5. CONVERTIBLE NOTES PAYABLE, UNSECURED

 SCHEDULE OF CONVERTIBLE NOTES PAYABLE UNSECURED

Exchanged Notes (July 2022)

In relation to the issuance of the 2022 Notes (see Note 4), certain noteholders of the Company’s Series 2 note payable agreed to exchange their Series 2 notes payable consisting of $600,000 principal and accrued interest of $99,781 for $699,781 of Unsecured Convertible Promissory Notes (the “Exchanged Notes”) on substantially the same terms as the 2022 Notes, except that the Exchanged Notes are subordinate to the 2022 Notes and are unsecured. The notes bear interest at a rate of 10% per annum payable at maturity or upon conversion, mature September 15, 2024, as amended. The Exchanged Notes also contain customary events of default similar to the 2022 Notes (see Note 4). The Exchanged 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 was triggered in May 2024 (see Note 4) and resulted in the conversion price being reduced to $0.50 per share.

Subsequent to issuance, for no additional consideration, the Exchanged 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 June 30, 2024, the Exchanged 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 Exchanged 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.

Second Closing Notes (January 2023)

In January 2023, the Company issued Unsecured Convertible Promissory Notes (the “Second Closing Notes”) in the aggregate of $636,000 in exchange for cash proceeds of $530,000, net of original issue discount (OID) of $106,000. The notes are unsecured, bear interest at a rate of 10% per annum, matures on September 15, 2024, as amended. The Second Closing Notes also contain customary events of default similar to the 2022 Notes (see Note 4). The Second Closing 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 was triggered in May 2024 (see Note 4) and resulted in the conversion price being reduced to $0.50 per share.

In connection with the issuance of the Second Closing Notes, the Company granted the Second Closing Notes noteholders 127,968 warrants to purchase shares of common stock and 9,589 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 determined the relative fair value of the warrants to be $256,000 and the relative fair value of the 9,598 shares of common stock to be $26,000. The Company also issued 6,565 placement agent warrants to purchase shares of the Company’s common stock. The placement agent warrants are fully vested, exercisable at $10.06 per share and will expire in 5 years. The Company determined the relative fair value of the placement agent warrants to be $13,000. Furthermore, the Company also incurred direct legal and professional fees of $31,000 as part of this offering.

The Company recorded debt discount totaling $432,000 to account for the direct legal and professional fees, OID and the relative fair value of the warrants and common stock. The debt discount was amortized in full over the original term of the notes using the effective interest rate method.

On February 14, 2024, the Company entered into an amendment to the Second Closing 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 Second Closing 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 Second Closing 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.

Third Closing Notes (March, April and May 2023)

In March, April and May 2023, the Company issued Unsecured Convertible Promissory Notes (the “Third Closing Notes”) in the aggregate of $702,720 in exchange for cash proceeds of $488,000, net of original issue discount (OID) of $215,000, and. The notes are unsecured, bear interest at a rate of 10% per annum, matures on June 30, 2024, as amended . The Third Closing Notes contain events of default similar to the 2022 Notes. The Third Closing 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 was triggered in May 2024 (see Note 4) and resulted in the conversion price being reduced to $0.50 per share.

In connection with the issuance of the Third Closing Notes, the Company granted the Third Closing Notes noteholders 141,396 warrants to purchase shares of common stock and 10,608 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 determined the relative fair value of the warrants to be $164,000, and the relative fair value of the 10,608 shares of common stock to be $18,000. The Company also incurred direct legal and professional fees of $5,000 as part of this offering.

The Company recorded debt discount totaling $402,000 to account for the direct legal and professional fees, OID and the relative fair value of the warrants and common stock. 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 Third Closing 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.

ARCH THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2024 AND 2023

(Unaudited)

On February 14, 2024, the Company entered into an amendment to the Third Closing 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 Third Closing 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 Third Closing 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.

Fourth Closing Notes (March 2024)

On March 12, 2024, investors agreed to purchase Unsecured Convertible Promissory Notes (the “Fourth Closing Notes”) in the aggregate principal amount of $648,000 in exchange for cash proceeds of $450,000, net of an OID of $198,000. The notes are unsecured, bears interest at a rate of 10% per annum. The Forth Closing Notes originally matured June 30, 2024, and were amended to mature on August 15, 2024. The Forth Closing 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 was triggered in May 2024 (see Note 4) and resulted in the conversion price being reduced to $0.50 per share.

In connection with the issuance of the Fourth Closing Notes, the Company granted the Fourth Closing Notes noteholders 130,383 warrants to purchase shares of common stock and 9,782 pre-funded warrants. The warrants are fully vested, exercisable at $0.50 per share, as effected by the down round provision, and expire in 5 years, and prefunded warrants have similar terms, however, are exercisable at $0.001 per share. The Company determined the relative fair value of the warrants and pre-funded warrants to be approximately $148,891.

The Company recorded debt discount totaling $346,891 to account for the OID and the relative fair value of the warrants. During the three months ended June 30, 2023, the debt discount was amortized in full over the original term of the notes using the effective interest rate method.

On February 14, 2024, the Company entered into an amendment to the Forth Closing 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 per share of $0.50.

On June 30, 2024, the Fourth Closing 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 Fourth Closing 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.