Arch Therapeutics Inc. (OTCBB:ARTH) Plummets After Filing 10-Q

Arch Therapeutics Inc. (OTCBB:ARTH) lost 12.73% once the market had time to properly react to its latest 10-Q hitting the web.

Truth be told, the company’s financials do not look all that horrible, considering the fact that it is a development stage OTC Markets pharmaceutical penny stock. Indeed, in some regards, it is showing definite progress:

  • Cash and cash equivalents – $ 3.2 million
  • Total assets – $3.3 million
  • Total current liabilities – $1.8 million
  • Total liabilities – $9.3 million
  • Net Loss – $1.8 million

However, as seasoned OTC Markets investors have probably guessed by now, the biggest potential pitfall hidden along the ARTH path does not lie in its financial figures. No, as far as those are concerned, ARTH is doing fine – with that much cash on hand, the company should be able to afford to continue its research for a bit longer without a hitch.

As is the norm with OTC Markets pharmaceutical penny stocks, ARTH investor value does not appear to be suffering because of its management’s incompetence or fraudulent intent, but because it has opted to fund its operations through the issuance of stock.

One look at its filings reveals the fact that the dilution of ARTH stock is a very real threat:

  • As of August 5, 2014 ARTH had 72 million shares of common stock outstanding.
  • As of August 5, 2015, ARTH had 101 million shares if common stock outstanding.

And said threat does not look like it is going away any time soon, as the aforementioned 10-Q also contained the following statements on the company’s convertible debt:

  • Convertible notes payable – $498 thousand
  • Long term debt on convertible notes – $964 thousand

Most of the almost half a million in notes payable can convert into shares of common stock at a fixed price of $0.20, or at other serious discounts. Said conversions are responsible for the dilution of ARTH‘s stock and most likely – for the occasional price drops the ticker experiences as well.

Long story short – ARTH does not look like it is in terrible shape financial-wise, but that does not mean that its investors can afford to relax.

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