| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Arch
Therapeutics, Inc. (together with its subsidiary, the “Company” or “Arch”) is a biotechnology company developing
and marketing products based on our innovative AC5® self-assembling technology platform. The Company’s products are in the
field of stasis and barrier applications, which includes managing wounds created during surgery, trauma or interventional care, or from
disease; stopping bleeding (hemostasis); and controlling leaking (sealant). Basis
of presentation The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities
and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally
included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and
regulations. We believe that the disclosures contained in these condensed financial statements are adequate to make the information presented
herein not misleading. These condensed financial statements should be read in conjunction with the financial statements contained in
the Company’s Annual Report on Form 10-K for the year ended September 30, 2023, filed with the SEC. The accompanying condensed
financial statements are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments,
necessary for a fair presentation of the results for the interim periods presented. The balance sheet as of September 30, 2023 is derived from the Company’s
audited financial statements. The results of operations for the three and nine months ended June 30, 2024 are not necessarily indicative
of the results of operations to be expected for the full fiscal year ending September 30, 2024. In
accordance with the “Segment Reporting” Topic of the Accounting Standards Codification, the Company’s chief operating
decision maker (the Company’s President and Chief Executive Officer) determined that the Company has only one The
condensed 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. Going
Concern The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company has not yet generated sufficient revenues to fund operations
and relies on issuance of debt and equity instruments to generate working capital. As reflected in the accompanying condensed financial
statements, for the nine months ended June 30, 2024, the Company recorded a net loss of $ 9,805,472 2,474,405 The
Company expects to incur substantial expenses for the foreseeable future relating to research, development and commercialization of its
current and its potential future products. The Company has not yet generated sufficient revenues to fund operations and relies on issuance
of debt and equity instruments to generate working capital. In evaluating the going concern position of the Company, management has considered
potential funding providers and believes that financing to fund future operations could be provided by equity and/or debt financing.
Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt
financing, or cause substantial dilution for our stockholders, in the case of equity financing. Reverse
stock split 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 1:200, effective January 17, 2023 ARCH
THERAPEUTICS, INC. NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE
AND NINE MONTHS ENDED JUNE 30, 2024 AND 2023 (Unaudited) 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 expense during the reporting
periods. Significant estimates include the assumptions used in the accrual for potential liabilities, the net realizable value of inventory,
the valuation of debt and equity instruments, the fair value of derivative liabilities, valuation of equity instruments issued for services,
and deferred tax valuation allowances. Actual results could differ from those estimates. Revenue The
Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers 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. In circumstances
where the transaction price is not able to be determined at the time of shipment, the Company does not recognize revenue or any receivable
amount until such time that the final transaction price is established. Cost
of Revenue Cost
of revenue includes product costs, warehousing, overhead allocation and royalty expense. 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 stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation-Stock Compensation
ASC 718 Black-Scholes
Model 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 expected life for awards uses the simplified method for all “plain vanilla” options, as defined in ASC 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 the Company’s awards. The dividend yield assumption is based on history and the expectation
of paying no dividends. Stock-based compensation expense, when recognized in the condensed 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 At
June 30, 2024 and September 30, 2023, the carrying amounts of cash, accounts payables and accrued expense and other liabilities
approximate fair value because of their short-term nature. The carrying amounts of the convertible notes payable, senior secured,
convertible notes payable, unsecured and convertible notes payable, Series 2, unsecured, approximate fair value because borrowing
rates and terms are similar to comparable market participants. ARCH
THERAPEUTICS, INC. NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE
AND NINE MONTHS ENDED JUNE 30, 2024 AND 2023 (Unaudited) Warrants The
Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s
specific terms and applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities
from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the
warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether
the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the
Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance
outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of
professional judgment, is conducted when the warrants are issued and at the end each subsequent quarterly period while the warrants are
outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be
recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the
criteria for equity classification, the warrants are required to be liability classified and recorded at their initial fair value on
the date of issuance and remeasured at fair value at each balance sheet date thereafter. Changes in the estimated fair value of the warrants
are recognized as a non-cash gain or loss on the statements of operations. The Company has determined that the warrants issued in June
2018 and May 2019 equity financing (see Note 3) meet the requirements for liability classification. During the nine months ended June
30, 2023, $ 1,158,197 12,019 49,278 Loss
per Common Share Basic
earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number
of shares of common stock outstanding during the year, excluding shares of unvested restricted common stock. Shares of restricted stock
are included in the basic weighted average number of common shares outstanding from the time they vest. Diluted earnings (loss) per share
is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding
plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued,
using the treasury stock method. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding
from the date they are granted. Potential common shares are excluded from the computation when their effect is antidilutive. For the three and nine months ended June 30, 2024, the Company recorded a deemed dividend of $ 730,002 SCHEDULE OF DEEMED DIVIDEND
June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023
For the three months ended For the nine months ended
June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023
Net loss $ (5,654,681 ) $ (1,823,107 ) $ (9,805,472 ) $ (4,525,640 )
Deemed dividend (730,002 ) — (730,002 ) —
Net loss attributed to common shareholders, numerator, basic computation $ (6,384,683 ) $ (1,823,107 ) $ (10,535,474 ) $ (4,525,640 ) For
the periods ended June 30, 2024 and 2023, the calculations of basic and diluted loss per share are the same because potentially dilutive
securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following: SCHEDULE
OF BASIC AND DILUTED LOSS PER SHARE POTENTIAL DILUTIVE SECURITIES
June 30, 2024 June 30, 2023
Stock options 88,275 104,325
Stock warrants 29,736,656 988,417
Convertible notes payable 18,776,444 798,675
Total 48,601,375 1,891,417 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. Risks
and uncertainties – Geopolitical Conflicts The
Company sources its materials and services for its products and product candidates from facilities in areas impacted or which may be
impacted by the outbreak of geopolitical conflicts. The Company’s ability to obtain future inventory may be impacted, therefore
potentially affecting the Company’s future revenue stream. In addition, the Company has historically and principally funded its
operations through debt borrowings, the issuance of convertible debt, and the issuance of units consisting of Common Stock and warrants
which may also be impacted by economic conditions beyond the Company’s control as well as uncertainties resulting from geopolitical
conflicts. The extent to which recent events, including recent wars in Ukraine and Israel/Gaza, will impact the global economy and the
Company is uncertain and cannot be reasonably measured. |
