SeriesG Warrants

Each of the investors participating in the 2018 Registered Direct Financing was issued a Series G Warrant to purchase up to a number of shares of our Common Stock equal to 75% of the shares of Common Stock purchased by such investor in such financing. The Series G Warrants had an initial exercise price of $140.00 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 G Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series G Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, the Series G 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 G Warrant, together with any person whose beneficial ownership would be aggregated with the holder, beneficially owning more than 4.99% of the outstanding shares of our Common Stock; provided however, the holder may increase such ownership limitation to 9.99% of the outstanding shares of our Common Stock, in which case the ownership limitation increase will become effective 61 days after the holder requests such increase. In addition, if (i) there is no effective registration statement registering the resale of the shares of Common Stock underlying the Series G Warrants as of certain time periods (as provided in the Series G Warrants), the Series G Warrant holders may choose to exercise such Series G Warrants on a “cashless exercise” or “net exercise” basis; and (ii) we undergo a change of control or are involved in a similar transaction, the holder may cause us or any successor entity to purchase its Series G Warrants for an amount of cash equal to $22.00 for each share of Common Stock underlying the Series G Warrants.

MLSC Warrants

In connection with and as a condition to receiving the $1,000,000 unsecured subordinated loan that MLSC (such agreement, the “MLSC Loan Agreement”) issued to us on September 30, 2013, we issued to MLSC the MLSC Warrant on September 30, 2013 to purchase 730 shares of our Common Stock at an exercise price of $54.80 per share. 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.

Series 1 Convertible Notes and Series 2 Convertible Notes

In addition to the aforementioned warrants, in June 2020 and November 2020, we issued $550,000 and $1,050,000 in aggregate principal amount of our Series 1 Convertible Notes and Series 2 Convertible Notes, respectively. The Series 1 Convertible Notes and Series 2 Convertible Notes (i) have a three year term; (ii) accrue interest on the unpaid principal balance at a rate equal to ten percent (10.0%), and (iii) can be converted into 21,302 shares and 18,815 shares of our Common Stock, respectively, at a conversion price of $54.00 per share and $50.00 per share, respectively. At maturity, at our sole option, we may convert the principal and accrued interest under the Series Convertible Notes (the “Note Obligations”) into shares of our Common Stock at the applicable conversion price in lieu of repaying the Convertible Notes; provided, however, in the event we exercise this option, the Note Obligations will be deemed to equal the product of 1.35 (which was subsequently increased to 1.60 in connection with the July 2022 financing as holders of the Series Convertible Notes were required to execute subordination agreements as a condition to the July 2022 financing) and the outstanding Note Obligations.

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.

UNDERWRITING

We are offering the units described in this prospectus through the underwriters named below. We have entered into an underwriting agreement with Maxim Group LLC as the representative of the several underwriters named below (“Maxim” or the “Representative”), in connection with this offering. Maxim is acting as the sole book-running manager in this offering. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and the underwriters have agreed to purchase, at the public offering price, less the underwriting discounts and commissions, as set forth on the cover page of this prospectus, the number of Units set forth opposite its name below.

Underwriter

Number of
Units

Maxim Group LLC

[●]

Total

[●]

The underwriter is committed to purchase all the Units offered by us if they buy any of them. However, the underwriter is not obligated to purchase the shares and Investor Warrants covered by the underwriter’s over-allotment option described below. The underwriter is offering the Units, subject to prior sale, when, as and if issued to and accepted by them. The underwriting agreement provides that the obligations of the underwriter to purchase the Units included in this offering are subject to approval of legal matters by their counsel and to other conditions. The underwriter reserves the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

We have been advised by the underwriter that it intends to make a market in our shares of Common Stock but that they are not obligated to do so and may discontinue making a market at any time without notice.

In connection with this offering, the underwriters or securities dealers may distribute prospectuses electronically.

Option to Purchase Additional Shares and/or Investor Warrants

We have granted the underwriter an option, exercisable for 45 days after the date of this prospectus, to purchase up to an additional shares of Common Stock and/or Investor Warrants to purchase up to an additional shares of Common Stock (equal to 15% of the shares of Common Stock and Investor Warrants underlying the Units sold in this offering), in any combination, at the public offering price per share of Common Stock and per Investor Warrant, respectively, less the underwriting discounts payable by us, solely to cover over-allotments, if any. If any additional shares of Common Stock and/or Investor Warrants are purchased, the underwriter will offer these shares of Common Stock and/or Investor Warrants on the same terms as those on which the other securities are being offered in this offering.

Discounts, Commissions and Expenses

The underwriter proposes to offer the Units to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $[●] per Unit. The underwriter may offer the Units through one or more of their affiliates or selling agents. If all the Units are not sold at the public offering price, the underwriter may change the offering price and the other selling terms. After this offering, the public offering price and concession may be changed by the underwriters. No such change will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus.

The underwriting discount is equal to the public offering price per share less the amount paid by the underwriters to us per Unit. The underwriting discount was determined through an arm’s length negotiation between us and the Representative. The underwriter’s commissions and discounts will be 9% of the gross proceeds of this offering, or $[●] per Unit based on the public offering price set forth on the cover page of this prospectus.

The following table shows the public offering price, underwriting discounts and commissions and proceeds, before expenses, to us assuming both no exercise and full exercise by the underwriter of its over-allotment option:

Total

Per Unit

Without
Option

With Option

Public offering price

$$$

Underwriting discounts and commissions

$$$

Proceeds, before expenses, to us

$$$

We have agreed to pay the Representative’s expenses relating to the offering, irrespective of whether the offering is consummated, including, without limitation, SEC and FINRA-related fees, stock exchange listing fees, disbursements relating to background checks of our officers and directors, fees and disbursements relating to the registration or qualification under the “blue sky” securities laws (including fees of the Representative’s counsel), roadshow fees and expenses, costs relating to printing and mailing of underwriting documents, registration statements and prospectuses, costs and expenses of a public relations firm, and fees of the Representative’s legal counsel and other agents and representatives, in an aggregate amount not to exceed $125,000.

We estimate that the total expenses of the offering payable by us, excluding the total underwriting discount and non-accountable expense allowance, will be approximately $[●].

Indemnification

Pursuant to the underwriting agreement, we have agreed to indemnify the underwriter against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriter or such other indemnified party may be required to make in respect of those liabilities.

Underwriter Warrants

We have agreed to issue to Maxim (or its permitted designees) warrants to purchase up to a number of shares of our Common Stock equal to 9% of the number of Units sold in this offering, including any shares sold in the over-allotment option, if any (the “Underwriter Warrants”). The Underwriter Warrants will be exercisable at any time, and from time to time, in whole or in part, commencing six months from the effective date of the registration statement of which this prospectus is a part, will have a term of five years from the date of the commencement of sales related to this offering and will have an exercise price equal to 110% of the public offering price of the Units set forth on the cover of this prospectus. The Underwriter Warrants may be exercised on a cashless basis. The Underwriter Warrants are not redeemable by us.

This prospectus also covers the sale of the Underwriter Warrants and the shares of Common Stock underlying such Underwriter Warrants. The Underwriter Warrants and the underlying securities have been deemed compensation by FINRA, and are therefore subject to the transfer restrictions under FINRA Rule 5110(e)(1). In accordance with FINRA Rule 5110(e)(1), neither the Underwriter Warrants nor any securities issued upon exercise of the Underwriter Warrants may be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of such securities for a period of 180 days beginning on the date of commencement of sales of the offering, except (i) the transfer of any security to any FINRA member firm participating in this offering and its officers or partners, its registered persons or affiliates, if all securities so transferred remain subject to the lock-up restriction described above for the remainder of the time period; (ii) the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction set forth above for the remainder of the time period; or (iii) the transfer or sale of the security back to our company in a transaction exempt from registration with the SEC. The Underwriter Warrants and the underlying securities will have resale registration rights including one demand and unlimited “piggy-back” rights for periods of five and seven years, respectively, from the commencement of sales of this offering at our expense. In compliance with FINRA Rule 5110(g)(8), the Maxim Group LLC registration rights are limited to demand and “piggy back” rights for periods of five and seven years, respectively, from the effective date of the registration statement of which this prospectus forms a part and such demand rights may be exercised on only one occasion. In addition, so long as the Underwriter Warrants are held by Maxim Group LLC or its designees, they will only be exercisable for a period of five years from the date of this prospectus in accordance with FINRA Rule 5110(g)(8)(A).

Lock-Up Agreements

We, our directors and executive officers, and the holder of 5% or more of the outstanding shares of our Common Stock have agreed, subject to limited exceptions, for a period of six months after the closing of this offering, not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of, or otherwise dispose of, any shares of Common Stock or any securities convertible into or exchangeable for our Common Stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of Maxim. Maxim may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.

Exclusivity Tail

We have agreed that until February 15, 2023 (the “Engagement Period”), Maxim will act as our exclusive underwriter, agent, or advisor if we proceed with an any alternative offering, whether registered or unregistered, of our equity securities or a reverse merger during the Engagement Period.

Upon the closing of an offering or if an offering is not consummated before the Engagement Period, we have also agreed to pay Maxim a tail fee equal to the compensation equivalent for this offering, if any investor, who was brought over-the-wall or introduced to us by Maxim during the term of its engagement, provides us with capital in any financing of equity, equity-linked or debt or other capital raising transaction during the 12 month period following the closing of an offering or the expiration or termination of our engagement of Maxim.

Right of First Refusal

We have granted a right of first refusal to Maxim pursuant to which it has the right to act as the sole managing underwriter and sole book runner, sole placement agent, or sole sales agent, for any and all future public or private equity, equity-linked or debt (excluding commercial bank debt) offerings for which the Company retains the service of an underwriter, agent, advisor, finder or other person or entity in connection with such offering of the Company, or any successor to or any subsidiary of the Company, at any time prior to the 12 month anniversary of the closing date of this offering. In accordance with FINRA Rule 5110(g)(6)(A), such right of first refusal shall not have a duration of more than three years from the commencement of sales of this offering. Additionally, in accordance with FINRA Rule 5110(g)(5)(B), such right of first refusal shall automatically terminate in the event the letter of engagement is terminated for cause.

Other Relationships

Maxim previously served as our placement agent for the 2022 Private Placement Financing. Pursuant to the 2022 Engagement Letter that we entered into with Maxim, we agreed, among other things, to (i) pay Maxim 10% of the gross proceeds in the First Closing from certain institutional investors,  and (ii) issue Maxim, or its designees, warrants to purchase up to 10% of the aggregate number of shares sold to the institutional investors in the First Closing, or warrants to purchase up to 31,510 shares of Common Stock. The First Placement Agent Warrants have substantially the same terms as the First Warrants, except that the exercise price of the First Placement Agent Warrants is $10.06 per share and are not exercisable until six (6) months from the date of issuance.

In connection with the Second Closing, we agreed, among other things, to (i) pay Maxim 10% of the gross proceeds in the Second Closing from certain institutional investors, and (ii) issue to Maxim, or its designees, warrants to purchase up to 6,565 shares of Common Stock pursuant to the 2022 Engagement Letter. The Second Placement Agent Warrants have substantially the same terms as the Second Warrants, except that the exercise price of the Second Placement Agent Warrants is $10.06 per share and are not exercisable until six (6) months from the date of issuance. See “Description of Securities Warrants, Options and Convertible Notes Issued and Outstanding Placement Agent Warrants” for a discussion of the warrants we issued to Maxim in the 2022 Private Placement Financing.

In connection with the 2022 Private Placement Financing, the total fees paid to Maxim was $290,000 and the total expenses reimbursed was $57,540.

The underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.

Nasdaq Listing

Our shares of Common Stock are quoted on the OTCQB under the symbol “ARTHD” and there is no established public trading market for the Investor Warrants. We have applied to list our Common Stock and Investor Warrants on the Nasdaq Capital Market under the symbol “ARTH” and “ARTH.W,” respectively. There is no assurance, however, that our Common Stock or Investor Warrants will ever be listed on the Nasdaq Capital Market or an Alternate Exchange. We will not consummate this offering unless our Common Stock is approved for listing on the Nasdaq Capital Market or an Alternate Exchange.

Price Stabilization, Short Positions

In connection with this offering, the underwriters may engage in activities that stabilize, maintain or otherwise affect the price of our shares of Common Stock during and after this offering, including:

stabilizing transactions;

short sales;

purchases to cover positions created by short sales;

imposition of penalty bids; and

syndicate covering transactions.

Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our shares of Common Stock while this offering is in progress. Stabilization transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. These transactions may also include making short sales of our shares of Common Stock, which involve the sale by the underwriter of a greater number of shares of Common Stock than they are required to purchase in this offering and purchasing shares of Common Stock on the open market to cover short positions created by short sales. Short sales may be “covered short sales,” which are short positions in an amount not greater than the underwriter’s option to purchase additional shares referred to above, or may be “naked short sales,” which are short positions in excess of that amount.

The underwriters may close out any covered short position by either exercising their option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option.

Naked short sales are short sales made in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares of Common Stock in the open market that could adversely affect investors who purchased in this offering.

The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the Representative has repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.

These stabilizing transactions, short sales, purchases to cover positions created by short sales, the imposition of penalty bids and syndicate covering transactions may have the effect of raising or maintaining the market price of our Common Stock or preventing or retarding a decline in the market price of our Common Stock. As a result of these activities, the price of our Common Stock may be higher than the price that otherwise might exist in the open market. The underwriter may carry out these transactions on Nasdaq, in the over-the-counter market or otherwise. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. Neither we, nor the underwriters make any representation that the underwriters will engage in these stabilization transactions or that any transaction, once commenced, will not be discontinued without notice.

Determination of Offering Price

The public offering price for our securities in this offering will be determined by negotiation among us and the Representative. The principal factors to be considered in determining the public offering price include:

the information set forth in this prospectus and otherwise available to the Representative;

our history and prospects and the history and prospects for the industry in which we compete;

our past and present financial performance;

our prospects for future earnings and the present state of our development;

the general condition of the securities market at the time of this offering;

the recent market prices of, and demand for, publicly traded shares of generally comparable companies; and

other factors deemed relevant by the Representative and us.

The estimated public offering price set forth on the cover page of this prospectus and throughout this prospectus is subject to change as a result of market conditions and other factors. We offer no assurances that the public offering price will correspond to the price at which our securities will trade on the Nasdaq Capital Market or an Alternate Exchange subsequent to this offering. Neither we nor the underwriters can assure investors that an active trading market will develop for our shares of Common Stock or that the shares of Common Stock will trade in the public market at or above the public offering price.

Affiliations

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and their affiliates may from time to time in the future engage with us and perform services for us or in the ordinary course of their business for which they will receive customary fees and expenses. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of ours. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of these securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in these securities and instruments.

Electronic Distribution

A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by the underwriters participating in this offering, or by its affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters’ websites and any information contained in any other website maintained by the underwriters is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or each underwriter in its capacity as underwriter and should not be relied upon by investors.

Selling Restrictions

Canada. The securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31 103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 of National Instrument 33 105 Underwriting Conflicts (NI 33 105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding the underwriters’ conflicts of interest in connection with this offering.

European Economic Area. In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any securities may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

to any legal entity which is a qualified investor as defined in the Prospectus Directive;

to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or

in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by us or the underwriters of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer to the public” in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any securities to be offered so as to enable an investor to decide to purchase any securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

United Kingdom. The underwriters have represented and agreed that:

they have only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by them in connection with the issue or sale of the securities in circumstances in which Section 21(1) of the FSMA does not apply to us; and

they have complied and will comply with all applicable provisions of the FSMA with respect to anything done by them in relation to the securities in, from or otherwise involving the United Kingdom.

Switzerland. The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (the SIX) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the securities or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering or marketing material relating to the offering, or the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of securities has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). Accordingly, no public distribution, offering or advertising, as defined in CISA, its implementing ordinances and notices, and no distribution to any non-qualified investor, as defined in CISA, its implementing ordinances and notices, shall be undertaken in or from Switzerland, and the investor protection afforded to acquirers of interests in collective investment schemes under CISA does not extend to acquirers of securities.

Australia. No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (ASIC), in relation to the offering.

This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the Corporations Act) and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

Any offer in Australia of the securities may only be made to persons (the Exempt Investors) who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the securities without disclosure to investors under Chapter 6D of the Corporations Act.

The securities applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring securities must observe such Australian on-sale restrictions.

This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

Notice to Prospective Investors in the Cayman Islands. No invitation, whether directly or indirectly, may be made to the public in the Cayman Islands to subscribe for our securities.

Taiwan. The securities have not been and will not be registered with the Financial Supervisory Commission of Taiwan pursuant to relevant securities laws and regulations and may not be sold, issued or offered within Taiwan through a public offering or in circumstances which constitutes an offer within the meaning of the Securities and Exchange Act of Taiwan that requires a registration or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorized to offer, sell, give advice regarding or otherwise intermediate the offering and sale of the securities in Taiwan.

Notice to Prospective Investors in Hong Kong. The contents of this prospectus have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this prospectus, you should obtain independent professional advice. Please note that (i) our shares may not be offered or sold in Hong Kong, by means of this prospectus or any document other than to “professional investors” within the meaning of Part I of Schedule 1 of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) (SFO) and any rules made thereunder, or in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong) (CO) or which do not constitute an offer or invitation to the public for the purpose of the CO or the SFO, and (ii) no advertisement, invitation or document relating to our shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere) which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the SFO and any rules made thereunder.

Notice to Prospective Investors in the Peoples Republic of China. This prospectus may not be circulated or distributed in the PRC and the shares may not be offered or sold, and we will not offer or sell, to any person for re-offering or resale directly or indirectly to any resident of the PRC, except pursuant to applicable laws, rules and regulations of the PRC. For the purpose of this paragraph only, the PRC does not include Taiwan and the special administrative regions of Hong Kong and Macau.

LEGAL MATTERS

 

Lowenstein Sandler LLP, Roseland, New Jersey, is acting as counsel in connection with the registration of our securities under the Securities Act. The validity of the Common Stocksecurities being offered hereby has been passed upon for us by McDonald Carano Wilson LLP, Reno, Nevada. Loeb & Loeb LLP, New York, New York, advised the underwriters in connection with the offering of the securities.

 

EXPERTS

 

Moody, Famiglietti & Andronico,Baker Tilly US, LLP, an independent registered public accounting firm, has audited our consolidated financial statements as of and for the years ended September 30, 20152022 and 2014,2021, 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. The report on the consolidated financial statements contains an explanatory paragraph regarding the Company’s ability to continue as a going concern.

 

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, athttp://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 ishttp://www.archtherapeutics.com. We have not incorporated by reference into this prospectus the information on, or that can be accessed through, our website, and you should not consider it to be a part of this document. You should not rely on any information on that website in making your decision to purchase shares of our Common Stock.

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of Common Stocksecurities 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 sharessecurities 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.

 

-78- 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors and

Stockholders of Arch Therapeutics, Inc. and Subsidiary

Framingham, Massachusetts

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Arch Therapeutics, Inc. and subsidiarySubsidiary (the “Company”)Company) as of September 30, 20152022 and 2014, and2021, the related consolidated statements of operations, changes in stockholders’ equity (deficit)deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibilityeach of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriatetwo years in the circumstances, but not forperiod ended September 30, 2022, and the purpose of expressing an opinion onrelated notes (collectively referred to as the effectiveness of the Company’s internal control over“consolidated 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 audit provides a reasonable basis for our opinion.

statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arch Therapeutics, Inc. and subsidiarythe Company as of September 30, 20152022 and 2014,2021, and the results of theirits operations and theirits cash flows for each of the two years thenin the period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

 

The accompanying consolidated financial statements have been prepared assuming that Arch Therapeutics, Inc. and subsidiarySubsidiary 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, only recently commenced generating limited operating revenues and has limited working capital that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard toregarding these matters are also described in Notes 1 andNote 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertaintyuncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accounting for Complex Financial Instruments

As described in Note 10, the Company entered a transaction (the 2022 Note Offering) that included the issuance of $4.23 million in aggregate principal of senior secured convertible promissory notes, 63,833 shares of Common Stock, warrants to purchase 425,554 shares of the Company’s common stock (the 2022 Warrants) and warrants to purchase 31,510 shares of the Company’s common stock (the 2022 Placement Agent Warrants). In addition, in conjunction with the 2022 Note Offering, certain Series 2 note holders exchanged their notes in the aggregate amount of approximately $700,000 of principal and interest (the Series 2 exchange), for senior secured convertible promissory notes of the Company. 

We identified the accounting for these complex financial instruments, including the evaluation for potential embedded derivatives, accounting for the Series 2 exchange, and the classification of the 2022 Warrants and the 2022 Placement Agent Warrants as a critical audit matter. The application of the accounting guidance applicable to the transaction, including the evaluation for potential embedded derivatives, accounting for the Series 2 exchange, and the classification of the related warrants is complex, and therefore, applying such guidance to the contract terms is complex and requires significant management judgement. Auditing these elements involved especially complex auditor judgement due to the nature of the terms of these instruments, and the effort required to address these matters, including the extent of specialized skills and knowledge required.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others:

Inspecting the agreements associated with the transaction and evaluating the completeness and accuracy of the Company’s technical accounting analysis and application of the relevant accounting literature.

Utilizing personnel with specialized knowledge and skills in technical accounting to assist in assessing management’s analysis of the senior secured convertible promissory notes and 2022 Warrants and 2022 Placement Agent warrants, and the Series 2 exchange, including the evaluation of potential embedded derivatives, and the classification of the 2022 Warrants and 2022 Placement Agent warrants including: (i) evaluating the contracts to identify relevant terms that affect the recognition in the consolidated financial statements, and (ii) assessing the appropriateness of conclusions reached by management.

 

 

/s/ Moody, Famiglietti & Andronico,

/s/ Baker Tilly US, LLP

Tewksbury, MA

December 11, 2015

F-2

Arch Therapeutics, Inc.
Consolidated Balance Sheets
As of September 30, 2015 and 2014
 

We have served as the Company’s auditor since 2013.

Tewksbury, Massachusetts

December 28, 2022, except for the effects of the reverse share split described in Note 2, as to which the date is January 23, 2023.

 

  September 30,
2015
  September 30,
2014
 
ASSETS        
Current assets:        
Cash $3,960,100  $833,520 
Prepaid expenses and other current assets  42,919   43,470 
Total current assets  4,003,019   876,990 
         
Total assets $4,003,019  $876,990 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
Current liabilities:        
Accounts payable $231,761  $175,832 
Accrued expenses and other liabilities  245,478   267,835 
Convertible notes, net of unamortized discount  473,747   - 
Current derivative liabilities  335,092   2,280,000 
Total current liabilities  1,286,078   2,723,667 
         
Long-term liabilities:        
Note payable, net of unamortized discount  966,824   955,766 
Accrued interest, net of current portion  210,000   100,000 
Derivative liabilities, net of current portion  -   3,990,000 
Total long-term liabilities  1,176,824   5,045,766 
         
Total liabilities  2,462,902   7,769,433 
         
Commitments and contingencies (see Note 12)        
         
Stockholders’ equity (deficit):        
         
Common stock, $0.001 par value, 300,000,000 shares authorized, 107,542,205 and 72,076,487 shares issued and outstanding as of September 30, 2015 and September 30, 2014, respectively  107,392   72,051 
Additional paid-in capital  17,154,945   5,810,200 
Accumulated deficit  (15,722,220)  (12,774,694)
Total stockholders’ equity (deficit)  1,540,117   (6,892,443)
         
Total liabilities and stockholders' equity (deficit) $4,003,019  $876,990 

Arch Therapeutics, Inc. and Subsidiary

Consolidated Balance Sheets

As of September 30, 2022 and 2021

  

September 30,

  

September 30,

 
  

2022

  

2021

 
ASSETS        
Current assets:        

Cash

 $746,940  $2,266,639 

Inventory

  1,414,848   1,093,765 

Prepaid expenses and other current assets

  436,407   307,341 

Total current assets

  2,598,195   3,667,745 
         
Long-term assets:        

Property and equipment, net

  2,044   5,240 

Other assets

  3,500   3,500 

Total long-term assets

  5,544   8,740 
         

Total assets

 $2,603,739  $3,676,485 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
Current liabilities:        

Accounts payable

 $1,328,000  $408,083 

Accrued expenses and other liabilities

  318,505   319,464 

Insurance premium financing

  247,933    

Current portion of Series 1 convertible notes

  550,000    

Current portion of accrued interest

  127,781    

Current portion of derivative liability

  748,275   1,000,000 

Total current liabilities

  3,320,494   1,727,547 
         
Long-term liabilities:        

Series 1 convertible notes

     550,000 

Series 2 convertible notes

  450,000   1,050,000 

Senior secured convertible notes, net of discount and issuance costs

  2,362,273    

Accrued interest

  204,575   167,137 

Derivative liability

  459,200   1,207,475 

Total long-term liabilities

  3,476,048   2,974,612 
         

Total liabilities

  6,796,542   4,702,159 
         
Commitments and contingencies (Note 15)        
         
Stockholders’ equity (deficit):        

Common stock, $0.001 par value, 12,000,000 shares authorized as of September 30, 2022 and 2021, 1,249,432 and 1,185,849 shares issued as of September 30, 2022 and 2021, and 1,249,682 and 1,183,599 outstanding as of September 30, 2022 and 2021

  1,249   1,184 

Additional paid-in capital

  50,878,721   48,770,061 

Accumulated deficit

  (55,072,773

)

  (49,796,919

)

Total stockholders’ deficit

  (4,192,803

)

  (1,025,674

)

         

Total liabilities and stockholders’ deficit

 $2,603,739  $3,676,485 

 

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

 

 

Arch Therapeutics, Inc.
Consolidated Statements of Operations
For the Years Ended September 30, 2015 and 2014

Arch Therapeutics, Inc. and Subsidiary

Consolidated Statements of Operations

For the Years Ended September 30, 2022 and 2021

 

  Fiscal Year Ended
September 30, 2015
  Fiscal Year Ended
September 30, 2014
 
       
Revenues $-  $- 
         
Operating expenses:        
General and administrative expenses  3,700,477   3,134,285 
Research and development expenses  1,760,037   1,477,479 
Total operating expenses  5,460,514   4,611,764 
         
Operating loss  (5,460,514)  (4,611,764)
         
Other income (expense):        
Interest expense  (377,805)  (111,059)
Fair value of derivative liabilites in excess of proceeds  -   (7,541,693)
Gain on exercise of warrants and conversion of debt  386,612   - 
Loss on warrant derivative modification, net of inducement shares  (1,032,113)  - 
Decrease to fair value of derivative  3,536,294   4,121,693 
Total other income (expense)  2,512,988   (3,531,059)
         
Net Loss $(2,947,526) $(8,142,823)
         
Earnings per share - basic and diluted        
Net loss per common share - basic and diluted $(0.04) $(0.12)
Weighted common shares - basic and diluted  81,394,873   67,492,823 
  

Fiscal Year

  

Fiscal Year

 
  

Ended

  

Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

 
         

Revenue

 $15,652  $11,565 
         
Operating expenses:        

Cost of revenues

  51,489   26,282 

Selling, general and administrative expenses

  4,519,636   5,009,323 

Research and development expenses

  1,153,333   1,353,084 

Total costs and expenses

  5,724,458   6,388,689 
         

Loss from operations

  (5,708,806

)

  (6,377,124

)

         
Other (expense) income:        

Interest expense

  (567,048

)

  (150,531

)

Gain on forgiveness of loan

     178,229 

Decrease to fair value of derivative

  1,000,000   108,944 

Total other income

  432,952   136,642 
         

Net loss

 $(5,275,854

)

 $(6,240,482

)

         
Loss per share - basic and diluted        

Net loss per common share - basic and diluted

 $(4.40

)

 $(5.67

)

Weighted common shares - basic and diluted

  1,199,574   1,100,007 

 

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

 

 

Arch Therapeutics, Inc. and Subsidiary

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

For the years ended Septermber 30. 2015Years Ended September 30, 2022 and 20142021

 

              Total 
        Additional     Stockholders' 
  Common Stock  Paid-in  Accumulated  Equity 
  Shares  Amount  Capital  Deficit  (Deficit) 
                
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)
                     
Net loss  -   -   -   (2,947,526)  (2,947,526)
                     
Issuance of restricted stock for services  475,000   475   165,682   -   166,157 
                     
Reclassification of Series A and C Warrants  -   -   3,263,753       3,263,753 
                     
Shares issued for the exercise of warrants  18,686,801   18,687   3,581,313   -   3,600,000 
                     
Shares issued for the exercise of stock options  462,298   462   (462)  -   - 
                     
Shares issued in consideration for extending the Series C Warrants and eliminating the Ratchet Provision  570,000   570   134,782   -   135,352 
                     
Issuance of stock in private placement funding  14,390,754   14,391   3,001,575   -   3,015,966 
                     
Shares issued for the conversion of the convertible notes  755,865   756   150,417   -   151,173 
                     
Stock based compensation expense  -   -   1,047,685   -   1,047,685 
                     
Balance at September 30, 2015  107,392,205  $107,392  $17,154,945  $(15,722,220) $1,540,117 
          

Additional

      

Total

 
  

Common Stock

  

Paid-in

  

Accumulated

  

Stockholders'

 

Fiscal Year Ended September 30, 2022

 

Shares

  

Amount

  

Capital

  

Deficit

  

Deficit

 
                     

Balance at September 30, 2021

  1,183,599  $1,184  $48,770,061  $(49,796,919

)

 $(1,025,674

)

                     

Net loss

           (5,275,854

)

  (5,275,854

)

                     

Issuance of common stock and warrants, net of financing costs

  63,833   64   1,609,077      1,609,141 
                     

Vesting of restricted stock Issued

  2,000   2   (2

)

      
                     

Stock-based compensation expense

        499,584      499,584 
                     

Balance at September 30, 2022

  1,249,432  $1,249  $50,878,721  $(55,072,773

)

 $(4,192,803

)

          

Additional

      

Total

 
  

Common Stock

  

Paid-in

  

Accumulated

  

Stockholders'

 

Fiscal Year Ended September 30, 2021

 

Shares

  

Amount

  

Capital

  

Deficit

  

Deficit

 
                     

Balance at September 30, 2020

  965,224  $965  $42,054,981  $(43,556,437

)

  (1,500,491

)

                     

Net loss

           (6,240,482

)

  (6,240,482

)

                     

Issuance of common stock and warrants, net of financing costs

  215,625   216   6,219,017      6,219,233 
                     

Vesting of restricted stock issued

  2,750   3   (3

)

       
                     

Stock-based compensation expense

        496,066      496,066 
                     

Balance at September 30, 2021

  1,183,599  $1,184  $48,770,061  $(49,796,919

)

 $(1,025,674

)

 

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

 

 

Arch Therapeutics, Inc.
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2015 and 2014

Arch Therapeutics, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Years Ended September 30, 2022 and 2021

 

  Fiscal Year Ended
September 30, 2015
  Fiscal Year Ended
September 30, 2014
 
Cash flows from operating activities:        
Net loss $(2,947,526) $(8,142,823)
Adjustments to reconcile net loss to cash used in operating activities:        
Depreciation expense  -   322 
Stock-based compensation  1,047,685   1,101,286 
Noncash interest expense on notes payable  377,805   111,059 
Issuance of restricted stock for services  166,157   94,875 
Gain on exercise of warrants and conversion of debt  (386,612)  - 
Loss on warrant derivative modification, net of inducement shares  1,032,113   - 
Decrease to fair value of derivative  (3,536,294)  (4,121,693)
Fair value of derivative liabilites in excess of proceeds  -   7,541,693 
Issuance of common stock for services  -   92,500 
Changes in operating assets and liabilities:        
(Increase) decrease in:        
Prepaid expenses and other current assets  551   (13,779)
Increase (decrease) in:        
Accounts payable  55,929   (138,937)
Accrued expenses and other liabilities  (49,194)  126,995 
Net cash used in operating activities  (4,239,386)  (3,348,502)
         
Cash flows from financing activities:        
Proceeds from exercise of warrants  3,600,000   - 
Proceeds from issuance of common stock and warrants  3,015,966   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  7,365,966   3,624,703 
         
Net increase in cash and cash equivalents  3,126,580   276,201 
         
Cash and cash equivalents, beginning of period  833,520   557,319 
         
Cash and cash equivalents, end of period $3,960,100  $833,520 
         
Non-cash financing activities        
Issuance of inducement shares $135,352  $- 
Conversion of 8% convertible notes and accrued interest to common stock $151,173  $- 
Reclassification of Series A and C Warrants from derivative liabilities to equity $3,263,753  $- 
Conversion feature embedded in convertible note $354,988  $- 
  

Fiscal Year

  

Fiscal Year

 
  

Ended

  

Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

 
Cash flows from operating activities:        

Net loss

 $(5,275,854

)

 $(6,240,482

)

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

Depreciation

  3,196   2,587 

Stock-based compensation

  499,583   496,066 

Decrease to fair value of derivative

  (1,000,000

)

  (108,944

)

Inventory obsolescence charge

  248,073   181,988 

Accretion of discount and debt issuance costs on 2022 Notes

  302,049    

Gain on forgiveness of loan

     (178,229

)

         
Changes in operating assets and liabilities:        
(Increase) decrease in:        

Inventory

  (569,156

)

  (307,760

)

Prepaid expenses and other current assets

  225,124   (91,668

)

Increase (decrease) in:        

Accounts payable

  846,869   66,033 

Accrued interest

  265,000   151,285 

Accrued expenses and other liabilities

  (959

)

  70,496 

Net cash used in operating activities

  (4,456,075

)

  (5,958,628

)

         
Cash flows from investing activities:        

Purchases of property and equipment

     (3,275

)

Net cash used in investing activities

     (3,275

)

         
Cash flows from financing activities:        

Repayment of insurance premium financing

  (106,257)   

Proceeds received from convertible notes

     1,050,000 

Proceeds received from senior secured convertible notes

  3,525,000    

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

     6,219,233 

Payment of 2022 Financing debt issuance costs

  (482,367

)

   

Net cash provided by financing activities

  2,936,376   7,269,233 
         

Net (decrease) increase in cash

  (1,519,699

)

  1,307,330 
         

Cash, beginning of year

  2,266,639   959,309 
         

Cash, end of year

 $746,940  $2,266,639 
         
Non-cash financing activities:        

Financing of insurance premium

 $354,190  $ 

Issuance of restricted stock

 $8,959  $ 

Fair value of 2022 Warrants issued (see Note 10)

 $1,470,133  $ 

Fair value of 2022 Inducement Shares issued (see Note 10)

 $314,523  $ 

Exchange of Series 2 Convertible Notes into Senior Secured Notes (See Note 10)

 $699,781  $ 

Issuance of restricted stock in consideration for services performed

 $30,840  $103,750 

Fair Value of 2022 Placement Agent Warrants (see Note 10)

 $219,894    

Unpaid issuance costs in accounts Payable

 $73,048  $ 

 

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

 

 

NotesNotes to the Consolidated Financial Statements

 

1.

DESCRIPTION OF BUSINESS

 

Arch Therapeutics, Inc., (together with its subsidiary, the “Company”Company” or “Arch) 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”Merger) with Arch Biosurgery, Inc. (formerly known as Arch Therapeutics, Inc.), a Massachusetts corporation (“ABS”ABS), and Arch Acquisition Corporation (“Merger Sub”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 devicebiotechnology company. Our currentThe Company’s principal offices are located in Framingham, Massachusetts.

 

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

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

 

TheIn the first quarter of 2021, the Company commenced commercial sales of our first product, AC5® Advanced Wound System, and has generated no operating revenues to date, and is devotingdevoted substantially all of its efforts toward productthe Company’s operational effort to the research, development and development.regulatory programs necessary to turn the Company’s core technology into commercial products. To date, the Company has principally raised capital through borrowings and the issuance of convertible debt, and the issuance of units consisting of its common stock, $0.001 par value per share (“Common Stock”), and warrants.warrants to purchase Common Stock (“warrants”).

 

The Company expects to incur substantial expenses for the foreseeable future relating to research, development and commercialization of its potential future products. The Company will be required to raise additional capital, obtain alternative means of financial support, or both, prior to or 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. The consolidated financial statements do not include any adjustments related to the recoverability of assets that might be necessary despite this uncertainty.

 

2.

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”GAAP).

 

Basis of AccountingPresentation

 

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

 

On January 6, 2023, the directors of the Company authorized a reverse share split of the issued and outstanding Common Shares in a ratio of 200:1, effective January 17, 2023 (the “Reverse Share Split”). All information included in these consolidated financial statements has been adjusted, on a retrospective basis, to reflect the Reverse Share Split, unless otherwise stated.

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.

 

F-7

Recently Issued and Adopted Accounting Guidance

 

In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and other Options (subtopic 470-20) and Derivatives and Hedging-Contracts in Entitys Own Equity (Subtopic 815-40)” (“ASU 2020-06”). The purpose of ASU 2020-06 is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles (“GAAP”) for certain financial instruments with characteristics of liabilities and equity. The amendments in ASU 2020-06 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020. The Company early adopted ASU 2020-06 using the full retrospective method, during our first quarter of fiscal year 2022, and the impact was considered immaterial on our consolidated financial statements.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents as of September 30, 2022 and 2021.

 

Inventories

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

Concentration of Credit Risk

 

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

 

Property and Equipment

 

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

 

Impairment of Long-Lived Assets

 

Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable in accordance with FASB ASC Topic 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, 20152022 and 20142021 there has not been any impairment of long-lived assets.

 

Convertible DebtLeases

 

The Company recordsdetermines if an arrangement is a discount to convertible notes forlease at its inception. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the intrinsicpresent value of conversion options embeddedlease payments over the lease term. As our lease does not provide an implicit interest rate, the Company used an incremental borrowing rate based on the information available at commencement date in debt instruments based upondetermining the differences between the fairpresent 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 interestlease payments. Lease expense using the effective interest rate methodfor lease payments is recognized on a straight-line basis 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.lease term.

 

Income Taxes

 

In accordance with FASB ASC Topic 740,Income Taxes(“ASC 740”), the Company recognizes deferred tax assets and liabilities for the expected future tax consequences or events that have been included in the Company’sour 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 probablemore likely than not that a loss will be incurred related to these matters and the amount of the loss is reasonably determinable.

Revenue

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

The Company’s source of revenue is product sales. Contracts with customers contain a single performance obligation and the Company recognizes revenue from product sales when the Company has satisfied our performance obligation by transferring control of the product to the customers. Control of the product transfers to the customer upon shipment from the Company’s third-party warehouse. The Company has no reserves related to uncertain tax positions aslaunched a reimbursement support program in September 2022. Under the terms of September 30, 2015the program, the invoice amount may be adjusted through full or partial write-offs based on actual reimbursement amounts paid by for Medicare and 2014.Medicaid Services (“CMS”) for AC5 units applied and billed by doctors. As such, revenue, if any, for the units shipped in connection with the Company’s reimbursement support program will be booked in future periods when all conditions have been satisfied.

 

 

Cost of Revenues

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

Research and Development

 

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

 

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”718), which 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. Theexpected life term for awards uses the simplified method for all “plain vanilla” options, as defined in SAB No. 107ASC 718-10-S99, and the contractual term for all other employee and non-employee awards. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on history and the expectation of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense, when recognized in the consolidated financial statements, is based on awards that are ultimately expected to vest.

 

Fair Value Measurements

 

The Company measures both financial and nonfinancial assets and liabilities in accordance with FASB ASC Topic 820,Fair Value Measurements and Disclosures, exceptincluding 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 assumptionsviews about the assumptions market participants would use in pricing the asset or liability.

 

The Company’s financial instruments includeAt September 30, 2022 and 2021, the carrying amounts of cash, accounts payables and notes payable. Becauseaccrued expenses and other liabilities approximate fair value because of their short maturity,short-term nature. The carrying amounts for the Convertible Notes (See Notes 11 and 12) approximate fair value because borrowing rates and the terms are similar to comparable market participants. The carrying amountamounts of cashthe Derivative Liabilities (See Note 7) are valued using Level 3 inputs and notes payable are considered to approximaterecognized in the consolidated financial statements at fair value.

 

Derivative Liabilities

The Company accounts for its warrants and other derivative financial instruments as either equity or liabilities based upon the characteristics and provisions of each instrument, in accordance with FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). 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.

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 Monte-Carlo simulations. Derivative instruments are valued at inception, upon events such as an exercise of the underlying financial instrument, and at subsequent reporting periods. The classification of derivative instruments, including whether such instruments should be recorded as liabilities, is re-assessed at the end of each reporting period.

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.

Financial Statement Reclassification

Certain balances in the prior year consolidated financial statements have been reclassified for comparison purposes to conform to the presentation in the current year consolidated financial statements. These reclassifications had no effect on the reported results of operations or financial position.

Subsequent Events

 

The Company evaluated all events or transactions that occurred through December 10, 201528, 2022, the date which these consolidated financial statements were availableissued. Please note the following matters deemed to be issued. The Company disclosed material subsequent events in Note 15.events.

 

F-9

CMS HCPCS Code Status

 

On December 5, 2022, the Company announced that the Centers for Medicare and Medicaid Services (“CMS”) made a preliminary recommendation to establish a dedicated Healthcare Common Procedure Coding System (“HCPCS”) Level II billing code specific to AC5® Advanced Wound System (“AC5”). The preliminary recommendation was discussed at CMS’ First Biannual 2022 HCPCS Public Meeting, which was held on November 30, 2022. The HCPCS code would better enable providers to bill third party payors for AC5® Advanced Wound System that is used in doctors’ offices. Although the establishment of a dedicated HCPCS code does not guarantee coverage or reimbursement, a HCPCS code specific to AC5® Advanced Wound System would also enhance the Company’s ability to work directly with payors and expand access in outpatient settings.

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 consolidated financial statements, the Company has an accumulated deficit as of September 30, 2022, has suffered significant recurring net losses and negative cash flows from operations, only recently commenced generating limited operating revenues, and has limited working capital. In addition, the Company does not have sufficient cash and cash equivalents to support its current operating plan. The continuation of ourthe Company’s business as a going concern is dependent upon raising additional capital, the ability to successfully market and sell its product and eventually attaining and maintaining profitable operations. AsIn particular, as of September 30, 2015,2022, the Company will be required to raise additional capital, obtain alternative means of financial support, or both, in order to continue to fund operations, and therefore there is substantial doubt about ourthe Company’s ability to continue as a going concern. The Company expects to incur substantial expenses forinto the foreseeable future for the research, development and commercialization of its current and potential products. In addition, the Company will require additional financing in order to seek to license or acquire new assets, research and develop any potential patents and the related compounds, and obtain any further intellectual property that the Company may seek to acquire. Finally, some of our product candidates or the materials contained therein (such as the Active Pharmaceutical Ingredients for our AC5® product line), are manufactured from facilities in areas impacted by the outbreak of the COVID-19, which could result in shortages due to ongoing efforts to address the outbreak. Historically, the Company has principally funded operations through debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stock and warrants. Provisions in the Securities Purchase Agreements that the Company entered into on June 28, 2018 (“2018 SPA”), and July 6, 2022 (“2022 SPA”) restrict the Company’s ability to effect or enter into an agreement to effect any issuance by the Company or its operations primarily throughsubsidiary 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 and 2022 SPA) including, but not limited to, an equity line of credit or “At-the-Market” financing facility until the institutional investors in the 2018 SPA collectively own less than 20% of the Series F Warrants and debt financings.the Series G Warrants purchased by them pursuant to the and 2018 SPA, respectively and for a period of six months pursuant to the 2022 SPA. In addition, under the 2022 SPA, we are required to complete an uplist to any of the Nasdaq Global Market, Nasdaq Capital Market, New York Stock Exchange or NYSE American by February 15, 2023. See Note 6 for more information on the 2018 Financing, including the terms of the Series F Warrants and Series G Warrants. and Note 10 for more information on the 2022 Note Financing, including the terms of the 2022 Warrants and 2022 Placement Agent Warrants.

The 2021 SPA contains certain restrictions on our ability to conduct subsequent sales of our equity securities (See Note 9). The continued spread of COVID-19 and uncertain market conditions may also limit the Company’s ability to access capital. If the Company is unable to obtain adequate capital, the Company may be required to reduce the scope, delay, or eliminate some or all of its planned activities. These conditions, in the aggregate, raise substantial doubt as to the Company’s ability to continue as a going concern.

 

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

 

Correction

 

The Company has determined that there had been an immaterial error in its accounting for the Series A Warrants, Series C Warrants, and Series D Warrants contained in its consolidated financial statements for the three and nine months ended June 30, 2015 filed with the Securities Exchange Commission on August 7, 2015. The Company determined that the Series A Warrants, Series C Warrants and Series D Warrants should have been presented in stockholders’ equity instead of as a liability.

The Company assessed the materiality of this error in accordance with Staff Accounting Bulletin No. 99,Materiality, and the Company determined that, qualitatively, the amounts would have no bearing on the decision making process of a reasonable investor. The Company intends to revise its consolidated financial statements for the periods ended June 30, 2015 through subsequent periodic filings

3.

3.

PROPERTY AND EQUIPMENT

 

At September 30, 20152022 and 2014,2021, property and equipment consisted of:

 

 Estimated      

Estimated

        
 Useful Life 2015 2014  

Useful Life

(in years)

  

September 30,

2022

  

September 30,

2021

 
      
Furniture and fixtures 5 years $2,925 $2,925  5  $9,357  $9,357 
     

Leasehold improvements

  

Life of Lease

  8,983  8,983 

Computer equipment

 3  14,416  14,416 
Lab equipment 5 years  1,000  1,000   5   1,000   1,000 
         33,756  33,756 
 3,925 3,925 
     
Less - accumulated depreciation  3,925  3,925 
 $- $- 

Less – accumulated depreciation

     31,712   28,516 

Property and equipment, net

    $2,044  $5,240 

For the years ended September 30, 2022 and 2021 depreciation expense recorded was $3,196 and $2,587, respectively.

 

F-10

4.

INVENTORIES

 

Inventories consist of the following:

  

September 30,

  

September 30,

 
  

2022

  

2021

 

Finished Goods

 $9,063  $249,571 

Goods-in-process

  1,405,785   844,194 

Total

 $1,414,848  $1,093,765 

The Company capitalizes inventory that has been produced for commercial sale and has been determined to have a probable future economic benefit. The determination of whether or not the inventory has a future economic benefit requires estimates by management, to the extent that inventory is expected to expire prior to being sold or used for research and development or used for samples, the Company will write down the value of inventory. In evaluating the net realizable value of the inventory, appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors.

5.

INSURANCE PREMIUM FINANCING

In July 2022, the Company entered into a finance agreement with First Insurance Funding in order to fund a portion of its insurance policies. The amount financed is approximately $354,000 and incurs interest at a rate of 2.99%. The Company is required to make monthly payments of approximately $35,000 through April 2023. The outstanding balance as of September 30, 2022 was approximately $248,000.

6.

REGISTERED DIRECT OFFERINGS

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

On February 20, 2017, the Company entered into a Securities Purchase Agreement (the “2017 SPA”) with six accredited investors (collectively, the "2017 “ Investors”) providing for the issuance and sale by the Company to the 2017 Investors of an aggregate of 50,833 units at a purchase price of $120.00 per unit in a registered offering (the “2017 Financing”). The securities comprising the units sold in the 2017 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock, a warrant equal to 55% of the shares of Common Stock at an exercise price of $150.00 per share (“Series F Warrant”) at any time prior to the fifth anniversary of the issuance date of the Series F Warrant subject to certain restrictions on exercise (the "2017“ Warrants”) and the shares issuable upon exercise of the 2017 Warrants (the "2017“ Warrant Shares”).

On June 28, 2018, the Company entered into a Securities Purchase Agreement (“2018 SPA”) with eight accredited investors (collectively, the “2018Investors”) providing for the issuance and sale by the Company to the 2018 Investors of an aggregate of 45,350 units at a purchase price of $100.00 per unit in a registered offering (“2018 Financing”). The securities comprising the units sold in the 2018 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock, a warrant to purchase up to a number of shares of the Company’s Common Stock equal to 75% of the shares of Common Stock at an exercise price of $140.00 per share (“Series G Warrant”) at any time prior to the fifth anniversary of the issuance date of the Series G Warrant subject to certain restrictions on exercise (the “2018Warrants”) and the shares issuable upon exercise of the 2018 Warrants (the “2018Warrant Shares”).

 

On May 12, 2019, the Company entered into a Securities Purchase Agreement (“2019SPA”) with five accredited investors (collectively, the “2019Investors”) providing for the issuance and sale by the Company to the 2019 Investors of an aggregate of 43,077 units at a purchase price of $65.00 per unit in a registered offering (“2019Financing"). The securities comprising the units sold in the 2019 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock, a warrant to purchase one share of Common Stock at an exercise price of $80.00 per share (“Series H Warrant”) at any time prior to the fifth anniversary of the issuance date of the Series H Warrant subject to certain restrictions on exercise (the “2019Warrants”) and the shares issuable upon exercise of the 2019 Warrants (the “2019 Warrant Shares”).

During the years ended September 30, 2022 and 2021, no Series F, Series G or Series H Warrants had been exercised. As of September 30, 2022, up to 34,013 and 43,077 shares may be acquired upon the exercise of the Series G and Series H Warrants, respectively.

During the year ended September 30, 2022, all 27,958 remaining Series F Warrants expired.

7.

4.

Derivative Liabilities

The Company accounted for the Series F Warrants, Series G Warrants and the Series H Warrants in accordance with ASC 815-10. Since the Company may be required to purchase its Series F Warrants, Series G Warrants and Series H Warrants for an amount of cash equal to $36.00, $22.00 and $10.66, respectively, for each share of Common Stock (“Minimum”) they are recorded as liabilities at the greater of the Minimum or fair value. They are marked to market each reporting period through the Consolidated Statement of Operations. During the year ended September 30, 2022, the Company recognized income of $1,000,000 for the expiration of the Series F Warrants.

On the respective closing dates, the derivative liabilities related to the Series G Warrants and Series H Warrants were recorded at an aggregate fair value of $1,628,113. Given that the fair value of the derivative liabilities was less than the net proceeds, the remaining proceeds were allocated to Common Stock and additional-paid-in-capital. For the fiscal year ended September 30, 2021, the Company recorded income of $108,944 in connection with the decrease in the fair value of the derivative liability.

Fair Value Measurements Using Significant Unobservable Inputs - Year Ended September 30, 2022

(Level 3)

  

Series F

  

Series G

  

Series H

 

Beginning balance at September 30, 2021

 $1,000,000  $748,275  $459,200 

Issuances

         

Adjustments for the expiration of warrant

  (1,000,000

)

      

Ending balance at September 30, 2022

 $  $748,275  $459,200 

Fair Value Measurements Using Significant Unobservable Inputs  Year Ended September 30, 2021

(Level 3)

  

Series F

  

Series G

  

Series H

 

Beginning balance at September 30, 2020

 $1,000,000  $748,275  $568,144 

Issuances

         

Adjustments to estimated fair value

        (108,944

)

Ending balance at September 30, 2021

 $1,000,000  $748,275  $459,200 

The derivative liabilities are recorded as liabilities at September 30, 2022 using the greater of the minimum value or the Black Scholes Model with the following assumptions. As of September 30, 2022, the derivative liabilities are recorded at their minimum value.

  

Series G

  

Series H

 
Closing price per share of Common Stock        
         

Exercise price per share

 $140.00  $80.00 
         

Expected volatility

  132.97

%

  122.50

%

         

Risk-free interest rate

  4.05

%

  4.14

%

         

Dividend yield

      
         

Remaining expected term of underlying securities (years)

  0.69   1.57 

During the year ended September 30, 2022, the Series F Warrants expired.

The derivative liabilities are recorded as liabilities at September 30, 2021 using the greater of the minimum value or the Black Scholes Model with the following assumptions. As of September 30, 2021, the derivative liabilities are recorded at their minimum value.

  

Series F

  

Series G

  

Series H

 

Closing price per share of Common Stock

 $0.12  $0.12  $0.12 

Exercise price per share

 $150.00  $140.00  $80.00 

Expected volatility

  90.28

%

  87.40

%

  86.59

%

Risk-free interest rate

  0.04

%

  0.19

%

  0.41

%

Dividend yield

         

Remaining expected term of underlying securities (years)

  0.34   1.70   2.58 

8.

OCTOBER 2019 REGISTERED DIRECT OFFERING

On October 16, 2019, the Company entered into a Securities Purchase Agreement (the “October 2019 SPA”) with seven accredited investors (collectively, the “October 2019 Investors”) providing for the issuance and sale by the Company to the 2019 Investors of an aggregate of 71,429 units at a purchase price of $35.00 per unit in a registered offering (“October 2019 Financing”). The securities comprising the units sold in the October 2019 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock, a warrant to purchase one share of Common Stock at an exercise price of $44.00 per share (“Series I Warrant”) at any time prior to the fifth anniversary of the issuance date of the Series I Warrant subject to certain restrictions on exercise and the shares issuable upon exercise of the Series I Warrants (collectively, the “ October 2019 Warrant Shares”). As of October 18, 2019, the Company recorded the 71,429 shares as Common Stock. Pursuant to the Engagement Agreement (as defined below), the Company also agreed to issue to the Placement Agent, or its designees, warrants to purchase up to 5,358 shares (the “Placement Agent Warrants”). The 2019 Placement Agent Warrants have substantially the same terms as the Series I Warrants, except that the exercise price of the Placement Agent Warrants is $43.75 per share and the term of the Placement Agent Warrants is five years.

The gross proceeds to the Company from the October 2019 Financing, which were received as of October 18, 2019, were approximately $2.5 million before deducting financing costs of approximately $333,000 which includes approximately $158,000 of placement fees. The number of shares of the Company’s Common Stock into which each of the Series I Warrants is exercisable and the exercise price therefore are subject to adjustment, as set forth in the Series I Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise).

The Company engaged H.C. Wainwright as its exclusive institutional investor placement agent (the “Placement Agent”) in connection with the October 2019 SPA pursuant to an engagement agreement dated as of October 10, 2019 (the “2019 EngagementAgreement”). In consideration for the services provided by the Placement Agent, the Placement Agent was entitled to receive cash fees ranging from 6.0% to 8.2% of the gross proceeds received by the Company, as well as reimbursement for all reasonable expenses incurred by it in connection with its engagement. The Company received gross proceeds of approximately $2.5 million in the aggregate, resulting in a fee of approximately $158,000.

During the year ended September 30, 2022, no Series I Warrants or Placement Agent Warrants have been exercised. As of September 30, 2022, up to 71,429 and 5,358 shares may be acquired upon the exercise of the Series I Warrants and Placement Agent Warrants, respectively.

Common Stock

At October 18, 2019 the Closing Date of the October 2019 Financing, the Company issued 71,429 shares of Common Stock.

Equity Value of Warrants

The Company accounted for the Series I Warrants and the Placement Agent Warrants relating to the aforementioned October 2019 Registered Direct Offering in accordance with ASC 815-40. Because the Series I Warrants and the Placement Agent Warrants are indexed to the Company’s stock, they are classified within stockholders’ equity (deficit) in the accompanying consolidated financial statements.

9.

2021 REGISTERED DIRECT OFFERING

On February 11, 2021, the Company entered into a Securities Purchase Agreement (the “2021 SPA”) with certain institutional and accredited investors (collectively, “2021 Investors”) providing for the issuance and sale by the Company to the 2021 Investors of an aggregate of 215,625 shares (the “Shares”) of the Company’s Common Stock, and warrants (the “Series K Warrants”) to purchase an aggregate of 161,719 shares (the “Warrant Shares”) of Common Stock, at a combined offering price of $32.00 per share (the “2021 Financing”). The Series K Warrants have an exercise price of $34.00 per share and are exercisable for a period of 5.5 years. The aggregate gross proceeds for the sale of the Shares and Series K Warrants were approximately $6.9 million, before deducting the Placement Agent’s fees and expenses and other offering expenses payable by the Company, of approximately $700,000. Pursuant to an engagement agreement dated as of February 8, 2021 (the “2021 Engagement Agreement”), by and between the Company and the Placement Agent, the Company agreed to pay the Placement Agent cash fees equal to (i) 7.5% of the gross proceeds received by the Company from certain investors in the 2021 Financing, and (ii) 6.0% of the gross proceeds received by the Company from certain investors that had pre-existing relationships with the Company. In addition, the Placement Agent received a one-time non-accountable expense fee of $10,000, up to $50,000 for fees and expenses of legal counsel and other out-of-pocket expenses and $10,000 for clearing expenses. Pursuant to the 2021 Engagement Agreement, the Company also agreed to issue to the Placement Agent, or its designees, warrants to purchase up to 7.5% of the aggregate number of Shares sold to the 2021 Investors, or warrants to purchase up to 16,172 shares (the “2021 Placement Agent Warrants”) of the Company’s Common Stock. The 2021 Placement Agent 2 Warrants have substantially the same terms as the Series K Warrants, except that the exercise price of the 2021 Placement Agent Warrants is $40.00 per share. The 2021 Engagement Agreement contained indemnity and other customary provisions for transactions of this nature.

The 2021 SPA contained certain restrictions on the Company’s ability to conduct subsequent sales of the Company’s equity securities. In particular, we were prohibited from entering into or effecting a Variable Rate Transaction (as defined in the 2021 SPA) until February 11, 2022; provided, however, the Company may enter into and effect an at-the-market offering facility with the Placement Agent.

The number of shares of the Company’s Common Stock into which each of the Series K Warrants is exercisable and the exercise price therefore are subject to adjustment, as set forth in the Series K Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). During the fiscal year ended September 30, 2022, no Series K Warrants or 2021 Placement Agent Warrants had been exercised. As of September 30, 2022, up to 161,719 and 16,172 shares may be acquired upon the exercise of the Series K Warrants and Placement Agent Warrants, respectively.

Common Stock

On February 17, 2021 the Closing Date of the 2021 Financing, the Company issued 215,625 shares of Common Stock.

Equity Value of Warrants

The Company accounted for the Series K Warrants and the Placement Agent 2 Warrants relating to the aforementioned February 2021 Registered Direct Offering in accordance with ASC 815-40, Derivatives and Hedging. Because the Series K Warrants and the Placement Agent 2 Warrants are indexed to the Company’s stock, they are classified within stockholders’ equity (deficit) in the accompanying consolidated financial statements.

10.

2022 CONVERTIBLE NOTE OFFERING

On July 7, 2022, the Company announced that it had entered into a Securities Purchase Agreement (the “2022 SPA”) with certain institutional and accredited individual investors (collectively, the “2022Investors”) providing for the issuance and sale by the Company to the 2022 Investors of (i) Senior Secured Convertible Promissory Notes (each a “2022 Note” and collectively, the “2022 Notes”) in the aggregate principal amount of $4.23 million, which includes an aggregate $0.705 million original issue discount in respect of the 2022 Notes; (ii) Warrants (the “2022 Warrants”), to purchase an aggregate of 425,554 shares (the “2022Warrant Shares”) of Common Stock; and (iii) 63,833 shares of Common Stock (the “2022Inducement Shares”) equal to 15% of the principal amount of the 2022 Notes divided by the closing price of the Common Stock immediately prior to the Closing Date (as defined below). The 2022 Notes, 2022 Warrants and 2022 Inducement Shares were issued as part of a convertible note offering authorized by the Company’s board of directors (the “2022Note Offering”). The aggregate gross proceeds for the sale of the 2022 Notes, 2022 Warrants and 2022 Inducement Shares was approximately $3.5 million, before deducting debt issuance costs of $775,000 consisting of fair value of the placement agent’s warrants of approximately $220,000 and other estimated fees and offering expenses payable by the Company of approximately $555,000. The closing of the sales of these securities under the 2022 SPA occurred on July 6, 2022 (the “2022Closing Date”).

The 2022 Notes bear interest on the unpaid principal balance at a rate equal to ten percent (10%) (computed on the basis of the actual number of days elapsed in a 360-day year) per annum accruing from the Closing Date until the 2022 Notes become due and payable at maturity or upon their conversion, acceleration or by prepayment, and may become due and payable upon the occurrence of an event of default under the 2022 Notes. Any amount of principal or interest on the 2022 Notes which is not paid when due shall bear interest at the rate of the lesser of (i) eighteen percent (18%) per annum or (ii) the maximum amount allowed by law from the due date thereof until payment in full.

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 $9.14 (the “Conversion Price”) through the later of (i) January 6, 2024 (the “Maturity Date”) and (ii) the date of payment of the Default Amount (as defined in the 2022 Note); provided, however, certain 2022 Notes include a provision preventing such conversion if, as a result, the holder, together with its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than 4.99% of the outstanding shares of the Common Stock (as applicable, the “Ownership Limitation”) immediately after giving effect to the Conversion; and provided further, the holder, upon notice to us, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of 9.99% of the outstanding shares of the Common Stock; and (ii) any increase in the Ownership Limitation will not become effective until the 61st day after delivery of such waiver notice. The Conversion Price is subject to adjustment as set forth in the 2022 Notes.

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 warranties 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 six (6) months from the First Closing Date or January 6, 2023; (ii) our failure to deliver the shares of Common Stock to the 2022 Note holder upon exercise by such holder of its conversion rights under the 2022 Note; (iii) our loss of the “bid” price for its Common Stock and/or a market and such loss is not cured during the specified cure periods; and (iv) our failure to complete an uplisting of our Common Stock to any of the Nasdaq Global Market, Nasdaq Capital Market, New York Stock Exchange or NYSE American by February 15, 2023 (an “Uplist Transaction”).

The 2022 Warrants (i) have an exercise price of $9.94 per share; (ii) have a term of exercise equal to 5 years after their issuance date; (iii) became exercisable immediately after their issuance; and (iv) have a provision preventing the exercisability of such 2022 Warrant if, as a result of the exercise of the 2022 Warrant, the holder, together with its affiliates and any other persons whose beneficial ownership of our Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than the Ownership Limitation. The holder, upon notice to us, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of 9.99% of outstanding shares of our Common Stock; and (ii) any increase in the Ownership Limitation will not become effective until the 61st day after delivery of such waiver notice. The number of shares of Common Stock into which each of the 2022 Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the 2022 Warrants, including standard antidilution provisions, and adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In the event of a Fundamental Transaction (as defined in the 2022 Warrants) holders of the 2022 Warrants would be entitled to receive alternate consideration in connection with such Fundamental Transaction, but only to the extent that holders of our Common Stock were entitled to receive the same. Moreover, as long as the 2022 Notes and 2022 Warrants remaining outstanding, upon the issuance of any security in connection with any potential future financing activity on terms more favorable than the existing terms, the Company has an obligation to notify the holders of the 2022 Notes and 2022 Warrants of such more favorable terms and to use best efforts to effect such terms in the 2022 Notes and 2022 Warrants. Finally, because of the Company’s net loss position, the shares underlying the 2022 Notes on an as converted basis are excluded from the calculation of basic and fully diluted earnings per share. Similarly, because of the Company’s net loss position, there was no impact on the calculation of basic and fully diluted earnings per share related to the classification of the 2022 Warrants as participating securities.

The Company retained a placement agent in connection with the private placement of $2.4 million of the 2022 Notes to the institutional investors. The Company paid the 2022 Placement Agent 10% of the gross proceeds in the 2022 Placement Agent from certain institutional investors, or $240,000 and we also reimbursed the 2022 Placement Agent approximately $58,000 for non-accountable banking fees, legal fees and other expenses. In addition, we issued 2022 Placement Agent Warrants to purchase an aggregate of 31,510 shares of Common Stock. An additional $1.1 million was raised in connection with the placement of the private placement notes, which included certain accredited investors some of which were Board members and executive officers of the Company. Board member, Laurence Hicks, and executive officers, Terrence W. Norchi and Michael S. Abrams, invested in the 2022 Senior Secured Convertible Notes. The investment made in the 2022 Senior Secured Convertible Notes made by the Board member and executive officers totaled $80,000.

In addition, as a part of the 2022 Convertible Notes Offering, certain holders (the “Series Holders”) of the Company’s 10% Series 2 Convertible Notes (the “Series Notes”) agreed to exchange their Series 2 Notes for promissory notes of the Company on substantially similar terms to those of the 2022 Notes (the “Subordinated”). The Subordinated Notes are convertible into 76,563 shares of Common Stock at a conversion price of $9.14. The holders of the Subordinated Notes did not receive warrants or inducement shares. In connection with the issuance of the Subordinated Notes, the Series Holders entered into a subordination agreement on July 6, 2022 (the “Closing Date”) to subordinate their rights in respect of the Subordinated Notes to the rights of the Investors in respect of the 2022 Notes. As of July 7, 2022, approximately $600,000 of the Series 2 Notes and accrued interest of approximately $100,000 were included in the exchange.

Further, in connection with the 2022 Note Financing, we are required to complete an Uplist Transaction by February 15, 2023 under the terms of the 2022 Notes. If we are unable to complete an Uplist Transaction, then the 2022 Notes will become immediately due and payable and we will be obligated to pay to each 2022 Note holder an amount equal to 125%, multiplied by the sum of the outstanding principal amount of the 2022 Notes plus any accrued and unpaid interest on the unpaid principal amount of the 2022 Notes to the date of payment, plus any default interest and any other amounts owed to the holder, payable in cash or shares of Common Stock.

During the fiscal year ended September 30, 2022, the Company recorded interest expense on the 2022 Notes of approximately $421,000 consisting of accrued interest of approximately $119,000 and accretion of original issue discount debt discount and issuance costs of approximately $302,000.

Allocation of Proceeds

The Company accounted for the Senior Secured Convertible Notes, the 2022 Warrants, and the 2022 Inducement Shares relating to the aforementioned July 2022 Senior Secured Convertible Promissory Notes in accordance with ASC 470-20-25-2 “Debt” which states that the allocation of the proceeds from the financing shall be based on the relative fair values of the securities issued at the time of the issuance. The 2022 Inducement Shares and the 2022 Warrants, which are indexed to the Company’s stock, are classified within stockholders’ equity (deficit) in the accompanying consolidated financial statements. The allocated value of the 2022 Inducement Shares and the 2022 Warrants are $314,523 and $1,470,133, respectively. The allocated value of the Senior Secured Convertible Notes are $1,740,344 were allocated as long-term liabilities in the accompanying consolidated financial statements. The fair value of the 2022 Placement Agent Warrants of $219,894 are being accounted for as debt issuance costs and are classified within stockholders’ equity (deficit) in the accompanying consolidated financial statements. As of September 30, 2022, the net carrying amount of the Senior Secured Convertible Notes was $2,362,273 with unamortized debt discount and issuance costs of $2,567,507.

The 2022 Warrants and the 2022 Placement Agent Warrants were valued as of July 6, 2022 using the Black Scholes Model with the following assumptions:

  

2022 Investor Warrants

  

2022 Placement Agent Warrants

 

Closing price per share of Common Stock

 $9.98  $9.98 

Exercise price per share

 $9.94  $10.06 

Expected volatility

  88.44

%

  88.44

%

Risk-free interest rate

  2.96

%

  2.96

%

Dividend yield

      

Remaining expected term of underlying securities (years)

  5.0   5.0 

11.

SERIES 1 AND SERIES 2 CONVERTIBLE NOTES

On June 4, 2020 and November 6, 2020, the Company issued unsecured 10% Series 1 Convertible Notes (“Series 1”) and Series 2 Convertible Notes (“Series 2 Notes”, and collectively with the Series 1 Notes, the “Convertible Notes”) in the aggregate principal amount of $550,000 and $1,050,000, respectively. The maturity dates of the Series 1 Notes and Series 2 Notes are June 30, 2023 and November 30, 2023, respectively. The Convertible Notes provide, among other things, for (i) a term of approximately three years; (ii) the Company’s ability to prepay the Convertible Notes, in whole or in part, at any time; (iii) the automatic conversion of the Convertible Notes upon a Change of Control (all capitalized terms not otherwise defined to have the meaning ascribed to such terms of the Convertible Notes) into shares of the Company’s Common Stock, at a per share price of $54.00 and $50.00 (the “Conversion Price”) for the Series 1 Notes and Series 2 Notes, respectively; (iv) the ability of the holders of the Convertible Note (a “Holder”) to convert the principal of the Convertible Notes, along with accrued interest, in whole or in part, into shares of Common Stock at the respective Conversion Price; (v) the Company’s ability to convert all Note Obligations outstanding upon a Qualified Equity Financing into shares of Common Stock at the respective Conversion Price; (vi) the Company’s ability to convert the principal of the Convertible Notes, along with accrued interest, in whole or in part, into shares of Common Stock at the respective Conversion Price in the event the volume weighted average price (“VWAP”) of the Common Stock equals or exceeds $64.00 per share for at least fifteen consecutive Trading Days; (vii) the Company’s ability to convert all outstanding Note Obligations into shares of Common Stock at the respective Conversion Price (an “In-Kind Note Repayment”) in lieu of repaying the Note Obligations outstanding on the Maturity Date, provided, however, that in the case of an In-Kind Note Repayment, the outstanding Note Obligations will be calculated by increasing by thirty-five percent the aggregate sum of the unpaid Principal Amount held by each Holder and the accrued interest at a rate of ten percent per annum, subject to, with respect to any portion of the Principal Amount that is converted or prepaid before the twelve month anniversary of the Issuance Date, a minimum interest payment equal to ten percent of the amount that is converted or prepaid. As consideration for agreeing to subordinate, the premium applicable in connection with an In-Kind Note Repayment at maturity was increased from thirty-five percent to sixty percent.

Beginning June 22, 2015 and through June 30, 2015, the Company entered into a series of substantially similar subscription agreements with 20 accredited investors providing for the issuance and sale by the Company to the 2015 Investors, in a private placement, of an aggregate of 71,954 Units at a purchase price of $44.00 per Unit. Each Unit consisted of a share of Common Stock and a Series D Warrant to purchase a share of Common Stock at an exercise price of $50.00 per share at any time prior to the fifth anniversary of the issuance date of the Series D Warrant and the shares issuable upon exercise of the Series D Warrants.

On June 3, 2020, the Company entered into an agreement (the “Agreement”) with the holders of a majority (the “Majority Holders”) of the outstanding warrants classified as “Series D Warrants”, resulting in approximately $850,000 of proceeds as a result of the full exercise of all Series D Warrants. Under the terms of the Agreement, in exchange for fully exercising their remaining Series D Warrants for 23,636 shares of Common Stock on June 4, 2020, the Majority Holders were issued warrants to purchase 17,727 shares of Common Stock at an exercise price of $50.00 over a 1-year term (“Series J Warrants”). On November 6, 2020, as consideration for an investment in the Convertible Notes, the Company entered into an amendment to the Series J Warrants with a holder of a Series J Warrant exercisable for up to 16,875 shares of Common Stock, to extend the term of the Series J Warrant from one year to thirty months.

On June 22, 2020, the Company entered into a Series J Warrant Issuance Agreement (the “Keyes Sulat Agreement”) with the Keyes Sulat Revocable Trust (the “Trust”), also a holder of outstanding Series D Warrants, resulting in approximately $82,000 of proceeds as a result of the full exercise of the Trust’s Series D Warrants. Under the terms of the Keyes Sulat Agreement, in exchange for fully exercising the Trust’s remaining Series D Warrants for 2,273 shares of Common Stock on June 22, 2020, the Trust was issued Series J Warrants to purchase 1,705 shares of Common Stock at an exercise price of $50.00 over a one-year term. James R. Sulat, a former member of the Board, is a co-trustee of the Trust, of which members of Mr. Sulat’s immediate family are beneficiaries. Mr. Sulat disclosed his interest in the Trust to the Board prior to its approval of the transaction and abstained from voting on the transaction.

As described in Note 10, above, as a part of the 2022 Convertible Notes Offering, certain holders of the Series Notes agreed to exchange Notes with principal amounts of $600,000 and accrued interest of approximately $100,000 for promissory notes of the Company on substantially similar terms to those of the 2022 Notes (the “Exchanged Notes”). As of July 6, 2022, $699,780 of principal and accrued interest of the Series 2 notes was exchanged for the Senior Secured Convertible Notes. In connection with the issuance of the Exchanged Notes, the Series Holders entered into a subordination agreement on the Closing Date to subordinate their rights to the rights of the Investors in respect of the 2022 Notes.

During the fiscal years ended September 30, 2022 and 2021, the Company recorded interest expense on the Series 1 and Series 2 Convertible Notes of approximately $146,000 and $150,000, respectively.

12.

INCOME TAXES

 

The principal components of the Company's net deferred tax assets consisted of the following at September 30:

 

 2015 2014  

2022

  

2021

 
Net operating loss carryforwards $3,748,426 $2,731,492  $11,485,524  $10,022,020 
Capitalized expenditures 802,769 381,872  1,535,736  1,703,849 
Research and experimentation credit carryforwards 164,252 63,368 

Research and development credit carryforwards

 946,243  946,158 
Stock based compensation 1,014,654 501,175  1,427,946  2,352,432 
Property and Equipment 1,569 1,568  2,616  2,740 
Accrued expenses  124,716  46,230  162,191  57,812 

Inventory allowance

  70,805   62,946 
Gross deferred tax assets 5,856,386 3,725,705  15,631,061  15,147,957 
Deferred tax asset valuation allowance  (5,856,386)  (3,725,705)  (15,631,061

)

  (15,147,957

)

      
Net deferred tax assets $- $-  $-  $- 

The provision (benefit) for income taxes differs from the tax computed with the statutory federal income tax rate as follows:

  

2022

  

2021

 

Expected income tax (benefit) at federal statutory rate

  21.00

%

  21.00

%

         

Increase/(Decrease) due to:

        

State income taxes – net of federal benefit

  3.65

%

  5.80

%

         

Permanent Differences:

        

Key man life insurance

  ---

%

  (0.01

)%

Stock Based Compensation

  (18.10

)%

  ---

%

R&D, taken as a credit

  (0.23

)%

  (0.29

)%

Adjustment to fair value of derivative

  3.98

%

  0.37

%

PPP Loan Forgiveness

  ---

%

  0.60

%

Other

  (1.14

)%

  (1.41

)%

Change in Valuation Allowance

  (9.16

)%

  (26.06

)%

         

Total Income Tax Provision / (Benefit)

  ---

%

  ---

%

 

As of September 30, 20152022 and 2014,2021, the Company had federal net operating loss carryforwards oftotaling approximately $9,509,000$42,695,000 and $6,230,000,$37,018,000, respectively, which may be available to offset future taxable incomeincome. The pre-2018 federal net operating loss carryforwards total approximately $21,750,000, and which would begin to expire in 2026. Due to the CARES Act, federal net operating losses generated in tax years beginning after December 31, 2017 can be carried forward indefinitely. As of September 30, 20152022 and 2014,2021, the Company has federal net operating loss carryforwards with an indefinite life of $20,945,000 and $15,268,000. As of September 30, 2022 and 2021, the Company had federal research and experimentation credit carryforwards of $139,744$626,000 and $44,112,$643,000, respectively, which may be available to offset future income tax liabilities and which would begin to expire in 2029.2028.

 

As of September 30, 20152022 and 2014,2021, the Company had state net operating loss carryforwards of approximately $8,487,000$40,367,000 and $5,271,000,$36,033,000, respectively, which may be available to offset future taxable income and which would begin to expire in 2015.2030. As of September 30, 20152022 and 2014,2021, the Company had state research and experimentationdevelopment credit carryforwards of $37,000$406,000 and $19,000,$384,000, 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, 20152022 and 20142021 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 2015 and 20142022 by approximately $2,130,000$483,000 and $2,202,000, respectively.increased in 2021 by approximately $1,626,000. The Company’s effective income tax rate differed from the federal statutory rate due to state taxes and the Company’s full valuation allowance and stock based compensation, 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 6,1, causing a limitation on the annual use of the net operating loss carryforwards, which are subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. A formal Section 382 study has not been performed.

 

As of September 30, 2015,2022, the Company is open to examination in the U.S. federal and certain state jurisdictions for tax years ended September 30, 2015, 2014, 20132022, 2021, 2010 and 2012.2019. In addition, any loss years remain open to the extent that losses are available for carryover to future years. Therefore, the tax years ended 2006 through 2022 remain open for examination by the IRS.

 

The Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted on March 27, 2020.  The CARES Act affected items such as carryback periods for net operating losses, modifications to the net interest deduction limitations and changes to tax depreciation methods. The company has taken the CARES Act into consideration for the tax year ended September 30, 2022 and continues to evaluate the impact of the CARES act on the business.

13.

5.2014 PRIVATE PLACEMENT FINANCING

PAYROLL PROTECTION PROGRAM LOAN

 

On January 30, 2014,April 25, 2020, the Company entered intoexecuted a Securities Purchase Agreementpromissory note (the “Securities Purchase Agreement”PPP Note) with nine separate accredited investors (“2014 Investors”evidencing an unsecured loan in the amount of $176,300 under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program (or “PPP) providing forwas established under the issuanceCares Act and saleis administered 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”U.S. Small Business Administration (“SBA) 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 Loan has been made through First Republic Bank (the “2014 Private Placement Financing”Lender).

 

F-11

The PPP Loan had a two-year term and bears interest at a rate of 1.00% per annum. Monthly principal and interest payments are deferred until the SBA makes a decision on our loan forgiveness application. Unless the PPP Loan is forgiven, the Company would have been required to make monthly payments of principal and interest of approximately $20,000 to the Lender.

 

Upon the closingThe PPP Note contains customary events 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, pursuantdefault relating to, which the Company became obligated, subject to certain conditions, to file with the Securitiesamong other things, payment defaults, providing materially false 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,misleading representations to the number of 2014 Warrant Shares issuable pursuant toSBA or Lender, or breaching 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.PPP Loan documents. 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, including liquidated damages. The resale registration statement was declared effective on July 2, 2014. 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 expired 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, have been 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 the 2014 Warrants in the amount of $1,300,170, which was determined using Monte Carlo Simulation.

F-12

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 and recognized as a gain in the Company’s statements of operations.

On March 13, 2015, the Company issued unsecured 8% Convertible Notes, (the “Notes”), in the aggregate principal amount of $750,000, see footnote 7. 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, 2016, 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.

Prior to June 22, 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 and recognized as a gain in the Company’s statements of operations.

During the year ended September 30, 2015, Series A Warrants, and Series C Warrants had been exercised for an aggregate issuance of 6,000,000, and 8,000,000, respectively, shares of the Company’s common stock resulting in gross proceeds to the Company of $2,800,000. For the year ended September 30, 2015, 1,750,000 of Series A Warrants were exercised through cashless transactions resulting in 686,801 shares of common stock being issued. The Company recorded the par value of the shares issued through cashless transactions of $687 (at par value of $0.001 per share) with a corresponding reduction in additional paid-in capital.

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 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 Company recognized a loss on modification of warrants, net of Inducement Shares, in the amount of $927,373 which was determined using the Black Scholes model. As of June 22, 2015, the company determined that its Series A and C Warrants were eligible for equity classification due to the elimination of the full ratchet anti-dilution provision. As a result, for the period ended September 30, 2015 the derivative liabilities were reclassified as equity within the company’s consolidated financial statements at a fair value of $3,263,753.

As of September 30, 2015, all 570,000 Inducement Shares had been issued.

Derivative Liabilities

The Company initially 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 were not indexed to the Company’s stock and were not classified within stockholders’ equity, they were recorded as liabilities at fair value. They were marked to market each reporting period through the consolidated statement of operations. As of June 22, 2015, the Company determined that its Series A and C Warrants were eligible for equity classification due to the elimination of the full ratchet anti-dilution provision. As a result, as of June 22, 2015, the derivative liabilities were reclassified as equity within the Company’s consolidated financial statements at the then current fair value of $3,263,753.

F-13

On February 4, 2014, the 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 the February 4, 2014 closing date.

The values of the derivative liability as of September 30, 2015 and 2014 were $0 and $6,270,000, respectively. As a result of a change in the estimated fair value of the derivative liability we recorded other expense of $896,763 and $4,121,693 for the years ended September 30, 2015 and 2014, respectively. In addition, during the year ended September 30, 2015, we recorded a gain on modification of warrants, net of Inducement Shares in the amount of $2,980,829. The Company recognized a gain on the exercise of warrants in the amount of $299,321, for the year ended September 30, 2015 as described above. As of June 22, 2015, the Company determined that its Series A and C Warrants were eligible for equity classification due to the elimination of the full ratchet anti-dilution provision and as a result reclassified $3,263,753 from derivative liabilities to equity. For the year ended September 30, 2015, the change in the estimated fair value was primarily due to the elimination of the full ratchet 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. 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.

Fair Value Measurements Using Significant Unobservable 
Inputs 
(Level 3)
   
  Warrant Derivative Liability 
  2015  2014 
Beginning balance at September 30, $6,270,000  $- 
         
Issuances  -   10,391,693 
         
Modification of warrants, net of Inducement Shares  896,763   - 
         
Exercises of warrants  (299,321)  - 
         
Adjustments to estimated fair value  (3,603,689)  (4,121,693)
         
Reclass of Derivative Liability to Equity  (3,263,753)  - 
         
Ending balance at September 30, 2015 $-  $6,270,000 

The derivative liabilities were valued as of September 30, 2014, December 1, 2014, and March 15, 2015 using Monte Carlo Simulation. The derivative liabilities as of June 22, 2015, June 30, 2015, and September 30, 2015 as well as the exercises during 4th quarter of fiscal 2015 were valued using Black Scholes.

  September 30,
2014
  December 1, 
2014
  March 15, 
2015
  June 22, 
2015  
 
Closing price per share of Common Stock $0.18  $0.25  $0.21  $0.23 
Exercise price per share $0.30 - 0.40  $0.20 - $0.30  $0.20 - $0.30  $0.20 
Expected volatility   85 - 90%   80 – 90%   80 – 110%   55- 85%
Risk-free interest rate   0.02 - 1.55%   .01 – 1.39%   0.03 – 1.41%   0.27 - 1.68%
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 

F-14

  As of
June 30, 
2015
  Exercises during
4th Quarter
2015
  As of
September 30, 
2015
 
Closing price per share of Common Stock $0.26  $0.23-0.27  $0.27 
Exercise price per share $0.20  $0.20  $0.20 
Expected volatility   75-85%   75- 85%   75-85%
Risk-free interest rate  1.63%   0.23-1.36%   0.21-1.09%
Dividend yield         
Remaining expected term of underlying securities (years)  1.01    0.80-3.96    0.76-3.76 

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.

6.2015 PRIVATE PLACEMENT FINANCING

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

The Company’s obligation to issue and sell the 2015 Shares and the Series D Warrants and the corresponding obligation of the 2015 Investors to purchase such 2015 Shares and Series D Warrants were subject to a number of conditions precedent including, but not limited to, the amendment of the Company’s Series A Warrants and Series C Warrants to delete certain of the anti-dilution provisions contained therein, as described in Footnote 5, 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 approximately $100,000.

On the Initial Closing Date, the Company entered into a registration rights agreement with the Initial Investors (the “ 2015 Registration Rights Agreement”), pursuant to which the Company was obligated, subject to certain conditions, to file with the Securities and Exchange Commission within 90 days after the closing of the 2015 Private Placement Financing one or more registration statements (any such registration statement, a “Resale Registration Statement”) to register the 2015 Shares and the 2015 Warrant Shares for resale under the Securities Act 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. On October 27, 2015, we received from the SEC a Notice of Effectiveness of our Registration Statement related to the 2015 Private Placement Financing which satisfied some of our obligation to register these securities with the SEC.

F-15

Following each Closing, each 2015 Investor was also issued Series D Warrants to purchase shares of the Company’s Common Stock up to 100% of the 2015 Shares purchased by such 2015 Investor under such 2015 Investor’s Subscription Agreement. The Series D Warrants have an exercise price of $0.25 per share, are exercisable immediately after their issuance and have a term of exercise equal to five years after their issuance date. The number of shares of the Company’s Common Stock into which each of the Series D Warrants is exercisable and the exercise price therefore are subject to adjustment, as set forth in the Series D Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, at 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.

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 $3,052,064 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 shares of Common Stock and recorded the par value of the shares issued of $454 (at par value of $0.001 per share) with the remaining proceeds of $99,511 allocated to additional paid-in capital. The Company completed an evaluation of the series D Warrants issued and determined the Series D Warrants should be classified as equity within the consolidated balance sheet.

7.8% CONVERTIBLE NOTES

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 judgmentsmay result in the aggregate amountimmediate repayment of $100,000all amounts outstanding, collection of all amounts owing from the Company, or more.filing suit and obtaining judgment.

 

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 notCARES Act, PPP Loan recipients can apply for and be repaid unless and untilgranted forgiveness for 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.

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 sucha portion of the Noteloan granted under the PPP. Such forgiveness will be determined, subject to be converted;limitations, based on the use of loan proceeds for payment of payroll costs and (b) the conversion price then in effect (the sharesany payments of Common Stock issuable upon such conversion, the “Conversion Shares”). The initial conversion pricemortgage interest, rent, and utilities. However, no assurance is $0.20 per share, and it may be (A) reduced to any amount andprovided that forgiveness 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% (atPPP Loan will be obtained. During November 2020, the holder’s discretion)Company applied for forgiveness of the shares of Common Stock outstanding immediately after giving effect to such conversion. DuringPPP Loan. On May 28, 2021, the Company received notice that the SBA completed review and all principal and interest has been forgiven. For the fiscal year ended September 30, 2015, $145,0002021, approximately $178,000 was recorded to Gain on forgiveness of notes and $6,173 of interest were converted into 755,865 shares of the Company’s Common Stock.

F-16

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 soldloan in Other Income 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.

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 statementstatements 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 being accreted to interest expense over the life of the loan. For the year ended September 30, 2015, $223,735 of the loan discount has been accreted to interest expense and $145,000 of the principal was converted into 725,000 shares of common stock. As of September 30, 2015 the accreted balance of the Notes was $473,747.

The value of the derivative liability as of September 30, 2015 was $335,092. As a result of a change in the estimated fair value of the derivative liability we recorded other expense of $67,395 and a gain on the conversion of the notes of $87,291 for the year ended September 30, 2015.

Fair Value Measurements Using Significant Unobservable 
Inputs 
(Level 3)
   
  Convertible
Debt Derivative 
Liability
 
Beginning balance at September 30, 2014 $- 
     
Issuances  354,988 
     
Conversion of Notes  (87,291)
     
Adjustments to estimated fair value  67,395 
     
Ending balance at September 30, 2015 $335,092 

The derivative liability was valued as of March 15, 2015, September 20, and September 30, 2015 using Monte Carlo Simulations with the following assumptions:

F-17

14.

  March 15, 
2015
  September 20, 
2015
  September 30, 
2015
 
Stated interest rate  8.0%  8.0%  8.0%
Exercise price per share $0.20  $0.20  $0.20 
Expected volatility  90.0%  80.0%  80.0%
Risk-free interest rate  0.24%  0.09%  0.07%
Credit adjusted discount rate  20.0%  22.0%  22.0%
Remaining expected term of underlying securities (years)  1.00   .48   .46 

8.

STOCK-BASED COMPENSATION

 

2013 Stock Incentive Plan

 

On June 18, 2013, the Company established the 2013 Stock Incentive Plan (the “2013 Plan”2013 Plan). Under the 2013 Plan, during the fiscal year ended September 30, 2015,2021, a maximum number of 13,114,256155,571 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) 3,000,00015,000 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”Board). The exercise price of each option shall be the fair value as determined in good faith by the Board at the time each option is granted. On October 1, 2015,2021, the aggregate number of authorized shares under the Plan was further increased by 3,000,00015,000 shares to a total of 16,114,256170,571 shares.

 

As of September 30, 2015, a total of 8,479,212 options had been issued to employees and directors and 4,652,500 options had been issued to consultants. The exercise price of each option has either beenis 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.grant.

 

Share-based awards

 

During the year ended September 30, 2015,2022, the Company granted 2,375 options to employees and directors to purchase 3,175,000 and 4,250 options to consultants to purchase 1,087,500 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 $0.28.Plan.

 

The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period, with the exception of options granted subject to a consulting agreement, whereby the option vesting period and the service period are defined pursuant to the terms of the consulting agreement. Share-based compensation expense for awards granted during the year ended September 30, 20152022 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 basedshare-based compensation for the year ended September 30, 2015;2022; expected volatility, 76.6%79.44% - 119.4%119.44%, risk-free interest rate, 0.64%0.13% - 2.03%, expected forfeiture rate, 0.00%2.85%, expected dividend yield, 0.00%0%, expected term, 1 to 105.6 years.

 

Expected price volatility is the measure by which the Company’s stock price is expected to fluctuate during the expected term

F-20

 

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. Prior to the year ended September 30, 2015, the Company did not experience any forfeitures of stock options. During the year ended September 30, 2015, the Company experienced an insignificant number of forfeitures of stock options granted. Since the Company has a limited history of stock option forfeitures it continues to estimate the forfeiture rate of its outstanding stock options as zero, but will continually evaluate its historical data as a basis for determining expected forfeitures.

Common Stock Options

 

Stock compensation activity under the 2013 Plan for the year ended September 30, 20152022 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  $0.38   -  $- 
Awarded  4,262,500  $0.21   -   - 
Exercised  1,025,000  0.33   -   - 
Forfeited  (1,098,962) $0.36   -   - 
Outstanding at September 30, 2015  10,776,500  $0.30   6.85   $335,435 
Vested  8,796,959  $0.32   4.73   $200,668 
Vested and expected to vest at September 30, 2015  10,776,500  $0.30   6.85   $335,435 

  Option  Weighted Average  Average Remaining  

Weighted Aggregate

 
  Shares  Exercise  Contractual  

Intrinsic

 
  

Outstanding

  

Price

  

Term (years)

  

Value

 

Outstanding at September 30, 2021

  124,495  $58.00   1.83  $140,151 

Awarded

  6,625  $6.00         

Forfeited/Cancelled

  (32,494

)

 $70.00         

Outstanding at September 30, 2022

  98,626  $52.00   1.46  $16,900 

Vested at September 30, 2022

  82,522  $58.00   1.52  $ 

Vested and expected to vest at September 30, 2022

  98,626  $52.00   1.46  $16,900 

 

As of September 30, 2015, 781,5062022, 41,366 shares are available for future grants under the 2013 Plan. Share-based compensation expense recorded in the Company’s Consolidated Statements of Operations for the yearsyear ended September 30, 20152022 and 20142021 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $1,048,000$459,000 and $1,101,000,$391,000, respectively. Of this amount during the years ended September 30, 20152022 and 2014, $466,0002021, $148,000 and $629,000,$124,000, respectively, waswere recorded toas research and development expenses, and $582,000$311,000 and $472,000,$267,000, respectively waswere recorded inas general and administrative expenses in the Company’s Consolidated Statements of Operations.

 

During the years ended September 30, 2022 and 2021, no stock options awarded under the 2013 Stock Incentive Plan were exercised for cash. During the years ended September 30, 2022 and 2021, no stock options awarded under the 2013 Stock Incentive Plan were exercised on a cashless basis.

As of September 30, 2015,2022, there is approximately $607,000$181,000 of unrecognized compensation expense related to unvested stock-based compensation arrangements granted under the 2013 Plan. That cost is expected to be recognized over a weighted average period of 1.622.47 years.

 

Restricted Stock

 

F-19

On October 14, 2020, the Company awarded 250 shares of Restricted Stock to a consultant. The shares subject to this grant were awarded under the 2013 Plan and vested 90 days from the date of the award.

 

On January 27, 2021, the Company awarded 2,500 shares of Restricted Stock to a consultant. The shares subject to this grant were awarded under the 2013 Plan and vested immediately.

On July 30, 2021, the Company awarded 750 shares of Restricted Stock to an employee. The shares subject to this grant were awarded under the 2013 Plan and 250 shares vest on each of the following dates: January 12, 2022, July 12, 2022 and January 12, 2023.

On September 27, 2021, the Company awarded 1,500 shares of Restricted Stock to a consultant. The shares subject to this grant were awarded under the 2013 Plan and 1/12 of the shares will vest on each of the next twelve monthly anniversaries.

 

Restricted stock activity in shares under the 2013 Plan for the years ended September 30, 20152022 and 20142021 follows:

 

  2015  2014 
Restricted Stock        
Non Vested at October 1  25,000   - 
Awarded  -   300,000 
Vested  (25,000)  (275,000)
Forfeited  -   - 
Non Vested at September 30  -   25,000 

The weighted average restricted stock award date fair value information for the years ended September 30, 2015 and 2014 follows:

  2015  2014 
Non Vested at October 1 $0.345  $- 
Awarded  -   0.345 
Vested  0.345   0.345 
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, 2015 and 2014, compensation expense recorded for the restricted stock awards was approximately $9,000 and $95,000, respectively.

9.2015 Restricted Stock

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.

Restricted Stock activity for the year ended September 30, 2015 follows:

2015
Restricted Stock
Non Vested at October 1-
Awarded600,000
Vested(450,000)
Forfeited-
Non Vested at September 30150,000
  

2022

  

2021

 

Non Vested at September 30, 2021 and 2020

  2,250     

Awarded

     5,000 

Vested

  (2,000

)

  (2,750

)

Forfeited

      

Non Vested at September 30, 2022 and 2021

  250   2,250 

 

 

The weighted average restricted stock award date fair value information for the years ended September 30, 20152022 and 2019 follows:

 

 2015  

2022

  

2021

 
Non Vested at October 1 $- 

Non Vested at September 30, 2021 and 2020

 $20.00  $ 
Awarded 0.35     26.00 
Vested 0.35  (20.00

)

 (32.00

)

Forfeited  -       
Non Vested at September 30 $0.35 

Non Vested at September 30, 2022 and 2021

 $18.00  $20.00 

 

For the yearyears ended September 30, 2015,2022 and 2021 compensation expense recorded for the restricted stock awards was approximately $157,000.

10.Coldstream Financing

In contemplation of the Merger, (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$40,000 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.$105,000, respectively. As of September 30, 2014, all warrants issued in connection with2022, there is approximately $3,000 of unrecognized compensation expense related to unvested stock-based compensation arrangements granted under the Coldstream Financing had expired.2013 Plan.

 

15.

11.Note Payable

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 September 30, 2015.

Of the $1,000,000, the Company allocated $944,707 to the loan and $55,293 to the warrants. 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 the years ended September 30, 2015 and 2014, was approximately $11,000 of the loan discount was accreted to interest expense. As of September 30, 2015 and 2014 the accreted balance of the MLSC Loan was $966,824 and $955,766, respectively.

12.COMMITMENTS AND CONTINGENCIES

 

In the ordinary course of business, the Company enters into various agreements containing standard indemnification provisions. The Company'sCompany’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, 20152022 and 2014,2021, 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.

F-21

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 $45,000$50,000 to MIT in the fiscal yearyears ended September 30, 20152022 and $35,000 in the fiscal year ended September 30, 2014.2021. For the years ended September 30, 20152022 and 2014,2021, the annual MIT license maintenance fees of $50,000 and $45,000, respectively, are included in accrued expenses and other liabilities on the Consolidated Balance Sheets. The license maintenance fees and patent prosecution costs cover the contract year beginning January 1 thruthrough 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,
   
2016 $50,000 
2017  50,000 
2018  50,000 
2019  50,000 
  $200,000 

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, 2015.2022.

 

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

 

We do not own any real property. In October 2013,The Company's corporate offices are located in Framingham, MA. During July 2017, we entered into a onethree-year operating lease commencing October 1, 2017 and one-half year operating sublease agreementending on September 30, 2020 at our current location, pursuant to which we leased the office space of our relocated headquarters in Wellesley, Massachusetts for a baseare obliged to pay annual rent equal to $5,031 per month. In April 2015,of $38,400 during the first year, $39,600 during the second year and $42,000 during the third year. During August 2020, we movedextended the lease through September 30, 2021 at our corporate offices to a property in Framingham, Massachusetts. We entered into a month-to-month operating lease agreement,current location pursuant to which we are obligated to pay monthlyannual rent of $2,000, with$42,000. During October 2021 we extended the lease for six months through March 31, 2022 at our current location pursuant to which we are obligated to pay $21,000. As of April 1, 2022 we have converted our current lease to a minimum six month commitment.monthly rental and are obligated to pay $3,500 per month. As of September 30, 2022 and 2021, there was no ROU asset or liability. We believe our present offices are suitable for our current and planned near-term operations.

 

F-22

16.

13.Immaterial Corrections to Prior Period Financial Statements

RISKS AND UNCERTAINTIES - COVID-19 AND GEOPOLITICAL CONFLICTS

 

The Company has determined that there had been an immaterial errorsources its materials and services for its products and product candidates from facilities in its accounting forareas impacted or which may be impacted by the Series A Warrants, Series C Warrants, and Series D Warrants contained in its consolidated financial statements for the three and nine months ended June 30, 2015 filed with the Securities Exchange Commission on August 7, 2015. The Company determined that the Series A Warrants, Series C Warrants and Series D Warrants should have been presented in stockholders’ equity instead of as a liability. The Company assessed the materiality of this error in accordance with Staff Accounting Bulletin No. 99,Materiality, and the Company determined that, qualitatively,, the amounts would have no bearing on the decision making process of a reasonable investor. The Company intends to revise its consolidated financial statements for the periods ended June 30, 2015 through subsequent periodic filings.An adjustment was made to correct the error by increasing additional paid-in capital by $5,721,957, decreasing the long-term derivative liabilities, net of current portion by $6,344,817 and decreasing the fair value mark to market of derivative by $622,860

The following table sets forth the effectsoutbreak of the adjustments discussed above on the consolidated balance sheet as at June 30, 2015.

  Previously  Increase   
  Reported   (Decrease)  Restated 
  $  $  $ 
Liabilities            
Derivative liabilities, net of current portion  6,344,817   (6,344,817)  - 
Total long-term liabilities  7,491,377   (6,344,817)  1,146,560 
Total liabilities  9,383,266   (6,344,817)  3,038,449 
             
Stockholders’ deficit            
Additional paid-in capital  8,566,193   5,721,957   14,288,150 
Accumulated deficit  (14,624,760)  (622,860)  (14,001,900)
Total stockholders’ deficit  (6,065,411)  6,344,817   279,406 

COVID-19 or geopolitical conflicts. The following table sets forth the effects of the adjustments discussed above on the consolidated statement of operations for the three and nine months ended June 30, 2015

  Three months ended  Nine Months Ended 
  Previously
Reported
  Increase
(Decrease)
  Restated  Previously
Reported
  Increase
(Decrease)
  Restated 
  $  $  $  $  $   $ 
(Increase)/decrease to fair value of derivative  (925,384)  (622,860)  (302,524)  2,924,064   (622,860)  3,546,924 
Total other income (expense)  (57,016)  (622,860)  565,844   2,013,925   (622,860)  2,636,785 
Net (loss)/income  (1,395,245)  (622,860)  (772,385)  (1,850,066)  (622,860)  (1,227,206)

F-23

The following table sets forth the effects of the adjustments discussed above on the consolidated statement of cash flow as at June 30, 2015

  Previously
Reported
  Increase
(Decrease)
  Restated 
  $  $  $ 
Net (loss)  (1,850,066)  (622,860)  (1,277,206)
Decrease to fair value of derivative  (2,924,064)  622,860   (3,546,924)

14.Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been madeCompany’s ability to the Consolidated Statements of Cash Flows for fiscal year ended September 30, 2014, to identify the non cash expense for the issuance of warrants of $7,541,693. This change in classification does not affect previously reported cash flows from operating activities in the Consolidated Statements of Cash Flows

15.SUBSEQUENT EVENTS

During the period commencing October 1, 2015 and ending on December 10, 2015, an additional 255,000 of Convertible Notes and $12,470 of accrued interest have been converted for an aggregate issuance of 1,337,347 shares ofobtain future inventory may be impacted, therefore potentially affecting the Company’s Common Stock.

F-24

Arch Therapeutics, Inc.
Consolidated Balance Sheets
As of March 31, 2016 (Unaudited) and September 30, 2015

  March 31, 2016
(Unaudited)
  September 30,
2015
 
ASSETS        
Current assets:        
Cash $1,669,249  $3,960,100 
Prepaid expenses and other current assets  90,119   42,919 
Total current assets  1,759,368   4,003,019 
         
Total assets $1,759,368  $4,003,019 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Accounts payable $135,615  $231,761 
Accrued expenses and other liabilities  163,386   245,478 
Convertible notes, net of unamortized discount  100,000   473,747 
Current derivative liabilities  -   335,092 
Total current liabilities  399,001   1,286,078 
         
Long-term liabilities:        
Note payable, net of unamortized discount  972,353   966,824 
Accrued interest, net of current portion  270,500   210,000 
Total long-term liabilities  1,242,853   1,176,824 
         
Total liabilities  1,641,854   2,462,902 
         
Commitments and contingencies        
         
Stockholders’ equity:        
         
Common stock, $0.001 par value, 300,000,000 shares authorized, 110,423,588 and 107,592,205 shares issued and outstanding as of March 31, 2016 and September 30, 2015, respectively  110,424   107,392 
Additional paid-in capital  18,139,021   17,154,945 
Accumulated deficit  (18,131,931)  (15,722,220)
Total stockholders’ equity  117,514   1,540,117 
         
Total liabilities and stockholders' equity $1,759,368  $4,003,019 

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

F-25

Arch Therapeutics, Inc.
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended March 31, 2016 and 2015

  Three Months Ended
March 31, 2016
  Three Months Ended
March 31, 2015
  Six Months Ended
March 31, 2016
  Six Months Ended
March 31, 2015
 
             
Revenues $-  $-  $-  $- 
                 
Operating expenses:                
General and administrative expenses  868,433   853,177   1,733,946   1,723,533 
Research and development expenses  386,285   402,495   800,288   802,230 
Total operating expenses  1,254,718   1,255,672   2,534,234   2,525,763 
                 
Operating loss  (1,254,718)  (1,255,672)  (2,534,234)  (2,525,763)
                 
Other income (expense):                
Interest expense  (66,823)  (50,556)  (210,569)  (78,320)
Gain on exercise of warrants and conversion of debt  13,503   -   142,964   224,000 
Loss on warrant derivative modification  -   (624,016)  -   (1,924,186)
Decrease to fair value of derivative  54,982   1,096,278   192,128   3,849,448 
Total other income  1,662   421,706   124,523   2,070,942 
                 
Net loss $(1,253,056) $(833,966) $(2,409,711) $(454,821)
                 
Earnings per share - basic and diluted                
Net loss per common share - basic and diluted $(0.01) $(0.01) $(0.02) $(0.01)
Weighted common shares - basic and diluted  109,524,010   76,076,487   109,069,824   74,716,734 

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

F-26

Arch Therapeutics, Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended March 31, 2016 and 2015

  Six Months Ended
March 31, 2016
  Six Months Ended
March 31, 2015
 
Cash flows from operating activities:        
Net loss $(2,409,711) $(454,821)
Adjustments to reconcile net loss to cash  used in operating activities:        
Stock-based compensation  358,330   609,272 
Noncash interest expense on notes payable  210,569   78,320 
Issuance of restricted stock for services  52,500   8,625 
Gain on exercise of warrants and conversion of debt  (142,964)  (224,000)
Loss on warrant derivative modification  -   1,924,186 
Decrease to fair value of derivative  (192,128)  (3,849,448)
Changes in operating assets and liabilities:        
(Increase) decrease in:        
Prepaid expenses and other current assets  (47,200)  11,029 
Increase (decrease) in:        
Accounts payable  (96,146)  28,267 
Accrued expenses and other liabilities  (64,101)  58,650 
Net cash used in operating activities  (2,330,851)  (1,809,920)
         
Cash flows from financing activities:        
Proceeds from exercise of warrants  40,000   800,000 
Proceeds from issuance of convertible notes  -   750,000 
Net cash provided by financing activities  40,000   1,550,000 
         
Net increase in cash  (2,290,851)  (259,920)
         
Cash, beginning of period  3,960,100   833,520 
         
Cash and cash equivalents, end of period $1,669,249  $573,600 
         
Non-cash financing activities        
Conversion of 8% convertible notes and accrued interest to common stock $536,278  $- 

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

F-27

ARCH THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Organization and Description of Business

Arch Therapeutics, Inc., (together with its subsidiary, the “Company” or “Arch”) was incorporated under the laws of the State of Nevada on September 16, 2009, under the name “Almah, Inc.” to pursue the business of distributing automobile spare parts online. Effective June 26, 2013, the Company completed a merger (the “Merger”) with Arch Biosurgery, Inc. (formerly known as Arch Therapeutics, Inc.), a Massachusetts corporation (“ABS”), and Arch Acquisition Corporation (“Merger Sub”), the Company’s wholly owned subsidiary formed for the purpose of the transaction, pursuant to which Merger Sub merged with and into ABS and ABS thereby became the wholly owned subsidiary of the Company. As a result of the acquisition of ABS, the Company abandoned its prior business plan and changed its operations to the business of a biotechnology company. Our 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 unaudited interim consolidated financial statements prior to the Merger are those of ABS. All share information has been restated to reflect the effects of the Merger. The Company’s financial information has been consolidated with that of ABS after consummation of the Merger on June 26, 2013, and the historical financial statements of the Company before the Merger have been replaced with the historical financial statements of ABS before the Merger in this report.

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

The Company has generated no operating revenues to date, and is devoting substantially all of its efforts toward product research and development. To date,future revenue stream. In addition, the Company has historically and principally raised capitalfunded its operations through debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stockCommon 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 willwarrants which may also be required to raise additional capital, obtain alternative means of financial support, or both, prior to or during October 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 aboutimpacted by economic conditions beyond the Company’s ability to continue as a going concern. The unaudited interim 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, 2015, filed with the SEC on December 11, 2015.

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For a complete summary of our significant accounting policies, please refer to Note 2 included in Item 15 of our Form 10-K for the fiscal year ended September 30, 2015. There have been no material changes to our significant accounting policies during the six months ended March 31, 2016.

Basis of Accounting

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

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) 2016-09, “Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting” was issued by the Financial Accounting Standards Board (FASB) in March 2016. The purpose of this amendment is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. 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, 2016. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations, financial position or disclosures.

ASU 2016-02, “Leases (Topic 842)” was issued by the FASB in February 2016. The purpose of this amendment requires the recognition of lease assets and lease liabilities by lessees for those leases previously classified as operating leases. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations, financial position or disclosures.

ASU 2015-17, “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes” was issued by the FASB in November 2015. The purpose of this amendment requires deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position. 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, 2017. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations, financial position or disclosures.

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 adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations, financial position or disclosures.

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 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 2014-16, “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.

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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 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. 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” 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents as of March 31, 2016 and September 30, 2015.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash. The Company maintains its cash in bank 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.

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 future 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 six month periods ended March 31, 2016 and 2015 there were no impairments of long-lived assets.

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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 through 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 the 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 March 31, 2016 and September 30, 2015.

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, which 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 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.

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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 its 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. 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.

At March 31, 2016 and September 30, 2015, the carrying amounts of cash, accounts payable, accrued liabilities, and convertible notes approximate fair value because of their short-term nature. The fair value of note payable, which is influenced by interest rates and the company’s liquidity, approximates carrying value.

Subsequent Events

The Company evaluated all events or transactions that occurred through April 27, 2016 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 unaudited interim consolidated 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 unaudited interim 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. The continuation of our business as a going concern is dependent upon raising additional capital and eventually attaining and maintaining profitable operations. As of March 31, 2016, 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 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.

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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, 2015, a maximum number of 13,114,256 shares of the Company’s authorized and available common stock could be issued in the form of: options, stock appreciation rights, sales or bonuses of restricted stock, restricted stock units or dividend equivalent rights, and an award may consist of one such security or benefit, or two or more of them in any combination or alternative. The 2013 Plan provides that on the first business day of each fiscal year commencing with fiscal year 2014, the number of shares of our common stock reserved for issuance under the 2013 Plan for all awards except for incentive stock option awards will be subject to increase by an amount equal to the lesser of (A) 3,000,000 Shares, (B) four (4) percent of the number of shares outstanding on the last day of the immediately preceding fiscal year of the Company, or (C) such lesser number of shares as determined by the Company’s Board of Directors (the “Board”). The exercise price of each option shall be the fair market value as determined in good faith by the Board at the time each option is granted. On October 1, 2015, the aggregate number of authorized shares under the Plan was further increased by 3,000,000 shares to a total of 16,114,256 shares.

As of March 31, 2016, a total of 8,479,212 options had been issued to employees and directors and 4,652,500 options had been issued to consultants. The exercise price of each option has either been equal to the closing price of a share of our common stock on the date of grant or has been determined to be in compliance with Internal Revenue Section 409A.

Share-based awards

During the three and six months ended March 31, 2016, the Company did not grant 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 outstanding during the three and six months ended March 31, 2016 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 six months ended March 31, 2016; expected volatility, 76.57% - 119.44%, risk-free interest rate, 0.58% - 2.40%, 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 uncertainties resulting from geopolitical conflicts, including the historical daily changerecent war in Ukraine. The extent to which the market price forCOVID-19 and recent events in Ukraine will impact the peer group as determined byglobal economy and the Company.Company is uncertain and cannot be reasonably measured.

[] Units

 

For so called “plain vanilla” options granted to employees, the expected termEach Unit Consisting 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 unaudited interim 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.

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Stock compensation plan activity is as follows:

Common Stock Options

Stock compensation activity under the 2013 Plan for the six months ended March 31, 2016 follows:

  Option 
Shares 
Outstanding
  Weighted 
Average 
Exercise 
Price
  Weighted 
Average 
Remaining 
Contractual 
Term (years)
  Aggregate 
Intrinsic 
Value
 
Outstanding at September 30, 2015  10,776,500  $0.30   -  $- 
Awarded  -   -   -   - 
Exercised  -   -   -   - 
Forfeited  (37,500) $0.22   -   - 
Outstanding at March 31, 2016  10,739,000  $0.31   5.67   593,828 
Vested  9,816,751  $0.31   4.87   434,330 
Vested and expected to vest at March 31, 2016  10,739,000  $0.31   5.67   593,828 

As of March 31, 2016, 4,381,704 shares are available for future grants under the 2013 Plan. Share-based compensation expense recorded in the Company’s unaudited interim consolidated statements of operations for the three months ended March 31, 2016 and 2015 resulting from outstanding stock option awards to the Company’s employees, directors and consultants was approximately $210,000 and $331,000, respectively. Of this amount during the three months ended March 31, 2016 and 2015, approximately $114,000 and $153,000 respectively was recorded to research and development expenses, and approximately $96,000 and $178,000, respectively was recorded in general and administrative expenses in the Company’s unaudited interim consolidated statements of operations. Share-based compensation expense recorded in the Company’s unaudited interim consolidated statements of operations for the six months ended March 31, 2016 and 2015 resulting from outstanding stock option awards to the Company’s employees, directors and consultants was approximately $358,000 and $609,000, respectively. Of this amount during the six months ended March 31, 2016 and 2015, approximately $168,000 and $274,000 respectively was recorded to research and development expenses, and approximately $190,000 and $335,000, respectively was recorded in general and administrative expenses in the Company’s unaudited interim consolidated statements of operations.

As of March 31, 2016, there is approximately $219,000 of unrecognized compensation expense related to unvested stock-based compensation arrangements granted under the 2013 Plan. That cost is expected to be recognized over a weighted average period of 1.18 years.

4.2015 RESTRICTED STOCK

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 sharesOne Share of Common Stock subjectand

One Warrant 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 the shares of common stock granted to each of Excelsior and Mr. Exley vested immediately upon issuance, and the remaining 150,000 shares were 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 sharesPurchase One Share 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.

 

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Restricted stock activity for the six months ended March 31, 2016 is as follows:

Restricted Stock
Non Vested at September 30, 2015150,000
Awarded-
Vested(150,000)
Forfeited-
Non Vested at March 31, 2016-

The weighted average restricted stock award date fair value information for the six months ended March 31, 2016 is as follows:

Non Vested at September 30, 2015 $0.35 
Awarded  - 
Vested  0.35 
Forfeited  - 
Non Vested at March 31, 2016 $- 

For the three and six months ended March 31, 2016, compensation expense recorded for the restricted stock awards was $0 and $52,500, respectively.

5.8% CONVERTIBLE NOTES

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.

During the three months ended March 31, 2016, $195,000 of Notes and $15,381 of accrued interest were converted into 1,051,904 shares of the Company’s Common Stock. During the six months ended March 31, 2016, $505,000 of Notes and $31,278 of accrued interest were converted into 2,681,383 shares of the Company’s Common Stock. As of March 31, 2016 and September 30, 2015 principal amounts outstanding under the Notes amounted to $100,000 and $605,000, respectively. On April 4, 2016, the remaining $100,000 of Notes and $8,622 of accrued interest were converted into 543,111 shares of the Company’s Common Stock.

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.

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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 fair value 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 Notes, which is being accreted to interest expense over the life of the loan. For the three and six months ended March 31, 2016, $29,101 and $131,252, respectively of the loan discount has been accreted to interest expense. As of March 31, 2016 the accreted balance of the outstanding Notes was $100,000. On April 4, 2016, the remaining $100,000 of Notes and $8,622 of interest were converted into 543,111 shares of the Company’s Common Stock.

As a result of the conversion of notes we recorded other income of $13,503 and $142,964 for the three and six months ended March 31, 2016, respectively and due to the change in the estimated fair value of the derivative liability we recorded other income of $54,982 and $192,128 for the three and six months ended March 31, 2016, respectively. As of March 31, 2016, the remaining derivative liability balance was deemed to be immaterial to the accompanying unaudited interim consolidated financial statements.

Fair Value Measurements Using Significant Unobservable   
Inputs   
(Level 3)   
    
  Convertible
Debt Derivative Liability
 
Beginning balance at September 30, 2015 $335,092 
     
Conversion of notes  (142,964)
     
Adjustments to estimated fair value  (192,128)
     
Ending balance at March 31, 2016 $- 

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The derivative liability was valued as of September 30, 2015, October 29, 2015 (weighted average conversion date) and December 31, 2015 using Monte Carlo Simulations with the following assumptions:

  September 30,  October 29,  December 31, 
  2015  2015  2015 
             
Stated interest rate  8.0%  8.0%  8.0%
Exercise price per share $0.20  $0.20  $0.20 
Expected volatility  80.0%  85.0%  110.0%
Risk-free interest rate  0.07%  0.14%  0.16%
Credit adjusted discount rate  22.0%  22.0%  25.0%
Remaining expected term of underlying securities (years)  0.46   0.38   0.21 

6.NOTE PAYABLE

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 principal 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 March 31, 2016.

Of the $1,000,000, the Company allocated $944,707 to the loan and $55,293 to the warrants. The warrant valuation was derived at the date of grant 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 being accreted to interest expense over the life of the loan. For both the three months ended March 31, 2016 and 2015, $2,764 of the loan discount has been accreted to interest expense. For both the six months ended March 31, 2016 and 2015, $5,529 of the loan discount has been accreted to interest expense. As of March 31, 2016 and September 30, 2015 the accreted balance of the MLSC Loan was $972,353 and $966,824, respectively. 

7.2014 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 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.

F-37

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 expired on the earlier of 12 months after their issuance date or 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 or 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 valuation model. 

F-38

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 the March 13, 2015 amendment, the Company recognized a loss on the modification of warrants in the amount of $624,016, which was determined using Monte Carlo Simulation.

On June 22, 2015 the Company entered into an 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”). All 570,000 Inducement Shares have been issued. As of June 22, 2015, the Company determined that its Series A and C Warrants were eligible for equity classification due to the elimination of the full ratchet anti-dilution provision. As a result, as of June 22, 2015, the derivative liabilities were reclassified as equity within the Company’s consolidated financial statements. 

During the three and six months ended March 31, 2016, Series C Warrants had been exercised on a cash basis for an aggregate issuance of 200,000 shares of the Company’s Common stock resulting in gross proceeds to the Company of $40,000. During the three and six months ended March 31, 2015, Series B Warrants had been exercised on a cash basis 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.

8.2015 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 Note 7, 2014 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.

F-39

On the Initial Closing Date, the Company entered into a registration rights agreement with the Initial Investors (the “ 2015 Registration Rights Agreement”), pursuant to which the Company was obligated, subject to certain conditions, to file with the Securities and Exchange Commission within 90 days after the closing of the 2015 Private Placement Financing one or more registration statements (any such registration statement, a “Resale Registration Statement”) to register the 2015 Shares and the 2015 Warrant Shares for resale under the Securities Act 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. On October 27, 2015, we received from the SEC a Notice of Effectiveness of our Registration Statement related to the 2015 Private Placement Financing which satisfied some of our obligation to register these securities with the SEC.

Following each Closing, each 2015 Investor was also issued Series D Warrants to purchase shares of the Company’s Common Stock up to 100% of the 2015 Shares purchased by such 2015 Investor under such 2015 Investor’s Subscription Agreement. The Series D Warrants have an exercise price of $0.25 per share, are exercisable immediately after their issuance and have a term of exercise equal to five years after their issuance date. The number of shares of the Company’s Common Stock into which each of the Series D Warrants is exercisable and the exercise price therefore are subject to adjustment, as set forth in the Series D Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, at 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 the Company.

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. On July 2, 2015, the Company conducted the Second Closing pursuant to which it sold and one of the 2015 Investors purchased 454,387 shares of Common Stock.

Equity Value of Warrants

The Company accounted for the Series D Warrants relating to the aforementioned 2015 Private Placement Financing in accordance with ASC 815-40,Derivatives and Hedging. Because the Series D Warrants are indexed to the Company’s stock, they are classified within stockholders’ equity in the accompanying unaudited interim consolidated financial statements.

9.SUBSEQUENT EVENTS

During the period commencing April 1, 2016 and ending on April 27, 2016, additional Series A and Series C Warrants have been exercised for an aggregate issuance of 2,699,725 shares of the Company’s Common Stock at an exercise price of $0.20 per share, resulting in gross proceeds to the Company of $539,945.  In addition, 1,400,000 Series A Warrants were exercised on a cashless basis, resulting in the issuance of 727,084 shares of the Company’s Common Stock. Also during this period additional Series D Warrants have been exercised for an aggregate issuance of 2,404,227 shares at an exercise price of $0.25 per shares, resulting in gross proceeds to the Company of $601,057. During April 2016, the remaining $100,000 of Notes and $8,622 of accrued interest were converted into 543,111 shares of the Company’s Common Stock. 

F-40

ARCH THERAPEUTICS, INC.

 

PRELIMINARY PROSPECTUS

 

Up to 16,482,082 Shares of Common Stock

 

Prospectus dated ____, 2016

Sole Book-Running Manager

Maxim Group LLC

, 2023

Until      , 2023 (25 days after the date of this prospectus), all dealers that buy, sell or trade our securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

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 “or 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 andThe estimated expenses payable by us in connection with the issuanceoffering described in this registration statement (other than the underwriting discount and distribution of the securities being offered.commissions) will be as follows:

 

EXPENSE AMOUNT 
SEC Registration Fees $1,100 
Legal Fees  100,000 
Accounting Fees  20,000 
Miscellaneous Fees and Expenses  28,900 
     
Total $150,000 

EXPENSE

 

AMOUNT

 

SEC/FINRA Expenses

 

[●]

 

Nasdaq listing and filing fees

 

[●]

 

Reimbursement to underwriters for expenses

 $125,000 

Legal fees and expenses

 $400,000 

Accounting fees and expenses

 

[●]

 

Printing and engraving expenses

 $100,000 

Miscellaneous expenses

 

[●]

 

Total offering expenses

 

[●]

 

 

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 or her 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 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 attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her 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;

 

II-1 

·

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

 

·

by court order.

 

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 or her and liability and expenses incurred by him or her in his or her capacity as a director, officer, employee or agent, or arising out of his or her status as such, whether or not the corporation has the authority to indemnify him or her 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.

 

UponOn July 6, 2022, we entered into a Securities Purchase Agreement, or the closingSPA, with certain institutional and accredited individual investors providing for the issuance and sale of the Merger, we issued an aggregate of 14,645,237(i) 63,833 First Inducement Shares; (ii) First Notes in the aggregate principal amount of $4.23 million that are convertible into an aggregate of 462,801 First Conversion Shares; (iii) First Warrants to purchase up to 425,554 First Warrant Shares; and (iv) First Placement Agent Warrants to purchase up to 31,510 shares of Common Stock.

The First Notes become due and payable on January 6, 2024, or the Maturity Date, and may not be prepaid, in whole or in part, at any time without the written consent of the lead investor, with such prepayment amounts subject to adjustment as a result of certain time-based prepayment premiums set forth in the First Notes; provided, that, the written consent of the lead investor is not required in connection with a prepayment made from the proceeds of an Uplist Transaction. The First Notes bear interest on the unpaid principal balance at a rate equal to ten percent (10%) (computed on the basis of the actual number of days elapsed in a 360-day year) per annum accruing from the First Closing Date until the First Notes become due and payable at maturity or upon their conversion, acceleration or by prepayment, and may become due and payable upon the occurrence of an event of default under the First Notes. Any amount of principal or interest on the First Notes which is not paid when due shall bear interest at the rate of the lesser of (i) eighteen percent (18%) per annum or (ii) the maximum amount allowed by law from the due date thereof until payment in full.

The First Notes are convertible into shares of Common Stock at the option of each holder of the First Notes from the date of issuance at the Conversion Price of $9.14 through the later of (i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined in the First Note); provided, however, certain First Notes include a provision preventing such conversion if, as a result, the holder, together with its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than 4.99% of the outstanding shares of the Common Stock, or as applicable, the Ownership Limitation, immediately after giving effect to the Conversion; and provided further, the holder, upon notice to us, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of 9.99% of the outstanding shares of the Common Stock; and (ii) any increase in the Ownership Limitation will not become effective until the 61st day after delivery of such waiver notice. The Conversion Price is subject to adjustment as set forth in the First Notes.

The First 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 First 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 First Notes; and (v) our breach of any representations or warranties under the First Notes which cannot be cured within five (5) days. Further, events of default under the First Notes also include (i) the unavailability of Rule 144 on or after six (6) months from the First Closing Date or January 6, 2023; (ii) our failure to deliver the shares of Common Stock to the First Note holder upon exercise by such holder of its conversion rights under the First Notes; (iii) our loss of the “bid” price for its Common Stock and/or a market and such loss is not cured during the specified cure periods; (iv) our failure to complete an uplist to any of The Nasdaq Global Market, The Nasdaq Capital Market, NYSE or NYSE American by February 15, 2023, or an Uplist Transaction; and (v) upon completion of an Uplist Transaction, our failure to repay the outstanding balance of the First Notes within two days of receipt of a First Note holder’s demand for repayment.

The First Warrants (i) have an exercise price of $9.94 per share; (ii) have a term of exercise equal to 5 years after their issuance date; (iii) became exercisable immediately after their issuance; and (iv) have a provision preventing the exercisability of such First Warrant if, as a result of the exercise of the First Warrant, the holder, together with its affiliates and any other persons whose beneficial ownership of our Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than the Ownership Limitation. The holder, upon notice to us, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of 9.99% of outstanding shares of our Common Stock to stakeholdersStock; and (ii) any increase in the Ownership Limitation will not become effective until the 61st day after delivery of ABS in exchange for the cancellationsuch waiver notice. The number of their shares, or rights to acquire shares of ABS. The issuanceCommon Stock into which each of the First Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the First Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise).

Pursuant to the 2022 Engagement Letter, that we entered into with Maxim Group LLC, or Maxim, we agreed, among other things, to (i) pay Maxim 10% of the gross proceeds in the First Closing from certain institutional investors, or $240,000, and (ii) issue Maxim, or its designees, warrants to purchase up to 10% of the aggregate number of shares sold to the institutional investors in connection with the MergerFirst Closing, or warrants to stakeholderspurchase up to 31,510 shares of ABS hasCommon Stock. The First Placement Agent Warrants have substantially the same terms as the First Warrants, except that the exercise price of the First Placement Agent Warrants is $10.06 per share and are not been registered underexercisable until six (6) months from the Securities Actdate of 1933, as amended (the “Securities Act”),issuance. We also reimbursed Maxim approximately $58,000 for non-accountable banking fees, legal fees and such shares have beenother expenses. The First Inducement Shares, First Notes, First Warrants and First Placement Agent Warrants were issued and sold in reliance upon an exemption from registration underafforded by Section 4(a)(2) of the Securities Act.

In the Notes Exchange, we issued certain investors Exchanged Notes in the aggregate principal amount of $699,780.93. The Exchanged Notes are convertible into 76,563, shares of Common Stock at a conversion price of $9.14 in exchange for their Series Convertible Notes. The terms of the Exchanged Notes are substantially similar to those of the First Notes. In connection with the issuance of the Exchanged Notes, the Series Convertible Notes holders entered into a subordination agreement on July 6, 2022 to subordinate their rights in respect of the Exchanged Notes to the rights of the investors respect of the First Notes.

On January 18, 2023, we entered into an amendment to the SPA with certain institutional and accredited individual investors providing for the issuance and sale of an aggregate of (i) 9,598 Second Inducement Shares; (ii) Second Notes in the aggregate principle amount of $636,000 convertible into 69,584 Second Conversion Shares; and (iii) Second Warrants to purchase up to 127,968 shares of Common Stock at an exercise price of $9.94 per share. The terms of the Second Notes are substantially similar to those of the First Notes, except that the Second Notes are unsecured. In connection with the Second Closing, we agreed to (i) pay Maxim 10% of the gross proceeds in the Second Closing from the institutional investors, or $50,000, and (ii) issue Second Placement Agent Warrants to purchase up to 6,565 shares of Common Stock to Maxim pursuant to the 2022 Engagement Letter. The Second Placement Agent Warrants have substantially the same terms as the Second Warrants, except that the exercise price of the Second Placement Agent Warrants is $10.06 per share and are not exercisable until six (6) months from the date of issuance. The Second Inducement Shares, Second Notes, Second Warrants and Second Placement Agent Warrants were issued and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act.

On February 11, 2021, we entered into a Securities Purchase Agreement, or the 2021 SPA, with certain institutional and accredited investors providing for the issuance and sale of an aggregate of (i) 215,625 shares of our Common Stock (the “2021 SPA Shares”); and (ii) Series K Warrants to purchase an aggregate of 161,719 shares of Common Stock, at a combined offering price of $32.00 per share and related Series K Warrant. The Series K Warrants (i) have an exercise price of $34.00 per share; (ii) have a term of exercise equal to 5.5 years after their issuance date; (iii) were exercisable immediately after their issuance; and (iv) have a provision preventing the exercisability of such Series K Warrant if, as a result of the exercise of the Series K Warrant, the holder, together with its affiliates and any other persons whose beneficial ownership of Company Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more the Ownership Limitation immediately after giving effect to the exercise of the Series K Warrant. The holder, upon notice to the Company, may increase or decrease the Ownership Limitation; provided that (i) the Ownership Limitation may only be increased to a maximum of 9.99% of the outstanding shares of the Company’s Common Stock; and (ii) any increase in the Ownership Limitation will not become effective until the 61st day after delivery of such waiver notice. The number of shares of the Company’s Common Stock into which each of the Series K Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series K Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise).

Pursuant to an engagement agreement that we entered into with H.C. Wainwright & Co., or the 2021 Placement Agent, we agreed, among other things, to issue the 2021 Placement Agent, or its designees, warrants to purchase up to 7.5% of the aggregate number of shares sold to investors in the 2021 Private Placement Financing, or warrants to purchase up to 16,172 shares, or the 2021 Placement Agent Warrants. The 2021 Placement Agent Warrants have substantially the same terms as the Series K Warrants, except that the exercise price of the 2021 Placement Agent Warrants is $40.00 per share.

The issuance and sale of the 2021 SPA Shares, Series K Warrants, 2021 Placement Agent Warrants, Exchanged Notes, and the shares of Common Stock issuable upon conversion of the Exchanged Notes and upon the exercise of the Series K Warrants and the 2021 Placement Agent Warrants 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 D506(b) 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.

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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 FebruaryJune 4, 2014, pursuant to a securities purchase agreement we entered into with a nine accredited investors (the “2014 Investors”) on January 30, 2014,2020 and June 22, 2020, 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 CJ Warrants to purchase up to an aggregate of 34,200,00019,432 shares of the Company’s Common Stock at an exercise price of $50.00 per share to certain holders of our Series D Warrants as an inducement for aggregate gross proceedsthose holders to us of $2.85 million (the “2014 Private Placement Financing”).exercise their Series D Warrants. The Series J Warrants were exercisable immediately upon their issuance and, saleas originally issued, have a term of exercise equal to one year after their issuance date; provided, however, on November 6, 2020, a Series J Warrant to purchase up to 16,875 shares of Common Stock was amended to extend the term by an additional eighteen (18) months. The number of shares of our Common Stock into which each of the securitiesSeries J Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the 2014 Private Placement Financing hasSeries J Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, the Series J Warrants provide that they shall not been registeredbe exercisable in the event and to the extent that the exercise thereof would result in the holder of the Series J Warrant, together with any person whose beneficial ownership would be aggregated with the holder, beneficially owning more than 4.99% of the outstanding shares of our Common Stock; provided however, the holder may increase such ownership limitation to 9.99% of the outstanding shares of our Common Stock, in which case the ownership limitation increase will become effective 61 days after the holder requests such increase. In addition, each Series J Warrant provides the holder with “piggy back” registration rights under certain circumstances. The Series J Warrant and the Securities Act,shares of Common Stock issuable thereunder were issued and such shares have been issuedsold in reliance upon an exemption from registration underafforded by 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 2014 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 2014 Investors; and the securities were issued as restricted securities.Act.

 

Beginning March 11, 2015 and through March 13, 2015, we entered into a series

On June 4, 2020, we issued unsecured 2016 8%10% Series 1 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$550,000 (the “Series 1 Convertible Notes”). The Series 1 Convertible Notes provide, among other things, for (i) a term of approximately three (3) years; (ii) the ClosingCompany’s ability to prepay the Series 1 Convertible Notes, in whole or in part, at any time; (iii) the automatic conversion of the Notes Offering on March 13, 2015, eachSeries 1 Convertible Notes Investor was issuedupon a Convertible NoteChange of Control (all capitalized terms in this paragraph not otherwise defined to have the meaning ascribed to such terms in the principal amount of $250,000. At any time prior to the March 13, 2016, the holders of theSeries 1 Convertible Notes have the right to convert some or all of such Convertible NotesNotes) into the number of shares of Common Stock determinedat a per share price of $54.00 (the “Series 1 Conversion Price”); (iv) the ability of a holder of a Series 1 Convertible Note to convert the Convertible Note and accrued interest, in whole or in part, into shares of Common Stock at the Series 1 Conversion Price (the “Series 1 Conversion Shares”); (v) the Company’s ability to convert all Note Obligations outstanding upon a Qualified Equity Financing into shares of Common Stock at the Series 1 Conversion Price; (vi) the Company’s ability to convert the Series 1 Convertible Notes and accrued interest, in whole or in part, into shares of Common Stock at the Series 1 Conversion Price in the event the volume weighted average price (“VWAP”) of the Common Stock equals or exceeds $64.00 per share for at least fifteen (15) consecutive Trading Days; (vii) the Company’s ability to convert all outstanding Note Obligations into shares of Common Stock at the Series 1 Conversion Price (an “Series 1 In-Kind Note Repayment”) in lieu of repaying the Note Obligations outstanding on the Maturity Date, June 30, 2023; provided, however, that in the case of a Series 1 In-Kind Note Repayment, the outstanding Note Obligations will be calculated by dividing (a)increasing by thirty-five percent (35%) the aggregate sum of the (i) principal amountunpaid Principal Amount held by each holder and the accrued interest at a rate of the Convertible Noteten percent (10%) per annum, subject to, be converted, and (ii) amount of any accrued but unpaid interest with respect to suchany portion of the Principal Amount that is converted or prepaid before the twelve month anniversary of the Issuance Date, a minimum interest payment equal to ten percent (10%) of the amount that is converted or prepaid. The Series 1 Convertible Note to be converted;Notes and (b) the conversion price then in effect (the shares of Common Stock issuable upon such conversion, the “Series 1 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 (“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 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 theAct.

On November 6, 2020, we issued unsecured 10% Series 2 Convertible Notes Investors represented that it is (and onin the dateaggregate principal amount of any conversion or sale of the$1,050,000 (the “Series 2 Convertible 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”). The Series 2 Convertible Notes Investors; and the securities were issued as restricted securities.

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Beginning June 22, 2015 and through June 30, 2015, we entered intoprovide, among other things, for (i) a seriesterm of substantially similar subscription agreements (each a “2015 Subscription Agreement”) with 20 accredited investors (collectively, the “2015Investors”) providing for the issuance and sale by us 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 ofapproximately three (3) years; (ii) the Company’s common stock, par value $0.001 per share (“Common Stock”, and such shares,ability to prepay the 2015Shares”), and a Series D Warrant to purchase a share of Common Stock at an exercise price of $0.25 per share2 Convertible Notes, in whole or in part, at any time prior totime; (iii) the fifth anniversary of the issuance dateautomatic conversion of the Series D Warrant (the “Series D Warrants,” and2 Convertible Notes upon a Change of Control (all capitalized terms in this paragraph not otherwise defined to have the shares issuable upon exercise ofmeaning ascribed to such terms in the Series D Warrants, collectively, the “Series D Warrant Shares”). Our obligation to issue and sell the 2015 Shares and 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 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 2015 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 2015 Investors purchased 454,387 Units at an aggregate purchase price of approximately $100,000. The issuance and sale of the 2015 Shares, Series D Warrants and Series D 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 2015 Shares and Series D Warrants issued and sold in the 2015 Private Placement Financing and the Series D Warrant Shares issuable upon the exercise of the Series D 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 2015 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 2015 Investors; and such securities will be issued as restricted securities.

On August 6, 2015, we enteredConvertible Notes) 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.

On May 3, 2016, pursuant to the approval of our Board, we issued an aggregate of 2,000,000 shares of our Common Stock pursuant to restricted stock awards granted outside of our 2013 Stock Incentive Plan to (i) Dr. Avtar Dhillon, the Chairman of our Board (737,000 shares); (ii) James R. Sulat, a member of our Board (30,000 shares); (iii) Dr. Terrence W. Norchi, our President, Chief Executive Officer and a member of our Board (1,130,000 shares); and (iv) Richard Davis, our Chief Financial Officer (103,000 shares). 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: each of the restricted stock awardees is an accredited investor as defined in Rule 501 promulgated under the Securities Act; the restricted stock awardees did not acquire the securities with a view towards, or for resale in connection with, the public sale or distribution thereof in violation of applicable securities laws; and the securities were issued as restricted securities.

II-4 

Beginning May 24, 2016 and through May 26, 2016, we entered into a series of substantially similar subscription agreements (each a “2016 Subscription Agreement”) with 18 accredited investors (collectively, the “2016 Investors”) providing for the issuance and sale by the Company to the Investors, in a private placement, of an aggregate of 9,418,334 Units at a purchase price of $0.36 per Unit (the “2016 Private Placement Financing”). Each Unit consisted of a share of Common Stock (the “2016 Shares”), and a Series E Warrant to purchase 0.75 shares of Common Stock, at an exercisea per share price of $0.4380$50.00 (the “Series 2 Conversion Price”); (iv) the ability of a holder of a Series 2 Convertible Note to convert the Series 2 Convertible Note and accrued interest, in whole or in part, into shares of Common Stock at the Series 2 Conversion Price (the “Series 2 Conversion Shares”); (v) the Company’s ability to convert all Note Obligations outstanding upon a Qualified Equity Financing into shares of Common Stock at the Series 2 Conversion Price; (vi) the Company’s ability to convert the Series 2 Convertible Notes and accrued interest, in whole or in part, into shares of Common Stock at the Series 2 Conversion Price in the event the VWAP of the Common Stock equals or exceeds $64.00 per share for at least fifteen (15) consecutive Trading Days; (vii) the Company’s ability to convert all outstanding Note Obligations into shares of Common Stock at the Series 2 Conversion Price (an “Series 2 In-Kind Note Repayment”) in lieu of repaying the Note Obligations outstanding on the Maturity Date, November 30, 2023; provided, however, that in the case of a Series 2 In-Kind Note Repayment, the outstanding Note Obligations will be calculated by increasing by thirty-five percent (35%) the aggregate sum of the unpaid Principal Amount held by each holder and the accrued interest at a rate of ten percent (10%) per annum, subject to, with respect to any time prior toportion of the fifthPrincipal Amount that is converted or prepaid before the twelve month anniversary of the issuance dateIssuance Date, a minimum interest payment equal to ten percent (10%) of the amount that is converted or prepaid. The Series E Warrant (the “Series E Warrants,” and the shares issuable upon exercise of the Series E Warrants, collectively, the “Series E WarrantShares”). The exercise price of the Series E Warrants was set to equal the closing price of our Common Stock on the date of their issuance (May 26, 2016), which was $0.4380, and therefore the Series E Warrants were not issued at a discount to the market price of our Common Stock as of such date. The issuance and sale of the 2016 Shares, Series E Warrants2 Convertible Notes and Series E Warrant2 Conversion Shares in the 2016 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 2016 Shares and Series E Warrants issued and sold in the 2016 Private Placement Financing and the Series E Warrant Shares issuable upon the exercise of the Series E Warrants were issued and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated under Securities Act based on the following facts: each506 of the 2016 Investors has represented that it is an accredited investor as defined in Rule 501Regulation D promulgated under the Securities Act; that it is acquiring the securities for its own account 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 2016 Investors; and the securities were issued as restricted securities.Act.

 

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:

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-5 

 

(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, forstatement; provided, however, that paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply if the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemedinformation required 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 initialbona fideoffering thereof.

(3) To remove from registration by means ofincluded in a post-effective amendment anyby those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the securities being registeredExchange Act 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 includedare incorporated by reference 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.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.

(5)

(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,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)

(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)

(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)

(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)

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

(6)

The undersigned registrant hereby undertakes that:

(i) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance on Rule 430A and contained in a form of prospectus filed by the undersigned registrant pursuant to the purchaser.

(6) Insofar as indemnification for liabilities arisingRule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of 1933 may be permitted to directors, officers and controlling personsthis registration statement as of the registrant pursuanttime it was declared effective; and

(ii) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the foregoing provisions, or otherwise,securities offered therein, and 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 adjudicationoffering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(7)

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.

 

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II-7

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statementRegistration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Framingham, State of Massachusetts, on June 24, 2016.January 23, 2023.

 

 

Arch Therapeutics, Inc.

   
 

By:

/s/ Terrence W. Norchi, MD

  

Terrence W. Norchi, MD

  

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 statementRegistration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

SIGNATURE

 

TITLE

 

DATE

     

/s/ Terrence W. Norchi, MD

 

President, Chief Executive Officer and Director

 June 24, 2016

January 23, 2023

Terrence W. Norchi, MD

 

(Principal Executive Officer)

  
     

/s/ Richard E. DavisMichael S. Abrams 

 

Chief Financial Officer

 June 24, 2016

January 23, 2023

Richard E. Davis

Michael S. Abrams 

 

(Principal Financial and Accounting Officer)

  
     
/s/ Avtar Dhillon

 

Director

 June 24, 2016

January 23, 2023

Dr. Avtar

Punit Dhillon

    
     
/s/ James R. Sulat

*

 

Director

 June 24, 2016

January 23, 2023

James R. Sulat

Guy Fish, MD 

    

Director 

January 23, 2023

Laurence Hicks 

 

II-7 

 

*By: /s/Terrence W. NorchiAttorney-in-Fact

 

EXHIBIT INDEX

 

      

Incorporated By Reference

Exhibit
No.

 

Exhibit Title

 

Filed
Herewith

 

Form

 

Exhibit
No.

 

File No.

 

Filing Date

             

1.1

 

Form of Underwriting Agreement

 

X

        
             

1.2*

 

Form of Warrant Agent Agreement

 

 

        
             

3.1

 

Restated Articles of Incorporation of Arch Therapeutics, Inc.

   

10-Q

 

3.1

 

000-54986

 

07/23/2020

             

3.2

 

Amended and Restated Bylaws, as adopted on August 15, 2022

   

8-K/A

 

3.1

 

000-54986

 

08/17/2022

             

4.1

 

Description of Securities

   

10-K

 

4.1

 

000-54986

 

12/11/2020

             

4.2*

 

Form of Investor Warrant

          
             

4.3

 

Form of Underwriter Warrant

 

X

        
             

5.1*

 

Opinion of McDonald Carano LLP

 

 

        
             

5.2*

 

Opinion of Lowenstein Sandler LLP

 

 

        
             

10.1#

 

Executive Employment Agreement dated June 26, 2013 between Arch Therapeutics, Inc. and Terrence W. Norchi

   

8-K

 

10.8

 

333-178883

 

6/26/2013

             

10.2#

 

First Amendment to Executive Employment Agreement, dated March 23, 2014, by and between Arch Therapeutics, Inc. and Terrence W. Norchi Stock

   

8-K

 

10.1

 

000-54986

 

3/27/2014

             

10.3#

 

Arch Therapeutics, Inc. 2013 Stock Incentive Plan

   

8-K

 

10.1

 

333-178883

 

6/24/2013

10.4#

 

Form of Stock Option Award Agreement under Arch Therapeutics, Inc. 2013 Stock Incentive Plan

   

10-Q

 

10.13

 

000-54986

 

8/14/2013

             

10.5#

 

Form of Restricted Stock Unit Award Agreement under Arch Therapeutics, Inc. 2013 Stock Incentive Plan

   

10-Q

 

10.14

 

000-54986

 

8/14/2013

             

10.6#

 

Form of Restricted Stock Bonus Award Agreement under Arch Therapeutics, Inc. 2013 Stock Incentive Plan

   

10-Q

 

10.15

 

000-54986

 

8/14/2013

             

10.7#

 

Form of Restricted Stock Award Agreement

   

8-K

 

10.2

 

000-54986

 

5/6/2016

             

10.8

 

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

   

8-K

 

10.6

 

333-178883

 

6/26/2013

             

10.9

 

Form of Warrant to Purchase Shares of Common Stock dated September 30, 2013 issued by Arch Therapeutics, Inc. to the Massachusetts Life Sciences Center ((included as Exhibit B in Exhibit 10.22)

   

8-K

 

10.2

 

000-54986

 

10/4/2013

             

10.10

 

Form of MLSC Subordination Agreement

   

8-K

 

10.1

 

000-54986

 

9/9/2013

             

10.11

 

Amendment Agreement to Arch Therapeutics, Inc. Accelerator Funding Agreement dated September 28, 2016 by and between Arch Therapeutics, Inc. and Massachusetts Life Sciences Center

   

8-K

 

10.1

 

000-54986

 

9/29/2016

             

10.12

 

Form of Subscription Agreement

   

8-K

 

10.1

 

000-54986

 

3/13/2015

             

10.13†

 

Project Agreement by and between Arch Therapeutics, Inc. and the National University of Ireland Galway dated May 28, 2015

   

8-K

 

10.1

 

000-54986

 

8/7/2015

             

10.14

 

2018 Securities Purchase Agreement

   

8-K

 

10.1

 

000-54986

 

06/29/2018

             

10.15

 

Form of Series G Warrants

   

8-K

 

10.2

 

000-54986

 

06/29/2018

             

10.16#

 

Offer Letter to Join the Board of Directors of Arch Therapeutics, Inc. dated July 19, 2018, by and between Arch Therapeutics, Inc. and Punit Dhillon

   

8-K

 

10.4

 

000-54986

 

07/20/2018

             

10.17

 

May 2019 Securities Purchase Agreement

   

8-K

 

10.1

 

000-54986

 

05/13/2019

             

10.18

 

Form of Series H Warrants

   

8-K

 

10.2

 

000-54986

 

05/13/2019

             

10.19

 

Form of October 2019 Securities Purchase Agreement

   

8-K

 

10.1

 

000-54986

 

10/18/2019

             

10.20

 

Form of Series I Warrants

   

8-K

 

10.2

 

000-54986

 

10/18/2019

             

10.21

 

2019 Engagement Agreement

   

8-K

 

10.3

 

000-54986

 

10/18/2019

             

10.22

 

Form of 2019 Placement Agent Warrant

   

8-K

 

10.4

 

000-54986

 

10/18/2019

             

10.23

 

Form of Amendment to Series D Warrants to Purchase Common Stock

   

8-K

 

10.1

 

000-54986

 

06/05/2020

             

10.24

 

Form of Series J Warrant

   

8-K

 

10.2

 

000-54986

 

06/05/2020

             

10.25

 

Form of Series 1 Convertible Notes

   

8-K

 

10.3

 

000-54986

 

06/05/2020

             

10.26

 

Amendment to Series J Warrant to Purchase Common Stock

   

8-K

 

10.1

 

000-54986

 

11/10/2020

             

10.27

 

Form of Series 2 Convertible Notes

   

8-K

 

10.2

 

000-54986

 

11/10/2020

             

10.28

 

Form of 2021 Securities Purchase Agreement

   

8-K

 

10.1

 

000-54986

 

2/12/2021

             

10.29

 

Form of Series K Warrant

   

8-K

 

10.2

 

000-54986

 

2/12/2021

             

10.30

 

2021 Engagement Agreement

   

8-K

 

10.3

 

000-54986

 

2/12/2021

             

10.31

 

Form of 2021 Placement Agent Warrant

   

8-K

 

10.4

 

000-54986

 

2/12/2021

             

10.32

 

Form of Registration Rights Agreement

   

8-K

 

10.5

 

000-54986

 

2/12/2021

10.33

 

Executive Employment Agreement, effective May 3, 2021, by and between Arch Therapeutics, Inc. and Michael S. Abrams

   

8-K

 

10.2

 

000-54986

 

5/3/2021

             

10.34

 

Employment Agreement, effective June 30, 2021, by and between Arch Therapeutics, Inc. and Dan M. Yrigoyen

   

8-K

 

10.1

 

000-54986

 

8/11/2021

             

10.35

 

First Amendment to Employment Agreement, effective August 9, 2021, by and between Arch Therapeutics, Inc. and Dan M. Yrigoyen

   

8-K

 

10.2

 

000-54986

 

8/11/2021

             

10.36

 

Form of Securities Purchase Agreement, dated July 6, 2022, by and among the Company and the signatories thereto

   

8-K

 

10.1

 

000-54986

 

7/8/2022

             

10.37

 

Form of First Notes

   

8-K

 

10.2

 

000-54986

 

7/8/2022

             

10.38

 

Form of First Warrant

   

8-K

 

10.3

 

000-54986

 

7/8/2022

             

10.39

 

Form of Registration Rights Agreement, dated July 6, 2022, by and among the Company and the signatories thereto

   

8-K

 

10.4

 

000-54986

 

7/8/2022

             

10.40^

 

Form of Security Agreement, dated July 6, 2022, by and among the Company and the signatories thereto

   

8-K

 

10.5

 

000-54986

 

7/8/2022

             

10.41

 

Form of Second Note

   

8-K

 10.2 

000-54986

 

 1/20/2023

             

10.42

 

Form of Second Warrant

   

8-K

 10.3 

000-54986

  1/20/2023
             

10.43

 

Form of Amended and Restated Registration Rights Agreement, dated January 18, 2023, by and among the Company and the signatories thereto

   

8-K

 10.4 

000-54986

  1/20/2023
             

10.44^

 

Form of Amendment No. 1 to Securities Purchase Agreement, dated January 18, 2023, by and among the Company and the signatories thereto

   

8-K

 10.1 

000-54986

  1/20/2023
             

21.1

 

List of Subsidiaries

   

8-K

 

21.1

 

333-178883

 

6/26/2013

             

23.1

 

Consent of Independent Registered Public Accounting Firm

 

X

        
             

23.2*

 

Consent of McDonald Carano LLP (included in Exhibit 5.1)

 

 

        
             

23.3*

 

Consent of Lowenstein Sandler LLP (included in Exhibit 5.2)

 

 

        
             

24.1**

 

Power of Attorney (included in the signature page to this registration statement)

   

S-1

 

24.1

 

333-268008

 

10/26/2022

             

101.INS

 

Inline XBRLInstance Document

          

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

          

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

          

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

          

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

          

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

          
104 Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101)          

107

 

Filing fee table

 

X

        

Exhibit

*

To be filed by amendment.

**

Previously filed.

Number

^

DescriptionPursuant to Item 601(b)(10) of Exhibit
2.1**AgreementRegulation S-K, certain identified information has been excluded from this exhibit because it is both (i) not material and Plan(ii) would be competitively harmful if publicly disclosed. Further, the schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Merger dated May 10, 2013, by and among Almah, Inc., Arch Acquisition Corporation, and Arch Therapeutics, Inc. (incorporated by reference to Exhibit 2.1Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Current Report on Form 8-K filed by the Company with the SEC on May 13, 2013)(File Number 333-178883)Securities and Exchange Commission upon request.

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)
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)
5.1*Opinion of McDonald Carano LLP.
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)
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)
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)
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)
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)
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)
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)
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)
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)

II-8 

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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)

II-9 

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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
10.40#**Consulting Agreement dated October 15, 2015 by and between Arch Therapeutics, Inc. and Dr. Arthur Rosenthal (incorporated by reference to Exhibit 10.40 of Arch Therapeutics, Inc.’s Registration Statement on Form S-1/A filed with the SEC on October 16, 2015)(File Number 333-206873)

II-10 

10.41#**Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company with the SEC on May 6, 2016) (File Number 000-54986)
10.42**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 June 2, 2016) (File Number 000-54986)
10.43**Form of Series E Warrants (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Company with the SEC on June 2, 2016) (File Number 000-54986)
10.43**Registration Rights Agreement dated May 26, 2016, 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 June 2, 2016) (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)
23.1*Consent of Independent Registered Public Accounting Firm
23.2*Consent of McDonald Carano LLP (included in Exhibit 5.1)
24.1*Power of Attorney (included on the signature page hereto).
101.INS*XBRL Instance Document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document

*Filed herewith.
**Previously filed.
Confidential treatment has been granted as to certain portions of these ExhibitsExhibits.

#

#

Management contract or compensatory plan or arrangement.

 

II-11