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ABIO > SEC Filings for ABIO > Form 10-K on 21-Mar-2013All Recent SEC Filings

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Form 10-K for ARCA BIOPHARMA, INC.


21-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

We have included or incorporated by reference into this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K, and from time to time our management may make, statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements may be


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identified by words including "anticipate," "plan," "believe," "intend," "estimate," "expect," "should," "may," "potential" and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our website.

Overview

We are a biopharmaceutical company whose principal focus is developing genetically-targeted therapies for cardiovascular diseases. Our lead product candidate is Gencaro™ (bucindolol hydrochloride), a pharmacologically unique beta-blocker and mild vasodilator that we plan to study in a new clinical trial for the treatment of atrial fibrillation, or AF, in patients with heart failure and reduced left ventricular ejection fraction ("HFREF"). We have identified common genetic variations in receptors in the cardiac nervous system that we believe interact with Gencaro's pharmacology and may enhance patient response.

We have been granted patents in the U.S., Europe, and other jurisdictions for methods of treating patients who have these genetic variations with Gencaro. We believe that if Gencaro is approved, the Gencaro patents may provide market exclusivity into 2029 or 2030 in the U.S. and in Europe.

We believe that that Gencaro has potential efficacy in reducing or preventing AF, and this efficacy may be genetically regulated. We plan to test this hypothesis in a clinical trial of Gencaro, known as GENETIC-AF. GENETIC-AF is projected to be a Phase 2b/3 trial comparing Gencaro to metoprolol CR/XL for prevention of AF in patients with HFREF.

We have created an adaptive design for GENETIC-AF, under which the trial is intended to be initiated as a Phase 2b study in approximately 200 HFREF patients. Depending on the results of the Phase 2b portion, the trial may then be expanded to a Phase 3 study by enrolling an estimated additional 420 patients. We estimate that GENETIC-AF could begin approximately 6 months after we obtain sufficient funding, and we believe the Phase 2b study would take approximately two years to complete.

To support the continued development of Gencaro, including the planned GENETIC-AF clinical trial and our ongoing operations, we plan to pursue an underwritten public equity offering within the next quarter to fund, at least, the Phase 2b portion of the GENETIC-AF trial and our general and administrative costs through its projected completion. We may also seek additional funding that could allow us to operate while we continue to pursue financing options, a strategic combination, partnering, 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. We believe our cash and cash equivalents balance as of December 31, 2012, along with the net proceeds from our recently completed financings, will be sufficient to fund our operations, at our current cost structure, through September 2013. 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 September 2013. 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.


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Results of Operations

Research and Development Expenses

Research and development, or R&D, expenses comprise research & development, regulatory, and manufacturing process development activities and costs. Our research and development expenses totaled $1.1 million for the year ended December 31, 2012 as compared to $2.3 million for 2011, a decrease of approximately $1.2 million. During 2012, our R&D efforts and costs were almost entirely for the development of Gencaro. The research and regulatory components of our R&D costs decreased approximately $883,000 due primarily to reduced personnel costs from staff furloughs implemented in the third quarter of 2012, and decreased consulting costs in association with our reduced clinical development activities compared to the prior year. Manufacturing process development costs decreased approximately $342,000 for the year. In 2011, we incurred milestone costs for ongoing, long-term drug stability studies of Gencaro and new costs for preliminary analysis and development of clinical trial materials for our planned GENETIC-AF clinical trial. During 2012 we did not have similar activities and the cost decrease reflects our lower utilization of outside support services in connection with our reduced level of operations.

Our R&D expenses are highly contingent upon our ability to raise substantial additional funding or complete a strategic transaction. Should we receive funds from one or a combination of these sources, R&D expense in 2013 will be substantially higher than 2012 if we initiate our GENETIC-AF clinical trial. Until substantial additional funding is obtained, R&D expenses in 2013 are expected to be comparable to 2012 levels.

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 expenses were $3.2 million for the year ended December 31, 2012, compared to $5.0 million for 2011, a decrease of approximately $1.8 million. Cost decreases of approximately $940,000 were comprised primarily of reduced personnel, consulting, board advisory, and legal expenses.

Approximately $772,000 of the total cost decrease was attributable to lower depreciation and occupancy expense, and the balance of the decrease is due to our reduced operations overall. During the fourth quarter of 2011 we relocated our corporate office to a smaller suite. The move necessitated additional depreciation of certain leasehold improvements, furniture and equipment that were not useable in the new office suite. The reductions in depreciation and occupancy related expenses in 2012 are the result of this office move.

SG&A expenses for 2013 are expected to be comparable to 2012 levels, but are contingent upon our ability to raise substantial additional funding or complete a strategic transaction. Should we receive funds from one or a combination of these sources, SG&A expense in 2013 could be substantially higher than 2012 as we increase activities to support initiating our GENETIC-AF clinical trial.

Gain on Assignment of Patent Rights

During the year ended December 31, 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 during the second quarter of 2011. The gain was exclusive to 2011.

Interest and Other Income

Interest and other income was $2,000 for the year ended December 31, 2012, as compared to $2,000 for 2011, remaining essentially unchanged. Interest income was nominal in both years due to low investment yields and declining cash balances. We expect interest income to continue to be nominal in 2013.


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Interest and Other Expense

Interest and other expense was $3,000 for the year ended December 31, 2012, as compared to $5,000 for 2011. The amounts and related change between years are nominal to our overall operations. Based on our current capital structure, interest expense for 2013 is expected to be comparable to 2012.

Liquidity and Capital Resources

Cash and Cash Equivalents



                                         December 31,      December 31,
                                             2012              2011
             Cash and cash equivalents   $       2,920     $       5,943

Cash Flows from Operating, Investing and Financing Activities



                                                     Year Ended December 31,
                                                   2012                  2011
   Net cash (used in) provided by:
   Operating activities                        $      (4,078 )      $       (6,959 )
   Investing activities                                   -                  2,006
   Financing activities                                1,055                 3,871

   Net decrease in cash and cash equivalents   $      (3,023 )      $       (1,082 )

Net cash used in operating activities for the year ended December 31, 2012 decreased nearly $2.9 million compared with the 2011 period due to decreased R&D and SG&A expenses discussed above.

Net cash flows provided by investing activities for the year ended December 31, 2011 was primarily due to $2 million of cash received from the assignment of patent rights during 2011. There were no such transactions during 2012. Net cash provided by financing activities of approximately $1.1 million for the year ended December 31, 2012 is comprised of approximately $1.2 million of net proceeds from the sales of our common stock, less $134,000 in payments made on a vendor financing arrangement. For the year ended December 31, 2011, net cash provided by financing activities was $3.9 million of net proceeds from sales of our common stock, less $146,000 in payments made on a vendor financing arrangement.

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 GENETIC-AF clinical trial and our ongoing operations, we are evaluating strategic alternatives for funding our operations and development programs. We plan to pursue an underwritten public offering to fund, at least, the Phase 2b portion of the GENETIC-AF trial and our general and administrative costs through its projected completion. We may also seek additional funding that could allow us to operate while we continue to pursue financing alternatives, a strategic combination, or partnership to support the continued clinical development of Gencaro, including the planned GENETIC-AF clinical trial.

On August 2, 2012, we sold approximately $953,000 of ARCA's common stock and warrants for common stock in a Registered Direct Offering under the Company's registration statement on Form S-3 (File No.333-172686)


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(the "Registration Statement") in which we issued 406,099 shares of common stock and warrants to purchase 304,575 shares of common stock. The net proceeds, after deducting placement agent fees and other offering expenses payable by us, was approximately $741,000, and these proceeds are being used solely for general working capital purposes. Each unit, consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock, was sold at a purchase price of $2.35 per unit, which was a 15 percent discount to the consolidated price of the stock and warrants, based on the closing bid price of $2.76 as reported on the Nasdaq Capital Market on August 2, 2012. The warrants become exercisable six months after issuance, expire 6 years thereafter, and have an exercise price of $2.76 per share, equal to 100% of the closing bid price of ARCA's common stock on the Nasdaq Capital Market on August 2, 1012. The Registered Direct Offering was effected as a takedown off the Registration Statement, which became effective on April 4, 2011, pursuant to a prospectus supplement filed with the Securities and Exchange Commission on August 3, 2012. The warrant agreements provide for settlement of the warrants in unregistered shares should an effective registration statement or current prospectus not be in place at the time a warrant is exercised.

On October 22, 2012, we sold approximately $325,000 of ARCA common stock and warrants for common stock in a private placement transaction. Certain Directors, Officers and Affiliates of ARCA were investors in the private placement. We issued to investors 137,530 shares of common stock together with warrants to purchase 103,148 shares of common stock. The net proceeds, after deducting offering expenses, were approximately $280,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock was sold at a purchase price of $2.36 per unit. The warrants were exercisable upon issuance, expire 5 years from the date of issuance, and have an exercise price of $1.80 per share, equal to 100% of the closing sales price of ARCA's common stock on the Nasdaq Capital Market on October 22, 2012.

On December 18, 2012, we sold approximately $250,000 of our common stock and warrants for common stock in a private placement transaction with our Chief Executive Officer, Dr. Michael Bristow. We issued 86,186 shares of common stock together with warrants to purchase 64,640 shares of common stock. The net proceeds, after deducting offering expenses were approximately $230,000, and these proceeds are being used solely for general working capital purposes. Each unit consisting of a share of common stock and a warrant to purchase 0.75 shares of common stock was sold at a purchase price of $2.90 per unit. The warrants were exercisable upon issuance, expire 5 years from the date of issuance, and have an exercise price of $2.34 per share, equal to 100% of the closing sales price of ARCA's common stock on the Nasdaq Capital Market on December 18, 2012.

On January 22, 2013, we sold approximately $1 million of our common stock and warrants for common stock in a private placement transaction with accredited investors and our Chief Executive Officer. We issued 356,430 shares of common stock together with warrants to purchase 249,501 shares of common stock. The net proceeds, after deducting placement agent fees and other offering expenses, were approximately $850,000, and these proceeds are being used solely for general working capital purposes. Each unit, consisting of a share of common stock and a warrant to purchase 0.70 shares of common stock, was sold at a purchase price of $2.81 per unit. The warrants were exercisable upon issuance, expire 7 years from the date of issuance, and have an exercise price of $2.28 per share, equal to 100% of the closing bid price of ARCA's common stock on the Nasdaq Capital Market on January 22, 2013.

Pursuant to the terms of the Registration Rights Agreements (the Rights Agreements) entered into as part of each of these Private Placement transactions, we granted to the investors certain registration rights related to the shares underlying the units sold in these private placements. We filed a registration statement, in accordance with the terms of the Rights Agreements, for the resale of the shares underlying the units sold in these private placements. That registration statement was declared effective by the Securities and Exchange Commission on February 14, 2013.

On January 31, 2013, we sold approximately $730,000 of ARCA's common stock and warrants for common stock in a Registered Direct Offering under the Company's registration statement on Form S-3 (File No.333-172686) (the


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"Registration Statement") in which we issued 164,636 shares of common stock and warrants to purchase 65,855 shares of common stock. The net proceeds, after deducting placement agent fees and other offering expenses payable by us, was approximately $630,000, and these proceeds are being used solely for general working capital purposes. Each unit, consisting of a share of common stock and a warrant to purchase 0.40 shares of common stock, was sold at a purchase price of $4.43 per unit. The warrants were exercisable upon issuance, expire 5 years from the date of issuance, and have an exercise price of $4.13 per share, equal to 100% of the closing bid price of ARCA's common stock on the Nasdaq Capital Market on January 30, 2013. The Registered Direct Offering was effected as a takedown off the Registration Statement, which became effective on April 4, 2011, pursuant to a prospectus supplement filed with the Securities and Exchange Commission on February 1, 2013. The warrant agreements provide for settlement of the warrants in unregistered shares should an effective registration statement or current prospectus not be in place at the time a warrant is exercised.

We believe our cash and cash equivalents balance as of December 31, 2012, along with the net proceeds from our recently completed financings, will be sufficient to fund our operations, at our current cost structure, through September 30, 2013. 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 September 30, 2013. 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;

- 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 management's most difficult, subjective or complex judgments, often as a result


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of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described in Note 1 of "Notes to Consolidated Financial Statements" included within Item 8 in this report, we believe the following critical accounting policy affected our most significant judgments, assumptions, and estimates used in the preparation of our consolidated financial statements and, therefore, is important in understanding our financial condition and results of operations.

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 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 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.

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.

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