Arch Therapeutics Inc (ARTH)

[Regis999]

The Arch Flash Crash Analysis


What happened on July 14, 2016 to ARTH


So I decided to dig deeper after the July 14, 2016 Arch decline when 8,730,581 shares traded and the Arch market price fell $.205 or 25.79% to $.59 a share.


July 14 , 2016 happens to be the SEC effective date for Arch S-1 registration of the May 26, 2016 private placement of 9,418,334 shares of Arch at $.36 and a Series E Warrant to purchase .75 shares or 7,063,750 shares at $ .438 per share EXPIRING May 26, 2021 (5/26/21 !) to 18 investors (12 of which had participated in the 6/30/15 Arch financing for $ 3.166 million for stock at $ .22 and one Series D warrant at $ .25 share expiring 6/30/20)


What was different about the May 26, 2016 Arch private placement:


1) This was the first private placement where less than one warrant was issued with the purchase of one share. In this case it was one share and only .75 warrant.


2) I knew that the 6/30/15 Arch private placement to 19 investors did not result in a decline in the Arch market price upon registration of the shares and warrants. These were high quality long term investors who believed in Arch. I had studied each one them. Some of them were there to provide funding by exercising their warrants. I understood this as they had a purpose.


3) Maxim Group LLC (“Maxim”) was the exclusive institutional investor placement agent for the May 2016 Arch Private placement. They did not participate in prior Arch private placements. I knew Maxim has the very worst reputation on Wall Street for toxic financings and king of death spiral financing.


Maxim was bringing what I call “hot money” into the Arch private placement. All the prior Arch financings were with long term investors.




So the ‘hot money” Maxim investors were six in number whose only interest was to flip the Arch shares and warrants at a profit. As far as these investors were concerned Arch could have been operating in any industry. They did not care.


4) So the Maxim "hot money" in the May 26, 2016 private placement was $ 2,084,000 out of total $ 3,390,600 or 61 %.


The Maxim "hot money" represented 5,788,889 common shares and 4,341,667 warrants or 10,130,556 total. The 4,341,667 Series E warrants that expire 5/26/21 at .438 per warrant or $ 1,901,650 were probably exercised by the Maxim “hot money ” resulting in more cash to Arch.


On July 14, 2016 the date of the S-1 being effective 8,730,581 shares traded and the Arch market price fell $.205 or 25.79% to $.59.


Conclusions: At first I was upset about this then I thought as a shareholder this is actually good because 61% of the Series E warrants expiring 5/26/21 were exercised for cash (to be confirmed by the 6/30/16 Form 10-Q which will be filed in a few weeks) totaling $ 1.9 million.

Prior to the exercise by Maxim “hot money” $ 1.9 million of Series E warrants Arch needed $6.1 million to $ 10.1 million of additional capital for Full Europe and US human trials for the 200 +/- AC5 applications. For biotech these are very small dollars.


By Maxim investors early exercising the warrants it means less cash capital will have to be raised by Arch in the future. Thus less dilution. This is great. As shareholders we want all warrants to be exercised EARLY.


In fact Arch private placement investors have a history of early exercise of their warrants (as shareholders we want this):




Warrant Series A Expires 2/14/19 outstanding 4.0 M At $.20 76.6% have already exercised Original issued 17.1 M


Warrant Series C Expires 7/02/16 outstanding 1.1 M At $.20 90.3% have already exercised Original issued 11.4 M


Warrant Series D Expires 6/30/20 outstanding 11.2 M At $.25 22.2% have already exercised Original issued 14.4 M


Warrant Series E Expires 5/26/21 outstanding 7.1 M At $.438 Possibly Maxim “hot money” just exercised 4.3 million or 61% of the total.


If the Maxim “hot money” has exited imho Arch should return to where it was before but now financially much stronger. The offering to Maxim was in many ways the equivalent to a shelf offering. In retrospect the 8.7 million shares traded on July 14, 2016 were absorbed well by the market. This was the Arch "Flash Crash." This is my analysis of the “Arch Flash Crash” and it may differ from actual events but I sincerely doubt it.

Best Summary of Arch: http://www.archtherapeutics.blogspot.com/