Executive Summary

Q3 FY2014 (quarter ended June 30, 2014) had no revenue and a $1.15M operating loss, but reported positive net income of $0.41M ($0.01 EPS) driven by a $1.58M non‑cash gain from revaluing warrant derivative liabilities; prior year Q3 was a $(0.51)M net loss (($(0.06)) EPS) and prior quarter (Q2) was a $(8.38)M net loss (($(0.12)) EPS) largely due to the initial warrant liability recognition .
Cash was $1.80M at quarter‑end with negative working capital of $(1.63)M; management reiterated runway only through October 2014 and the need for additional financing to support R&D and operations .
Operationally, Arch advanced toward EU commercialization: selected a Notified Body, progressed manufacturing scale‑up to cGMP, and continued pre‑clinical/biocompatibility work on AC5; CEO highlighted “progress… to date” despite challenges .
Near‑term catalysts/risks: potential first-in-human trial start as early as Q4 CY2014 (dependent on manufacturing, regulatory and biocompatibility milestones) and financing timing/terms; resale registration for financing securities was declared effective July 2, 2014, easing a technical overhang but funding needs remain acute .

What Went Well and What Went Wrong

What Went Well
- Advanced EU regulatory pathway: company selected a Notified Body and outlined steps toward CE mark, a “critical regulatory step on the road to European commercialization” .
- Manufacturing and R&D execution: progressed product development, manufacturing scale‑up to cGMP, and biocompatibility programs for AC5 .
- Management build‑out and disclosure: hired a full‑time CFO (announced July 7, 2014) to remediate controls, and obtained effectiveness of the resale registration statement on July 2, 2014 .
- CEO quote: “we are encouraged by the progress that we have been able to achieve to date, and we remain excited about this opportunity” (Terrence W. Norchi, MD, President & CEO) .
What Went Wrong
- No revenue; operating loss widened vs prior year on higher G&A and R&D as the company scaled operations (G&A $0.826M vs $0.451M; R&D $0.320M vs $0.044M YoY) .
- Liquidity strain: cash $1.80M, negative working capital $(1.63)M, runway only through October 2014; company must raise capital to continue operations .
- Internal control weaknesses persisted (insufficient resources, segregation of duties, lack of audit committee), though management reported remediation efforts underway with the new CFO .

Financial Results

Metric	Q3 2013	Q1 2014	Q2 2014	Q3 2014
Revenue ($)	$0	$0	$0	$0
General & Administrative ($)	$451,046	$523,443	$808,483	$825,951
Research & Development ($)	$43,750	$257,233	$487,090	$320,345
Total Operating Expenses ($)	$494,796	$780,676	$1,295,573	$1,146,296
Operating Income (Loss) ($)	$(494,796)	$(780,676)	$(1,295,573)	$(1,146,296)
Other Income (Expense) ($)	$(19,564)	$(27,765)	$(7,084,583)	$1,557,055
Net Income (Loss) ($)	$(514,360)	$(804,441)	$(8,380,156)	$410,759
Basic EPS ($)	$(0.06)	$(0.01)	$(0.12)	$0.01

Notes: Q2’s large other expense reflects initial recognition of warrant derivative liabilities; Q3’s net income reflects a non‑cash derivative fair value gain .

KPIs and Balance Sheet Highlights

KPI	Q1 2014	Q2 2014	Q3 2014
Cash & Cash Equivalents ($)	$945,398	$2,631,285	$1,802,524
Working Capital ($)	$472,226	$(1,706,674)	$(1,625,391)
Derivative Liabilities ($)	—	$9,906,818	$8,322,000
Shares Outstanding (period-end)	60,145,237	71,926,487 outstanding; 72,076,487 issued	72,076,487

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Estimated cash requirements (FY14)	FY 2014	~$3.6–$3.8M (incl. 6M ended Mar 31, 2014)	~$3.8–$4.0M (incl. 9M ended Jun 30, 2014)	Raised
Cash runway	Through	Through Oct 2014	Through Oct 2014	Maintained
First-in-human clinical trial timing (AC5)	Start window	As early as Q4 CY2014, dependent on manufacturing/regulatory/biocompatibility	As early as Q4 CY2014, dependent on manufacturing/regulatory/biocompatibility	Maintained

Company did not provide revenue, margin, OpEx dollar guidance ranges beyond operating plan spend estimates .

Earnings Call Themes & Trends

(Arch did not publish an earnings call transcript; themes reflect MD&A and press release disclosures.)

Topic	Previous Mentions (Q1 & Q2)	Current Period (Q3)	Trend
Manufacturing scale‑up (cGMP)	Plan to select large-scale partner and initiate cGMP production in Q3 CY2014	Working with large-scale partners to scale up cGMP; ~$750k 12‑mo spend	Progressing per plan
EU regulatory/CE mark	Plan to select Notified Body and engage in regulatory meetings	Notified Body selected; CE path and meetings underway	Positive advancement
Biocompatibility/clinical initiation	Formal & informal biocompatibility in Q2–Q3 CY2014; develop protocols	Informal studies in Q3 CY2014; develop protocols and submit to Ethics Committee	On track
Funding/runway	Runway through Oct 2014; need additional financing	Runway through Oct 2014; need additional financing	Unchanged; acute
Internal controls/leadership	Material weaknesses; intent to hire full‑time CFO	CFO hired July 7, 2014; remediation continues	Incremental improvement

Management Commentary

Strategic progress: “We advanced the product development, manufacturing, and biocompatibility programs. We also selected a Notified Body, which is a critical regulatory step on the road to European commercialization of the AC5 Surgical Hemostatic Device™” (Terrence W. Norchi, MD, President & CEO) .
Capital and liquidity: “We intend to raise additional funding to support further product development, necessary clinical trials and for general corporate expenses” .
Operating focus next 12 months: expand reporting/controls; IP portfolio; cGMP scale‑up; EU regulatory engagement; pipeline selection; informal biocompatibility; clinical protocol development; potential clinical start as early as Q4 CY2014; funding to support milestones .

Q&A Highlights

No earnings call transcript was furnished; disclosures were provided via the 8‑K press release and the 10‑Q MD&A. Key investor focus areas likely include funding runway/terms, EU pathway milestones, and timing prerequisites for first‑in‑human studies .

Estimates Context

Wall Street consensus (S&P Global) for Q3 FY2014 EPS and revenue was unavailable for ARTH; micro‑cap development‑stage coverage appears limited. As a result, no vs‑consensus comparisons are provided (S&P Global consensus unavailable via tool).

Key Takeaways for Investors

Reported profit was non‑operational: Q3 net income and $0.01 EPS were driven by a $1.58M non‑cash derivative fair value gain; core operations remain loss‑making with no revenue .
Liquidity is the gating factor: $1.80M cash and negative working capital with runway only through October 2014 implies near‑term financing is essential; structure/terms (including existing warrant anti‑dilution protections) could be an overhang .
Execution milestones are lining up: Notified Body selection, cGMP scale‑up, and biocompatibility work support potential CE pathway and a first‑in‑human start as early as Q4 CY2014, contingent on remaining manufacturing and regulatory steps .
OpEx rising with scale: YoY increases in G&A and R&D reflect hiring, stock‑based comp, and external development; monitor spend vs. milestone progression and the updated FY14 cash needs ($3.8–$4.0M) .
Governance improving but not fixed: CFO hire is a step toward remediating material weaknesses; lack of an established audit committee and segregation of duties remain risks until resolved .
Technical clean‑up: July 2 effectiveness of the resale registration addresses prior registration obligations tied to the February private placement, potentially improving share liquidity dynamics, but does not resolve funding needs .

All figures and statements are sourced from Arch Therapeutics’ Q3 FY2014 8‑K (press release) and 10‑Q filings and prior 10‑Qs as cited above.

Arch Therapeutics, Inc. (ARTH)·Q3 2014 Earnings Summary