Oruka Therapeutics, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Page Report of Independent Registered Public Accounting Firm, KPMG LLP 54 Balance Sheets as of December 31, 2020 and 2019 56 Statements of Operations for the years ended December 31, 2020 and 2019 57 Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019 58 Statements of Cash Flows for the years ended December 31, 2020 and 2019 59 Notes to Financial Statements 60 53 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors ARCA biopharma, Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of ARCA biopharma, Inc. (the Company) as of December 31, 2020 and 2019, the related statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Research and development costs incurred but not invoiced As discussed in Note 1 to the financial statements, research and development costs incurred but not invoiced related to clinical trial and drug manufacturing activities are recorded within accrued expenses and other liabilities and as reductions of prepayments included in other current assets. These amounts are based upon the services received and related expenses incurred by contract research organizations (CROs), clinical study sites, drug manufacturers, collaboration partners, laboratories, consultants, or other third-parties. Research and development contracts vary significantly in length, and could be for a fixed amount, a variable amount based on actual costs incurred, capped at a certain limit, or for a combination of these elements. Expenses related to the CROs and clinical studies, as well as contract drug manufacturers, are primarily based on progress made against specified milestones or targets in each period. We identified the sufficiency of the audit evidence over the research and development costs incurred but not invoiced as a critical audit matter. Evaluating the sufficiency of audit evidence obtained over research and development costs required especially subjective auditor judgment due to the nature of evidence available regarding research and development activities. That evidence may include communications from third parties regarding tasks completed, invoices received from third parties, and management’s analysis of expenses incurred against budgeted and contractual amounts. 54 The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over research and development costs incurred but not invoiced. For a selection of research and development costs incurred but not invoiced we examined contracts, invoices, and third-party confirmations of the completion of contractual milestones and project status. In addition, for these selections, we reviewed management’s analysis of project expenses against contractually budgeted amounts. We then compared the information from the above procedures to the assumptions and inputs that were used by management to calculate research and development costs incurred but not invoiced. We also compared the Company’s estimate of costs incurred as of year-end to a selection of third-party invoices received after year-end, but prior to the issuance of the Company’s financial statements. We evaluated the sufficiency of audit evidence obtained by assessing the results of audit procedures over the research and development costs incurred but not invoiced. /s/ KPMG LLP We have served as the Company’s auditor since 2006 . Denver, Colorado March 18, 2021 55 ARCA BIOPHARMA, INC. BALANCE SHEETS As of December 31, 2020 2019 (in thousands, except share and per share amounts) ASSETS Current assets: Cash and cash equivalents $ 49,071 $ 8,363 Other current assets 897 117 Total current assets 49,968 8,480 Right-of-use asset - operating 428 22 Property and equipment, net 21 10 Other assets 12 24 Total assets $ 50,429 $ 8,536 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,773 $ 418 Accrued compensation and employee benefits 815 129 Accrued expenses and other liabilities 911 379 Total current liabilities 3,499 926 Operating lease liability, net of current portion 409 — Total liabilities 3,908 926 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.001 par value; 5 million shares authorized; no shares issued or outstanding at December 31, 2020 and 2019 — — Common stock, $0.001 par value; 100 million shares authorized at December 31, 2020 and 2019; 9,548,150 and 1,594,070 shares issued and outstanding at December 31, 2020 and 2019, respectively 10 2 Additional paid-in capital 200,665 152,024 Accumulated deficit (154,154 ) (144,416 ) Total stockholders’ equity 46,521 7,610 Total liabilities and stockholders’ equity $ 50,429 $ 8,536 See accompanying Notes to Financial Statements 56 ARCA BIOPHARMA, INC. STATEMENTS OF OPERATIONS Years Ended December 31, 2020 2019 (in thousands, except share and per share amounts) Costs and expenses: Research and development $ 4,992 $ 1,833 General and administrative 4,774 3,981 Total costs and expenses 9,766 5,814 Loss from operations (9,766 ) (5,814 ) Interest and other income 28 172 Interest expense (9 ) (7 ) Loss before income taxes (9,747 ) (5,649 ) Income tax benefit 9 167 Net loss $ (9,738 ) $ (5,482 ) Net loss per share: Basic and diluted $ (2.07 ) $ (4.15 ) Weighted average shares outstanding: Basic and diluted 4,710,237 1,321,234 See accompanying Notes to Financial Statements 57 ARCA BIOPHARMA, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY Stockholders’ Equity Additional Common stock Paid-In Accumulated Shares Amount Capital Deficit Total (in thousands, except share and per share amounts) Balance, December 31, 2018 773,558 $ 1 $ 144,965 $ (138,934 ) $ 6,032 Issuance of common stock for cash, net of offering costs 820,561 1 6,908 — 6,909 Adjustment for fractional shares (49 ) — — — — Share-based compensation — — 151 — 151 Net loss — — — (5,482 ) (5,482 ) Balance, December 31, 2019 1,594,070 2 152,024 (144,416 ) 7,610 Issuance of common stock and exercise of prefunded warrants for cash, net of offering costs 7,954,080 8 48,598 — 48,606 Share-based compensation — — 43 — 43 Net loss — — — (9,738 ) (9,738 ) Balance, December 31, 2020 9,548,150 $ 10 $ 200,665 $ (154,154 ) $ 46,521 See accompanying Notes to Financial Statements 58 ARCA BIOPHARMA, INC. STATEMENTS OF CASH FLOWS Years Ended December 31, 2020 2019 (in thousands) Cash flows from operating activities: Net loss $ (9,738 ) $ (5,482 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 8 18 Amortization of right-of-use asset - operating 85 71 Share-based compensation 43 151 Change in operating assets and liabilities: Other current assets (348 ) 401 Other assets (12 ) — Accounts payable 1,101 188 Accrued compensation and employee benefits 686 (21 ) Accrued expenses and other liabilities 450 (127 ) Net cash used in operating activities (7,725 ) (4,801 ) Cash flows from investing activities: Purchase of property and equipment (19 ) (4 ) Net cash used in investing activities (19 ) (4 ) Cash flows from financing activities: Proceeds from the issuance of common stock 50,894 7,281 Common stock offering costs (2,034 ) (372 ) Repayment of principal on vendor finance agreement (408 ) (349 ) Net cash provided by financing activities 48,452 6,560 Net increase in cash and cash equivalents 40,708 1,755 Cash and cash equivalents, beginning of year 8,363 6,608 Cash and cash equivalents, end of year $ 49,071 $ 8,363 Supplemental cash flow information: Interest paid $ 9 $ 7 Income tax refund received $ 9 $ 167 Supplemental disclosure of noncash investing and financing transactions: Leased assets obtained in exchange for operating lease liabilities $ 491 $ 93 Common stock offering costs accrued but not yet paid $ 254 $ — See accompanying Notes to Financial Statements 59 ARCA BIOPHARMA, INC. NOTES TO FINANCIAL STATEMENTS (1) The Company and Summary of Significant Accounting Policies Description of Business ARCA biopharma, Inc. (the Company or ARCA), a Delaware corporation, is headquartered in Westminster, Colorado. The Company is a clinical-stage biopharmaceutical company applying a precision medicine approach to the development and commercialization of genetically targeted therapies for cardiovascular diseases. The Company’s lead product candidates are rNAPc2 (AB201) as a potential treatment for diseases caused by ribonucleic acid, or RNA, viruses, initially focusing on COVID-19, the disease caused by SARS-CoV-2 virus, and Gencaro™ (bucindolol hydrochloride) for the treatment of atrial fibrillation (AF) in patients with chronic heart failure (HF). rNAPc2 is a protein therapeutic in clinical development as a potential treatment for patients hospitalized with COVID-19. Based on its unique mechanism of action, development history and the clinical evidence from the SARS‑CoV-2 pandemic, the Company believes rNAPc2 has potential to be a beneficial therapy for patients with this serious viral disease. The Company initiated the Phase 2b clinical trial of rNAPc2 as a potential treatment for patients hospitalized with COVID-19 in the fourth quarter of 2020. The Company continues to evaluate the feasibility and potential timing for initiating PRECISION-AF relative to the COVID-19 pandemic and prioritizing the development of rNAPc2. The Company’s other product candidate, AB171, is a thiol-substituted isosorbide mononitrate, which ARCA plans to develop as a genetically-targeted treatment for HF and peripheral arterial disease. In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. The Company does not expect a material financial effect as a result of the pandemic. However, if the pandemic continues to be a severe worldwide crisis, it could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. Liquidity and Going Concern The Company devotes substantially all of its efforts towards obtaining regulatory approval and raising capital necessary to fund its operations and it is subject to a number of risks associated with clinical research and development, including dependence on key individuals, the development of and regulatory approval of commercially viable products, the need to raise adequate additional financing necessary to fund the development and commercialization of its products, and competition from larger companies. The Company has not generated revenue to date and has incurred substantial losses and negative cash flows from operations since its inception. The Company has historically funded its operations through issuances of common and preferred stock. The Company believes that its current cash and cash equivalents as of December 31, 2020, together with the $23.3 million of net proceeds raised through February 2021 from sales of our common stock, as discussed in Note 7, will be sufficient to fund its operations through the end of fiscal year 2022. Conducting a Phase 3 rNAPc2 clinical trial or the Phase 3 PRECISION-AF trial would likely require additional financing . However, changing circumstances may cause us to consume capital significantly faster or slower than currently anticipated. The Company has based these estimates on assumptions that may prove to be wrong, and the Company could exhaust its available financial resources sooner than the Company currently anticipates. Therefore, the Company may have to raise additional capital for clinical trials of rNAPc2 and will have to raise additional capital for clinical trials of Gencaro. The Company may not be able to raise sufficient capital on acceptable terms, or at all, to continue development of rNAPc2 or Gencaro or to otherwise continue operations and may not be able to execute any strategic transaction . The Company’s liquidity, and its 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 the potential additional clinical trials in order to gain possible regulatory approval for rNAPc2, Gencaro or any other product candidate; • the market price of the Company’s stock and the availability and cost of additional equity capital from existing and potential new investors; • the Company’s ability to retain the listing of its common stock on the Nasdaq Capital Market; • general economic and industry conditions affecting the availability and cost of capital, including as a result of the COVID‑19 pandemic; 60 • the Company’s ability to control costs associated with its operations; • general economic and industry conditions affecting the availability and cost of capital, including as a result of the COVID‑19 pandemic; • the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and • the terms and conditions of the Company’s existing collaborative and licensing agreements. The sale of additional equity or convertible debt securities would likely result in substantial additional dilution to the Company’s stockholders. If the Company raises additional funds through the incurrence of indebtedness, the obligations related to such indebtedness would be senior to rights of holders of the Company’s capital stock and could contain covenants that would restrict the Company’s operations. The Company also cannot predict what consideration might be available, if any, to the Company or its stockholders, in connection with any strategic transaction. Should strategic alternatives or additional capital not be available to the Company, or not be available on acceptable terms, the Company may be unable to realize value from its assets and discharge its liabilities in the normal course of business which may, among other alternatives, cause the Company to further delay, substantially reduce or discontinue operational activities to conserve its cash resources. Basis of Presentation The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include all adjustments necessary for the fair presentation of our financial position, results of operations and cash flows for the periods presented. Management has performed an evaluation of the Company’s activities through the date of filing of this Annual Report on Form 10-K. Recent Accounting Pronouncements The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the financial statements. Accounting Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company bases estimates on various assumptions that are believed to be reasonable under the circumstances. The Company believes significant judgment was involved in estimating the outsourcing expenses, and in estimating other accrued liabilities and income taxes. Management is continually evaluating and updating these estimates, and it is possible that these estimates will change in the future or that actual results may differ from these estimates. Cash Equivalents Cash equivalents generally consist of money market funds and debt securities with maturities of 90 days or less at the time of purchase. The Company invests its excess cash in securities with strong ratings and has established guidelines relative to diversification and maturity with the objective of maintaining safety of principal and liquidity. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company has no off-balance-sheet concentrations of credit risk, such as foreign exchange contracts, option contracts, or foreign currency hedging arrangements. The Company maintains cash and cash equivalent balances in the form of bank demand deposits and money market fund accounts with financial institutions that management believes are creditworthy. Such balances may at times exceed the insured amount. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Cost includes expenditures for equipment, leasehold improvements, replacements, and renewals. Maintenance and repairs are charged to expense as incurred. When assets are sold, retired, or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The cost of property and equipment is depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the lease or the estimated useful life of the assets. 61 Comprehensive Loss Comprehensive loss is defined as the change in equity during a period from transactions and other events and/or circumstances from non-owner sources. If the Company had comprehensive gains (losses), they would be reflected in the statement of operations and comprehensive loss and as a separate component in the statement of stockholders’ equity. There were no elements of comprehensive loss during the years ended December 31, 2020 and 2019. Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use (ROU) asset – operating and lease obligations are included in accrued expenses and other liabilities and operating lease liability on the Company’s December 31, 2020 and 2019 balance sheets. ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Accrued Outsourcing Expenses As part of the process of preparing its financial statements, the Company is required to estimate accrued outsourcing expenses. This process involves identifying services that third parties have performed on 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 outsourcing expenses include contract service fees, such as fees payable to contract manufacturers in connection with the production of materials related to the Company’s drug product, and service fees and pass through costs from clinical research organizations. The Company develops estimates of liabilities using its judgment based upon the facts and circumstances known at the time. Segments The Company operates in one segment. Management uses one measure of profitability and does not segment its business for internal reporting. Research and Development Research and development costs are expensed as incurred. These consist primarily of salaries, contract services, and supplies. Costs related to clinical trial and drug manufacturing activities are based upon estimates of the services received and related expenses incurred by contract research organizations (CROs), clinical study sites, drug manufacturers, collaboration partners, laboratories, consultants, or otherwise. Related contracts vary significantly in length, and could be for a fixed amount, a variable amount based on actual costs incurred, capped at a certain limit, or for a combination of these elements. Activity levels are monitored through communications with the vendors, including detailed invoices and task completion review, analysis of expenses against budgeted amounts, and pre-approval of any changes in scope of the services to be performed. Certain significant vendors may also provide an estimate of costs incurred but not invoiced on a periodic basis. Expenses related to the CROs and clinical studies, as well as contract drug manufacturers, are primarily based on progress made against specified milestones or targets in each period. In accordance with certain research and development agreements, the Company is obligated to make certain upfront payments upon execution of the agreement. The Company records these upfront payments as prepaid research and development expenses, which are included in Other current assets or Other assets in the accompanying Balance Sheets. Such payments are recorded to research and development expense as services are performed. The Company evaluates on a quarterly basis whether events and circumstances have occurred that may indicate impairment of remaining prepaid research and development expenses. Stock-Based Compensation The Company’s stock-based compensation cost recognized is based on the estimated grant date fair value. The Company recognizes compensation costs for its stock-based awards on a straight-line basis over the requisite service period for the entire award, as adjusted for expected forfeitures. 62 Income Taxes The current benefit for income taxes represents actual or estimated amounts payable or refundable on tax returns filed or to be filed each year. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense or benefit for the period. The measurement of deferred tax assets may be reduced by a valuation allowance based on judgmental assessment of available evidence if deemed more likely than not that some or all of the deferred tax assets will not be realized. (2) Net Loss Per Share The Company calculates basic loss per share by dividing net loss by the weighted average common shares outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding if the potential common shares had been issued. The Company’s potentially dilutive shares include stock options and warrants for common stock. Because the Company reported a net loss for the years ended December 31, 2020 and 2019, all potentially dilutive shares of common stock have been excluded from the computation of the dilutive net loss per share for all periods presented. Such potentially dilutive shares of common stock consist of the following: Years Ended December 31, 2020 2019 Potentially dilutive securities, excluded: Outstanding stock options 531,238 31,136 Warrants to purchase common stock 133,401 135,862 664,639 166,998 (3) Fair Value Disclosures Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Inputs used to measure fair value are classified into the following hierarchy: • Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets consist of money market investments. The Company does not have any Level 1 liabilities. • Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability. The Company’s Level 2 assets consist of corporate bonds and commercial paper securities. The Company does not have any Level 2 liabilities. • Level 3—Unobservable inputs for the asset or liability. The Company does not have any Level 3 assets or liabilities. As of December 31, 2020 and 2019, the Company had $49.1 million and $8.3 million, respectively, of cash equivalents consisting of money market funds with original maturities of 90 days or less. The Company has the ability to liquidate these investments without restriction. The Company determines fair value for these money market funds with Level 1 inputs through quoted market prices. There were no transfers between any fair value hierarchy levels in 2020 or 2019. Fair Value of Other Financial Instruments The carrying amount of other financial instruments, including accounts payable, approximated fair value due to their short maturities. As of December 31, 2020 and 2019, the Company did not have any debt outstanding. 63 (4) Property and Equipment Property and equipment consist of the following (in thousands): Estimated Life December 31, 2020 December 31, 2019 Computer equipment 3 years $ 31 $ 54 Lab equipment 5 years 146 142 Furniture and fixtures 5 years 38 61 Computer software 3 years 56 61 Leasehold improvements Lesser of useful life or life of the lease — 59 271 377 Accumulated depreciation and amortization (250 ) (367 ) Property and equipment, net $ 21 $ 10 For the years ended December 31, 2020 and 2019, depreciation and amortization expense was $8,000 and $18,000, respectively. (5) Related Party Arrangements Transactions with the Company’s President and Chief Executive Officer The Company has entered into unrestricted research grants with its President and Chief Executive Officer’s academic research laboratory at the University of Colorado. Funding of any unrestricted research grants is contingent upon the Company’s financial condition, and can be deferred or terminated at the Company’s discretion. Total expense under these arrangements for the years ended December 31, 2020 and 2019 was $356,000 and $286,000, respectively. (6) Commitments and Contingencies The Company has or is subject to the following commitments and contingencies: Employment Agreements The Company maintains employment agreements with several key executive employees. The agreements may be terminated at any time by the Company with or without cause upon written notice to the employee, and entitle the employee to wages in lieu of notice for periods not exceeding one calendar year from date of termination without cause or by the employee for good reason. Certain of these agreements also provide for payments to be made under certain conditions related to a change in control of the Company. 64 Operating Lease On August 1, 2013 the Company entered into a lease agreement for approximately 5,300 square feet of office facilities in Westminster, Colorado which served as the Company’s primary business office from October 1, 2013 until September 30, 2020. Effective February 24, 2020, the lease was renewed for an additional six month term beginning April 1, 2020 and expired on September 30, 2020. On August 29, 2020 the Company entered into a lease agreement for approximately 5,200 square feet of office facilities in Westminster, Colorado which serves as the Company’s primary business office effective October 1, 2020 (October 2020 Lease). The lease term is 42 months beginning October 1, 2020 and includes an option to renew for an additional 36 month term at the then prevailing rental rate. The exercise of the lease renewal option is at the Company’s sole discretion. The amounts recorded assume the Company will exercise its renewal option. The lease includes real estate taxes and insurance, which is not a lease component and is not included in the lease obligation. In addition, common area maintenance charges are based on actual costs incurred and are a non-lease component that is not included in the lease obligation. Future minimum commitments due under the October 2020 Lease agreement as of December 31, 2020 are as follows (in thousands): 2021 $ 71 2022 88 2023 90 2024 93 2025 96 Thereafter 125 Total remaining lease payments 563 Less: imputed lease interest (113 ) Less: Current portion (41 ) Operating lease liability, net of current portion $ 409 Rent expense, which is included in general and administrative expense, under these leases for the years ended December 31, 2020 and 2019 was $95,000 and $74,000, respectively. As of December 31, 2020, the lease liability was $450,000 and the current portion is included in accrued expenses and other liabilities and the non-current portion is in operating lease liability, net of current portion in the accompanying balance sheet. Cash paid for amounts included in the measurement of lease liabilities and the operating cash flows from operating leases for the years ended December 31, 2020 and 2019 were $76,000 and $91,000, respectively. The weighted-average remaining lease term for the operating lease as of December 31, 2020 is 6.2 years. The weighted-average discount rate for the operating lease is 7%. Gencaro License ARCA has licensed worldwide rights to all preclinical and clinical data through the BEST trial for development of bucindolol. The patents that were the subject of this license are expired. If the license agreement is deemed enforceable, the Company would incur milestone and royalty obligations upon the occurrence of certain events, including if the FDA grants marketing approval for Gencaro, upon regulatory marketing approval in Europe and Japan and based on achievement of specified product sales levels. 65 (7) Equity Financings and Warrants Registered Direct Financing On June 3, 2020, the Company closed a registered direct offering with certain institutional and accredited investors of 348,000 shares of the Company’s common stock, at a purchase price of $9.00 per share, and pre-funded warrants to purchase 325,500 shares of common stock at a purchase price of $8.999 per warrant. All warrants were exercised by the closing date. No pre-funded warrants are outstanding as of December 31, 2020. The net proceeds were approximately $5.3 million, after deducting placement agent fees and other offering expenses. The Company paid JonesTrading Institutional Services LLC (JonesTrading) a placement agent fee equal to 8.0% of the aggregate gross proceeds and agreed to provide JonesTrading with customary indemnification and contribution rights. At the Market Equity Financing On January 11, 2017, the Company entered into a Capital on Demand TM Sales Agreement (the Sales Agreement) with JonesTrading, pursuant to which the Company may offer and sell, from time to time through JonesTrading, shares of the Company’s common stock, par value $0.001 per share (the Common Stock), having an aggregate offering price of up to $7.3 million. On August 21, 2017, January 25, 2019, March 11, 2019, May 9, 2019, May 20, 2019, June 28, 2019, July 2, 2020 and July 14, 2020, the Company amended its Capital on Demand Sales Agreement. The amendments, among other things, increased the maximum aggregate offering value of shares of the Company’s common stock which the Company may issue and sell from time to time under the Sales Agreement from $7.3 million to $32.4 million (the Shares). Under the amended Sales Agreement, JonesTrading may sell the Shares by any method permitted by law and deemed to be an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on or through The NASDAQ Capital Market, on any other existing trading market for the Common Stock or to or through a market maker. In addition, under the amended Sales Agreement, JonesTrading may sell the Shares by any other method permitted by law, including in negotiated transactions. The Company may instruct JonesTrading not to sell Shares if the sales cannot be effected at or above the price designated by the Company from time to time. The Company is not obligated to make any sales of the Shares under the amended Sales Agreement. The offering of Shares pursuant to the amended Sales Agreement will terminate upon the earlier of (a) the sale of all of the Shares subject to the amended Sales Agreement or (b) the termination of the amended Sales Agreement by JonesTrading or the Company, as permitted therein. The Company paid JonesTrading a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares and agreed to provide JonesTrading with customary indemnification and contribution rights. The Company will also reimburse JonesTrading for certain specified expenses in connection with entering into and amending the Sales Agreement. 66 Under the amended Sales Agreement, the Company sold an aggregate of 2,214,301 and 820,561 shares of Common Stock pursuant to the terms of such Sales Agreement, as amended, for net proceeds of approximately $14.4 million and $6.9 million during the years ended December 31, 2020 and 2019, respectively, including initial expenses for executing the “at the market offering” and commissions to the placement agent. On July 22, 2020, the Company entered into a new Capital on Demand TM Sales Agreement (the 2020 Sales Agreement) with JonesTrading, pursuant to which the Company may offer and sell, from time to time through JonesTrading, shares of the Company’s Common Stock, having an aggregate offering price of up to $54.0 million. As of December 31, 2020, the Company had sold an aggregate of 5,066,279 shares of its Common Stock pursuant to the terms of the 2020 Sales Agreement for net proceeds of approximately $28.9 million, after deducting expenses for executing the “at the market offering” and commissions paid to the placement agent. From January 1, 2021 through February 22, 2021, the Company sold an aggregate of 4,861,993 shares of its Common Stock pursuant to the terms of the 2020 Sales Agreement. Net proceeds received in the period were approximately $23.3 million, after deducting commissions paid to the placement agent. As of February 22, 2021, the Company had sold all shares available under its current prospectus to the Company’s registration statement on Form S-3 (No. 333‑238067). Warrants Warrants to purchase shares of common stock were granted as part of various financing and business agreements. All outstanding warrants were recorded in additional paid-in capital at their estimated fair market value at the date of grant using a Black-Scholes option-pricing model. As of December 31, 2020, these warrants, by year of expiration, are summarized below: Year of Expiration Number of Warrants Weighted Average Exercise Price 2022 133,401 $ 109.80 (8) Share-based Compensation Stock Plans The Company’s equity incentive plan, the 2020 Equity Incentive Plan (the Equity Plan), was approved by stockholders on December 10, 2020. The maximum number of shares issuable under this plan is 1,167,425 shares. The Equity Plan provides for the granting of stock options (including indexed options), restricted stock units, stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, performance shares, performance units and deferred stock units. Under the Equity Plan, awards may be granted to employees, directors and consultants of ARCA, except for incentive stock options, which may be granted only to employees. As of December 31, 2020, options to purchase 494,100 shares with a weighted average exercise price of $4.27 per share were outstanding under the Equity Plan, and 636,347 shares were reserved for future awards. In general, the Equity Plan authorizes the grant of stock options that vest at rates set by the Board of Directors or the Compensation Committee thereof. Generally, stock options granted by ARCA under the equity incentive plans become exercisable ratably for a period of three to four years from the date of grant and have a maximum term of ten years. The exercise prices of stock options under the equity incentive plan generally meet the following criteria: the exercise price of incentive stock options must be at least 100% of the fair market value on the grant date and exercise price of options granted to 10% (or greater) stockholders must be at least 110% of the fair market value on the grant date. In conjunction with the adoption of the Equity Plan, the Company discontinued grants under the 2013 Plan, effective December 10, 2020. In conjunction with the adoption of the 2013 Plan, the Company discontinued grants under its previous plan the Amended and Restated ARCA biopharma, Inc. 2004 Equity Incentive Plan (the 2004 Plan), effective September 17, 2013. As of December 31, 2020, options to purchase 36,978 shares with a weighted average exercise price of $61.84 per share were outstanding under the 2013 plan. The 2004 Plan expired in 2014; however, options outstanding under the 2004 plan will continue to vest according to the original terms of each grant. As of December 31, 2020, options to purchase 160 shares with a weighted average exercise price of $1,437.48 per share were outstanding under the 2004 plan. The Company granted options to purchase an aggregate of 500,350 shares of common stock in the year ended December 31, 2020 and granted no options to purchase shares of common stock in the year ended December 31, 2019. The fair values of employee stock 67 options granted in the year ended December 31, 20 20 were estimated at the date of grant using the Black-Scholes model with the following assumptions and had the following estimated weighted average grant date fair value per share: Year Ended December 31, 2020 Expected term 6.0 years Expected volatility 96 % Risk-free interest rate 0.50 % Expected dividend yield 0 % Weighted-average grant date fair value per share $ 3.28 A summary of ARCA’s stock option activities for the years ended December 31, 2020 and 2019, and related information as of December 31, 2020, is as follows: Options Outstanding Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Options outstanding - December 31, 2018 33,503 $ 96.22 Granted — — Exercised — — Forfeited and cancelled (2,367 ) 250.36 Options outstanding - December 31, 2019 31,136 $ 84.50 6.26 $ — Granted 500,350 4.29 Exercised — — Forfeited and cancelled (248 ) 610.46 Options outstanding - December 31, 2020 531,238 $ 8.71 9.68 $ — Options exercisable - December 31, 2020 31,587 $ 79.08 5.08 $ — Options vested and expected to vest - December 31, 2020 530,618 $ 8.71 9.68 $ — The aggregate intrinsic value in the table above represents the total intrinsic value, based on our closing price as of December 31 of the respective year, which would have been received by the option holders had all the option holders with in-the-money options exercised as of that date. As of December 31, 2020, the unrecognized compensation expense related to unvested options, excluding estimated forfeitures, was $1.6 million which is expected to be recognized over a weighted average period of 4.0 years. The Company recognizes compensation costs for its share-based awards on a straight-line basis over the requisite service period for the entire award, as adjusted for expected forfeitures. Non-cash Stock-based Compensation For the years ended December 31, 2020 and 2019, the Company recognized the following non-cash, share-based compensation expense (in thousands): Years Ended December 31, 2020 2019 Research and development $ 26 $ 71 General and administrative 17 80 Total $ 43 $ 151 ARCA did not recognize any tax benefit related to employee stock-based compensation cost as a result of the full valuation allowance on its net deferred tax assets. 68 (9) Employee Benefit Plans The Company has a 401(k) plan and makes a matching contribution equal to 100% of the employee’s first 3% of the employee’s contributions and 50% of the employee’s next 2% of contributions. The Company adopted the plan in 2006 and contributed $76,000 and $77,000 for the years ended December 31, 2020 and 2019, respectively. ( 10) Income Taxes Effective June 1, 2005, the Company changed from an S-Corporation to a C-Corporation. As an S-Corporation, the net operating loss carryforwards were distributed to the Company’s stockholders; such amounts were not significant. As of December 31, 2020, the Company has net operating loss carryforwards of approximately $179.5 million, and approximately $1.9 million of research and development credits that may be used to offset future taxable income. The Company’s net operating loss carryforwards through December 31, 2017 will expire beginning 2025 through 2037. The net operating loss carryforwards beginning in 2018, have no expiration. Utilization of net operating losses and tax credits, including those acquired as a result of the Merger, will be subject to an annual limitation due to ownership change limitations provided by Internal Revenue Code Section 382. The Company believes that an ownership change limitation as defined under Section 382 of the U.S. Internal Revenue Code occurred as a result of its various historical financing transactions. Future utilization of the federal net operating losses and tax credit carryforwards accumulated from June 2005 to the change in ownership date will be subject to annual limitations to offset future taxable income. The annual limitation may result in the expiration of the net operating losses and credits before utilization. As such, a portion of the Company’s net operating loss carryforwards may be limited. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Due primarily to the Company’s history of operating losses, management is unable to conclude that it is more likely than not that the Company will realize the benefits of these deductible differences, and accordingly has provided a valuation allowance against the entire net deferred tax assets and liabilities of approximately $47.0 million at December 31, 2020, reflecting an increase of approximately $2.4 million from December 31, 2019. During 2020, deferred tax assets and liabilities decreased $0.1 million related to the remeasurement of the deferred tax assets and liabilities as a result of a decrease in the effective state tax rate. The deferred tax assets are primarily comprised of net operating loss carryforwards and research and experimentation credit carryforwards. As of December 31, 2020, the Company has not performed an Internal Revenue Code Section 382 limitation study. Depending on the outcome of such a study, the gross amount of net operating losses recognizable in future tax periods could be limited. A limitation in the carryforwards would decrease the carrying amount of the gross amount of the net operating loss carryforwards, with a corresponding decrease in the valuation allowance recorded against these gross deferred tax assets. Income tax benefit for the years ended December 31, 2020 and 2019 primarily were related to the reduction in the recorded valuation allowance as a result of the realization of research and experimentation credit carryforwards under the Protecting Americans from Tax Hikes Act of 2015, or PATH Act. As of December 31, 2019, the Company has realized the full amount available under the PATH Act. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted. The CARES Act changed net loss carryforward and back provisions and the business interest expense limitation. The Company has evaluated the impact of the CARES Act and determined that none of the changes would result in a material cash benefit to the Company. Income tax benefit attributable to our loss from operations before income taxes differs from the amounts computed by applying the U.S. federal statutory income tax rate of 21% for 2020 and 2019, as a result of the following (in thousands): Years ended December 31, 2020 2019 U.S. federal income tax benefit at statutory rates $ (2,047 ) $ (1,151 ) State income tax benefit, net of federal benefit (350 ) (201 ) Change in state tax rate 110 — Research and experimentation credits (191 ) (31 ) Deferred tax asset adjustment 3 3 Other 103 115 Change in valuation allowance 2,363 1,098 Income tax benefit $ (9 ) $ (167 ) 69 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes, as well as operating loss and tax credit carryforwards. The income tax effects of temporary differences and carryforwards that give rise to significant portions of the Company’s net deferred tax assets and liabilities consisted of the following (in thousands): As of December 31, 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 44,142 $ 41,989 Charitable contribution carryforwards 433 439 Research and experimentation credits 1,860 1,668 Capitalized intangibles 416 387 Stock-based compensation 116 119 Depreciation and amortization (5 ) — Accrued compensation 22 16 Lease liabilities 111 — Other — 9 Total deferred tax assets 47,095 44,627 Valuation allowance (46,990 ) (44,627 ) Deferred tax assets, net of valuation allowance 105 — Deferred tax liabilities: Right-of-use asset (105 ) — Net deferred tax liability $ — $ — Since the Company is in a loss carryforward position, the Company is generally subject to U.S. federal and state income tax examinations by tax authorities for all years for which a loss carryforward is available. Thus, the Company’s open tax years extend back to 2009. The Company believes that its tax filing positions and deductions related to tax periods subject to examination will be sustained upon audit and does not anticipate any adjustment will result in a material adverse effect on the Company’s financial condition, result of operations, or cash flow. For the years ended December 31, 2020 and 2019, the Company has no reserve for uncertain tax positions. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the subsequent twelve months. In the event the Company concludes it is subject to interest or penalties arising from uncertain tax positions, the Company will record interest and penalties as a component of other income and expense. No interest or penalties were recognized in the financial statements for the years ended December 31, 2020 and 2019. (11) Subsequent Event From January 1, 2021 through February 22, 2021, the Company issued additional Common Stock under the 2020 Sales Agreement, as discussed in Note 7. As of February 22, 2021, the Company has sold all shares available under its current prospectus to the Company’s registration statement on Form S-3 (No. 333-238067). 70 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.