This Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995, including statements about the timing and outcome of regulatory reviews and approvals, anticipated expenditures relating to seeking regulatory approval and the potential commercialization of Gencaro, expectations with respect to the commercialization of Gencaro, if approved, ARCA's plans with respect to obtaining additional capital or consummating a strategic transaction, the prospects for further development other non-Gencaro product candidates and ARCA's ability to continue to operate as a going concern and its future capital requirements. Forward-looking statements may be identified by words including "will," "plan," "anticipate," "believe," "intend," "estimates," "expect," "should," "may," "potential" and similar expressions. Such statements are based on management's current expectations and involve risks and uncertainties. Actual results and performance could differ materially from those projected in the forward-looking statements as a result of many factors discussed herein and elsewhere including, in particular, those factors described under the "Risk Factors" set forth below, and in our other periodic reports filed from time to time with the Securities and Exchange Commission, or SEC, including our Annual Report on form 10-K for the year ended December 31, 2011. Actual results and performance could also differ materially from time to time from those projected in our filings with the SEC.

The terms "ARCA," "we," "us," "our" and similar terms refer to ARCA biopharma, Inc.

Overview

ARCA is a biopharmaceutical company whose principal focus is developing genetically-targeted therapies for cardiovascular diseases. Our lead product candidate, Gencaro TM(bucindolol hydrochloride), a pharmacologically unique beta-blocker and mild vasodilator, is being developed for the treatment of atrial fibrillation, or AF, in patients with heart failure, or HF. We have identified common genetic variations in the cardiovascular system that we believe interact with Gencaro's pharmacology and may predict patient response to the drug.

We have been granted patents in the U.S., Europe, and other jurisdictions for methods of treating AF and HF patients with Gencaro based on genetic testing, which we believe will provide market exclusivity for these uses of Gencaro into at least 2026 in the U.S. and into 2025 in Europe. In addition, we believe that if Gencaro is approved, the Gencaro patents will be eligible for patent term extension based on our current clinical trial plans which, if granted in the U.S., may provide market exclusivity into 2029, and if granted in Europe may provide market exclusivity into 2030.

We are planning to initiate a Phase 3 clinical study of Gencaro in AF patients with HF and/or left ventricular dysfunction. We believe AF is an attractive potential indication for Gencaro because data from the previously conducted Phase 3 HF trial of Gencaro in 2,708 HF patients, or the BEST HF trial, suggest that Gencaro may have a potentially significant effect in reducing or preventing AF. Based on our analysis of data from the BEST HF trial, we believe that Gencaro's prevention of AF in HF patients is pharmacogenetically regulated. We plan to enroll approximately 200-400 patients with persistent AF who have the genotype that appears to respond most favorably to Gencaro. We anticipate that this trial could begin approximately 6 months after we obtain sufficient funding.

AF is a disorder in which the normally regular and coordinated contraction pattern of the heart's two small upper chambers (the atria) becomes irregular and uncoordinated. The irregular contraction pattern associated with AF causes blood to pool in the atria, predisposing the formation of clots. These clots may travel from the heart and become lodged in the arteries leading to the brain and other organs, thereby blocking necessary blood flow and potentially resulting in stroke. AF is considered an epidemic cardiovascular disease that affects approximately 2-3 million Americans, making it one of the most common heart rhythm disorders. The approved therapies for the treatment or prevention AF have certain disadvantages, such as toxic side effects. We believe there is an unmet medical need for new AF treatments that have fewer side effects than currently available therapies and are more effective, particularly in patients with HF where most of the approved drugs are contra-indicated or have warnings in their prescribing information.

The planned AF clinical trial is designed to be a multi-center, randomized, double-blind clinical trial to assess the safety and efficacy of Gencaro in AF patients with HF and/or left ventricular dysfunction, with the primary endpoint being time to recurrent symptomatic AF after direct current cardioversion. This AF trial is designed to compare Gencaro to the beta-blocker metoprolol CR/XL in the patient genotype we believe responds most favorably to Gencaro. The therapeutic benefit of metoprolol CR/XL does not appear to be enhanced in patients with this genotype. We believe data from the BEST HF trial indicate that Gencaro may have a potentially significant effect in reducing or preventing AF, and this effect may be one that is genetically regulated. The entire cohort of patients in the BEST HF trial that were treated with Gencaro had a 41% reduction in the risk of new onset AF (time-to-event) compared to placebo (p = 0.0004), although because there was not a predetermined AF clinical endpoint in the BEST HF trial, the data is based on subsequent analysis of adverse events and surveillance electrocardiograms (ECGs). In the DNA sub-study, patients with the most favorable genotype for Gencaro experienced a 74% (p = 0.0003) reduction in risk of AF, based on the same analysis. This most favorable genotype was present in about 47% of the patients in the sub-study, and we estimate it is present in about 50% of the US general population. We believe the AF study would take approximately two and one half years from enrollment of the first patient through completion.

We have exclusive patent rights to other product candidates that have potential indications in cardiovascular disease, oncology and other therapeutic areas, some of which are in early stages of development and others of which are in later stages of development. We are seeking development partners to assist us in the development of these product candidates or who may license rights to them. For example, we hold exclusive rights to rNAPc2, a recombinant protein that is a potent, long acting tissue factor inhibitor with a unique mechanism of action. Previously, preclinical studies of rNAPc2 showed evidence of potential efficacy against lethal hemorrhagic fever viruses.

To support the continued development of Gencaro, including the planned AF clinical trial and our ongoing operations, we will need to raise substantial additional funding through public or private debt or equity transactions or a strategic combination or partnership, or government funding. In August of 2012 we raised approximately $750,000, net of offering costs, through a registered direct public offering of our common stock and warrants to purchase our common stock. We may seek additional funding that could allow us to operate while we continue to pursue strategic combination, partnering, additional financing and licensing opportunities. If we are delayed in obtaining funding or are unable to complete a strategic transaction, we may discontinue our development activities on Gencaro or discontinue our operations. In July 2012, to preserve our capital resources, we placed five full time and two part-time employees within our research and development and general and administrative areas, respectively, on indefinite furlough. We currently believe our cash and cash equivalents balance as of June 30, 2012, when aggregated with the funds raised through our registered direct public offering that closed on August 8, 2012, will be sufficient to fund our operations, at our current cost structure, through December 2012. We are unable to assert that our current cash and cash equivalents are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern beyond December 2012. Changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate.

Results of Operations

Research and Development Expenses

Research and development, or R&D, expense is comprised of research & development, regulatory and manufacturing process development activities and costs. Our R&D expense continues to be almost entirely generated by our activities relating to the development of Gencaro. Research and Development expense for the three months ended June 30, 2012 was $322,000 compared to $497,000 for the corresponding period of 2011, a decrease of approximately $175,000. R&D expense was $744,000 for the six months ended June 30, 2012 as compared to $1,187,000 for the corresponding period of 2011, a decrease of $443,000.

Research & development expense decreased $108,000 for the three months and $215,000 for the six months ended June 30, 2012 due to reduced personnel and consulting costs attributable to staff reductions completed in the first quarter of 2011 and reduced clinical development activities compared to the prior year periods.

Regulatory and manufacturing process costs decreased by $67,000 for the three months and $228,000 for the six months ended June 30, 2012 compared to the corresponding periods of 2011. The decreases in both the three and six month periods are due to reduced personnel costs from staff reductions completed in the first quarter of 2011 and lower utilization of outside support services attributable to our reductions in regulatory and manufacturing process activities compared to the prior year periods.

In July 2012 we placed five employees from our R&D departments on furlough for an indefinite period of time to conserve our capital resources as we work to secure substantial additional funding or complete a strategic transaction. Our R&D expenses are contingent upon our ability to complete such a transaction. Should we receive funds from one or a combination of these sources, R&D expense in 2012 could be substantially higher than 2011 as we initiate our planned AF clinical trial. Until substantial additional funding is obtained, R&D expenses for the remainder of 2012 are expected to be comparable or moderately less than the first six months of 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SG&A, primarily consist of personnel costs, consulting and professional fees, insurance, facilities and depreciation expenses, and various other administrative costs.

SG&A expense was $823,000 for the three months ended June 30, 2012 as compared to $1.2 million for the corresponding period in 2011, a decrease of $384,000. For the six months ended June 30, 2012, SG&A expense was $1.8 million as compared to $2.7 million in the corresponding period in 2011, a decrease of $912,000. The decreases in the three month and six month periods are comprised of reduced personnel, consulting, legal and accounting expenses, as a result of our reduced operations.

SG&A expenses for the remainder of 2012 are expected to decrease from 2011 levels as we continue to monitor and control our costs but are contingent upon our ability to raise substantial additional funding through public or private debt or equity transactions or a strategic combination or partnership, or government funding. Should we receive funds from one or a combination of these sources, SG&A expense in future periods could be substantially higher to support increased activities.

Gain on Assignment of Patent Rights

During the second quarter of 2011, we entered into an agreement in which we assigned certain patent rights to a large pharmaceutical company. In exchange for the patent rights we received a $2.0 million non-recourse payment. The gain was exclusive to 2011.

Interest and Other Income

Interest and other income was less than $1,000 in the three months ended June 30, 2012 and approximately $1,000 in the six months ended June 30, 2012 as compared to less than $1,000 and approximately $1,000, respectively, in the three months and six months ended June 30, 2011. The amounts and related change between years are nominal to our overall operations. We expect interest income to continue to be nominal in 2012 due to low investment yields and declining cash and cash equivalent investment balances.

Interest and Other Expense

Interest and other expense was $1,000 in the three months ended June 30, 2012 and $3,000 in the six months ended June 30, 2012 as compared to $2,000 and $7,000, respectively, in the three months and six months ended June 30, 2012. Based on our current capital structure, interest expense for 2012 is expected to be minimal.

Liquidity and Capital Resources

Cash and Cash Equivalents



                                            June 30,      December 31,
                                              2012            2011
                                                  (in thousands)
               Cash and cash equivalents   $    3,182     $       5,943

As of June 30, 2012, we had total cash and cash equivalents of approximately $3.2 million, as compared to $5.9 million as of December 31, 2011. The net decrease of $2.8 million in the six month period reflects cash used to fund operating activities.

Cash Flows from Operating, Investing and Financing Activities



                                                         Six Months Ended June 30
                                                           2012              2011
                                                              (in thousands)
Net cash (used in) provided by:
Operating activities                                   $     (2,633 )      $  (4,047 )
Investing activities                                             (1 )          2,000
Financing activities                                           (127 )          2,485

Net increase (decrease) in cash and cash equivalents   $     (2,761 )      $     438

Net cash used in operating activities for the six months ended June 30, 2012 decreased approximately $1,414,000 compared with the 2011 period primarily due to decreased R&D and SG&A expenses discussed above.

Net cash used in investing activities for the six months ended June 30, 2012 was approximately $1,000 representing nominal investment in capitalized equipment compared to net cash provided by investing activities in the six months ended June 30, 2011 of $2 million which was proceeds from our assignment of certain patent rights to a large pharmaceutical company.

Net cash used in financing activities was $127,000 for the six months ended June 30, 2012 and are costs incurred for preparing and filing the registration statement required as part of our equity financing completed in December 2011 plus payments on a vendor finance arrangement. Net cash provided by financing activities of $2.5 million in the six months ended June 30, 2011 were the net proceeds from the sale of our common stock completed in April 2011.

Sources and Uses of Capital

Our primary sources of liquidity to date have been capital raised from issuances of shares of our common and preferred stock, issuance of convertible promissory notes, and funds provided by the Merger. The primary uses of our capital resources to date have been to fund operating activities, including research, clinical development and drug manufacturing expenses, license payments, and spending on capital items.

Considering the substantial additional time and costs associated with the development of Gencaro and our need to raise a significant amount of capital on acceptable terms to finance the planned clinical trial and our ongoing operations, we are evaluating strategic alternatives for funding our continued operations and development programs. We will need to raise substantial additional funding through public or private debt or equity transactions or a strategic combination or partnership, or government funding to support the continued clinical development of Gencaro, including planned clinical trial. In evaluating the substantial costs associated with development of rNAPc2 and our limited financial resources, further development of rNAPc2 will be dependent upon receipt of government or third party funding, which may not be available.

In August 2012 we sold 2,436,599 shares of our common stock and warrant to purchase up to 1,827,449 of our common stock in a registered direct public offering. Our net proceeds after deducting placement agent fees and other offering expenses were approximately $750,000. During 2011, we completed two equity financing transactions. In April 2011 we sold 1,680,672 shares of ARCA's common stock and warrants to purchase up to 1,176,471 shares of ARCA's common stock in a registered direct public offering. Our net proceeds after deducting placement agent fees and other offering expenses were approximately $2.5 million. In December 2011 we sold 1,666,666 shares of our common stock and warrants to purchase up to an additional 1,250,000 shares of our common stock to various institutional investors in a private placement transaction. Our net proceeds, after deducting placement agent fees and other offering expenses were approximately $1.4 million. In aggregate, these two financing transactions provided net proceeds of approximately $3.9 million. These financings allow us to continue operations while we pursue a strategic combination, partnering, financing and licensing opportunities, and we may seek more interim funding in 2012.

In July 2012, to preserve our capital resources, we placed five full time and two part time employees within our research and development and general and administrative areas, respectively, on indefinite furlough. We currently believe our cash and cash equivalents balance as of June 30, 2012, plus the funds raised through our recent registered direct public offering that closed on August 8, 2012, will be sufficient to fund our operations, at our current cost structure, through December 31, 2012. However, we are unable to assert that these funds are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about our ability to continue as a going concern beyond December 31, 2012. The consolidated financial statements contained in this report have been prepared with the assumption that we will continue as a going concern and will be able to realize our assets and discharge our liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. We may not be able to raise sufficient capital on acceptable terms or at all to continue development of Gencaro or to continue operations and may not be able to execute any strategic transaction.

Our liquidity, and ability to raise additional capital or complete any strategic transaction, depends on a number of factors, including, but not limited to, the following:

• the costs and timing for an additional clinical trial in order to gain possible FDA approval for Gencaro;

• the market price of our stock and the availability and cost of additional equity capital from existing and potential new investors;

• our ability to retain the listing of our common stock on the Nasdaq Capital Market;

• general economic and industry conditions affecting the availability and cost of capital;

• potential receipt of government or third party funding to further develop Gencaro or rNAPc2;

• our ability to control costs associated with our operations;

• the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

• the terms and conditions of our existing collaborative and licensing agreements.

The sale of additional equity or convertible debt securities would likely result in substantial additional dilution to our stockholders. If we raise additional funds through the incurrence of indebtedness, the obligations related to such indebtedness would be senior to rights of holders of our capital stock and could contain covenants that would restrict our operations. We also cannot predict what consideration might be available, if any, to us or our stockholders, in connection with any strategic transaction. Should strategic alternatives or additional capital not be available to us in the near term, or not be available on acceptable terms, we may be unable to realize value from our assets and discharge our liabilities in the normal course of business which may, among other alternatives, cause us to further delay, substantially reduce or discontinue operational activities to conserve its cash resources.

Critical Accounting Policies and Estimates

A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires our management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 1 of "Notes to the Consolidated Financial Statements" included within our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Following is a discussion of the accounting policies that we believe involve the most difficult, subjective or complex judgments and estimates.

Long-Lived Assets and Impairments

We review long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. As a development stage company, we have not generated positive cash flows from operations, and such cash flows may not materialize for a significant period in the future, if ever. Additionally, we may make changes to our business plan that would result in changes to expected cash flows from long-lived assets. It is reasonably possible that future evaluations of long-lived assets, including changes from our current expected use of long-lived assets, may result in material impairments.

Accrued Expenses

As part of the process of preparing our financial statements, we are required to estimate accrued expenses. This process involves identifying services that third parties have performed on our the Company's behalf and estimating the level of service performed and the associated cost incurred for these services as of the balance sheet date. Examples of estimated accrued expenses include contract service fees, such as fees payable to contract manufacturers in connection with the production of materials related to our drug product, and professional service fees, such as attorneys, consultants, and clinical research organizations. We develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time.

Share-based Compensation

Our share-based compensation cost recognized includes: (a) compensation costs for current period vesting of all share-based awards granted prior to January 1, 2006, based on the intrinsic value method, and (b) compensation cost for current period vesting of all share-based awards granted or modified subsequent to January 1, 2006, based on the estimated grant date fair value. We recognize compensation costs for our share-based awards on a straight-line basis over the requisite service period for the entire award, as adjusted for expected forfeitures.

From Inception through December 31, 2005, we accounted for issuances of share-based compensation under the intrinsic-value-based method of accounting. Under this method, compensation expense is generally recorded on the date of grant only if the estimated fair value of the underlying stock exceeds the exercise price.

Recent Accounting Pronouncements

In June 2011, the FASB issued FASB ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income in U.S. GAAP and IFRS. This ASU provides companies the option to present the components of net income and other comprehensive income either as one continuous statement of comprehensive income or as two separate but consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this new guidance effective January 1, 2012. The adoption of this new guidance will not impact our financial position, results of operations or cash flows.

Off-Balance Sheet Arrangements

We have not participated in any transactions with unconsolidated entities, such as special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

Indemnifications

In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify certain parties from any losses incurred relating to the services they perform on our behalf or for losses arising from certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses. We have entered into indemnity agreements with each of our directors, officers and certain employees. Such indemnity agreements contain provisions, which are in some respects broader than the specific indemnification provisions contained in Delaware law. We also maintain an insurance policy for our directors and executive officers insuring against certain liabilities arising in their capacities as such.