4. CONVERTIBLE NOTES PAYABLE, SENIOR SECURED

 SCHEDULE OF CONVERTIBLE NOTES PAYABLE, SENIOR SECURED

2022 Notes

In July 2022, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional and accredited individual investors and issued Senior Secured Convertible Promissory Notes (the “2022 Notes”) in the aggregate of $4,230,000 in exchange for cash proceeds of $3,525,000, net of original issue discount (OID) of $705,000.

The 2022 Notes are secured by tangible and intangible assets of the Company, bears interest at a rate of 10% per annum payable at maturity or upon conversion, matures on September 15, 2024, as amended.

Repricing of conversion price

The 2022 Notes were originally convertible into shares of the Company’s common stock at a conversion price of $9.14 per share, subject to a down-round anti-dilution provision that lowers the conversion price if the Company sells shares of common stock or issues convertible debt convertible at a lower price per share. In May and June 2004 the Company issued notes (the “2024 First Notes”, see below) convertible into common stock of the Company at an exercise price of $0.50 per share, resulting in a triggering event lowering the conversion price of the 2022 Notes to $0.50 per share. The Company adopted ASU 2020-06 on October 1, 2022, and following the guidance of ASU 2020-06, no discount was recorded for any incremental value created by the triggering event.

Other

The 2022 Notes contain customary events of default such as automatic increase in the notes’ stated interest rate. Further, events of default under the 2022 Notes also include (i) the unavailability of Rule 144 on or after 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 April 30, 2024 (the “Uplist Transaction”). During the year ended September 2023, for no additional consideration, the 2022 Notes were amended several times in order to allow the Company to issue additional notes payable, extend the completion date for the Uplist Transaction, and amend certain provisions with regards to mandatory conversion of the notes upon the Uplist Transaction.

ARCH THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2024 AND 2023

(Unaudited)

In connection with the issuance of the 2022 Notes, the Company granted the 2022 Notes noteholders 425,555 warrants to purchase shares of common stock. The warrants are fully vested, exercisable at $0.50 per share, as effected by the down round provision, and expire in 5 years. The Company estimated the relative fair value of the warrants to be $1,470,000 using the Black Scholes option pricing model. The Company also issued note holders 63,834 shares of the Company’s common stock with a relative fair value of $315,000. The Company also issued 31,510 warrants to purchase shares of common stock to the placement agent that assisted in the 2022 Notes offering. The placement agent warrants are fully vested, exercisable at $10.06 per share and will expire in 5 years. The Company estimated the relative fair value of the placement agent warrants to be $108,000 using the Black Scholes option pricing model. The Company incurred direct legal and professional fees of $271,000 as part of this offering.

The Company recorded 2022 Notes with total principal of $4,230,000. In addition, total debt discount of $2,870,000 was recorded to account for the 2022 Notes OID of $705,000, the relative fair value of the warrants of $1,578,000, the relative fair value of common stock issued of $315,000, and direct legal and professional fees incurred in the 2022 Notes offering of $271,000. The debt discount was amortized in full over the original term of the notes using the effective interest rate method.

Subsequent to issuance, for no additional consideration, the 2022 Notes were amended several times in order to allow the Company to issue additional notes payable, extend the completion date of the Uplist Transaction, and amend certain provisions with regards mandatory conversion of the notes upon the Uplist Transaction.

On February 14, 2024, the Company entered into an amendment to the 2022 Notes, under which 95% of the principal amount of the Notes shall automatically convert, upon the closing of an Uplist Transaction, as defined, with a conversion price of $0.50 per share, into pre-funded warrants with an exercise price of $0.000125 per share, exercisable immediately. In addition, the note holder shall receive a warrant to purchase 80 times the dollar amount of the notes that are converted, with an exercise price of $0.50 per share.

On June 30, 2024, the 2022 Notes were again amended in order to extend the maturity date to August 15, 2024. There was no compensation provided to the noteholder nor any changes in the other terms of the notes payable.

On August 15, 2024, the 2022 Notes were again amended in order to extend the maturity date to September 15, 2024. There was no compensation provided to the noteholder nor any changes in the other terms of the notes payable.

As of September 30, 2023, outstanding balance of the 2022 Notes payable was $4,230,000 and unamortized debt discount was $710,897, or a net balance of $3,519,103. On December 26, 2023, the Company issued a total of 2,000 shares of Common Stock with a fair value of $18,280 in partial satisfaction of the outstanding Senior Secured Convertible Promissory Notes with the principal balance of $18,280. During the nine months ended June 30, 2024, the Company amortized debt discount of $710,897. As of June 30, 2024, the outstanding balance of the 2022 Notes payable amounted to $4,211,720 and no unamortized debt discount was remaining.

2024 First Notes

In May and June 2024, the Company issued senior secured convertible promissory notes (the “2024 First Notes”) in the aggregate of $2,490,000 in exchange for cash of $2,075,000, net of original issue discount (OID) of $415,000. The 2024 First Notes are secured by the Company’s tangible and intangible assets, bears interest at a rate of 10% per annum, convertible to common stock at a conversion price of $0.50 per share. The 2024 First Notes originally matured June 30, 2024, and were amended to mature on August 15, 2024. The OID was recorded as a debt discount and was amortized in full to interest expense over the original term of the notes payable.

The 2024 First Notes also contain customary events of default similar to the 2022 Notes. Furthermore, upon the closing of a transaction that results in the Uplist of the Company’s common stock to a national exchange, 100% of the outstanding principal of the 2024 First Notes will automatically convert into shares of common stock at a conversion price of $0.515625 per share. In addition, each Note Holder shall receive (i) a warrant to purchase a number of shares of common stock equal to the number of shares of common stock issued upon automatic conversion following the Uplist transaction with an exercise price of $0.50 per share and (ii) pre-funded warrants in lieu of common shares otherwise issuable to each Note Holder with an exercise price of $0.000125.

On June 30, 2024, the 2024 First Notes were amended in order to extend the maturity date to August 15, 2024. There was no compensation provided to the noteholder nor any changes in the other terms of the notes payable.

On August 15, 2024, the 2024 First Notes were amended in order to extend the maturity date to September 15, 2024. There was no compensation provided to the noteholder nor any changes in the other terms of the notes payable.

During the three and nine months ended June 30, 2024, the Company amortized debt discount of $415,000. As of June 30, 2024, the outstanding balance of the 2024 First Notes amounted to $2,490,000 and no unamortized debt discount was remaining.