Quarterly report pursuant to Section 13 or 15(d)

Note 8 - Derivative Liabilities

Note 8 - Derivative Liabilities

6 Months Ended

Mar. 31, 2023

8. 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 was 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.

On the respective closing dates of June 28, 2018 and May 12, 2019, respectively, 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.

On March 10, 2023, Arch Therapeutics, Inc. entered into exchange agreements (the “Exchange Agreements”) with each holder (the “Warrantholders”) of the Company’s outstanding Series G Warrants to purchase shares of the Company’s common stock, par value $0.001 per share at an exercise price of $140.00 per share and the Company’s outstanding Series H Warrants to purchase shares of Common Stock at an exercise price of $80.00 per share. Pursuant to the Exchange Agreements, the Warrantholders exchanged 34,013 Series G Warrants for 3,402 shares of Common Stock and 43,077 Series H Warrants for 8,617 shares of Common Stock.

During the three months ended March 31, 2023, $1,158,197 was recorded to gain on extinguishment of derivative liability for the exchange of the Series G warrants and Series H warrants and $49,278 was recorded as part of shareholder’s deficit. During the three months ended March 31, 2023 and 2022, $0 and $1,000,000, respectively was recorded to decrease the fair value of derivative liability related to the Series F warrants.

Fair Value Measurements Using Significant Unobservable Inputs – Six Months Ended March 31, 2023
(Level 3)	Series G			Series H

Beginning balance at September 30, 2022	$	748,275		$	459,200
Exchange of warrants into common stock		(13,948	)		(35,330	)
Extinguishment of derivative liabilities		(734,327	)		(423,870	)
Ending balance at March 31, 2023	$	—		$	—

Fair Value Measurements Using Significant Unobservable Inputs - Six Months Ended March 31, 2022
(Level 3)	Series F			Series G		Series H

Beginning balance at September 30, 2021	$	1,000,000		$	748,275	$	459,200
Issuances		—			—		—
Adjustments to estimated fair value		—			—		—
Expiration of derivative liability		(1,000,000	)		—		—
Ending balance at March 31, 2022	$	—		$	748,275	$	459,200

The derivative liabilities as of March 10, 2023 and September 30, 2022 are valued at the greater of their minimum value or by using the Black Scholes Model with the following assumptions.

As of March 10, 2023, the derivative liabilities are recorded at their minimum value.

	Series G			Series H
Closing price per share of Common Stock	$	4.10		$	4.10
Exercise price per share	$	140.00		$	80.00
Expected volatility		179.41	%		141.03	%
Risk-free interest rate		4.91	%		4.75	%
Dividend yield		-			-
Remaining expected term of underlying securities (years)		0.24			1.31

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	$	3.84		$	3.84
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