UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
" ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
! TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 000-22873
ARCA BIOPHARMA, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
11080 CirclePoint Road, Suite 140, Westminster, CO
(Address of Principal Executive Offices)
36-3855489
(I.R.S. Employer
Identification No.)
80020
(Zip Code)
(720) 940-2200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
Common Stock $0.001 par value
Name of Each Exchange on Which Registered
The Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes ! No "
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 and Section 15(d) of the Act. Yes ! No "
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes " No !
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes " No !
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. "
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
!
"
!
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
!
! (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ! No "
The aggregate market value of the common stock held by non-affiliates of the Registrant on June 30, 2017, the last business day of the most recently
completed second fiscal quarter, was $13,807,570 based on the last sale price of the common stock as reported on that day by the The Nasdaq Capital
Market.
As of March 19, 2018, the Registrant had 13,914,320 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business ..........................................................................................................................................................................
Risk Factors ....................................................................................................................................................................
Unresolved Staff Comments...........................................................................................................................................
Properties ........................................................................................................................................................................
Legal Proceedings...........................................................................................................................................................
Mine Safety Disclosures.................................................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ........................................................................................................................................................................
Selected Financial Data ..................................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................................
Quantitative and Qualitative Disclosures About Market Risk .......................................................................................
Financial Statements and Supplementary Data ..............................................................................................................
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, KPMG LLP .................................
BALANCE SHEETS......................................................................................................................................................
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS .......................................................................
STATEMENTS OF STOCKHOLDERS’ EQUITY ......................................................................................................
STATEMENTS OF CASH FLOWS..............................................................................................................................
NOTES TO FINANCIAL STATEMENTS ...................................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................
Controls and Procedures.................................................................................................................................................
Other Information ...........................................................................................................................................................
Directors, Executive Officers and Corporate Governance .............................................................................................
Executive Compensation ................................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......................
Certain Relationships and Related Transactions, and Director Independence ...............................................................
Principal Accountant Fees and Services.........................................................................................................................
Exhibits and Financial Statement Schedules ..................................................................................................................
SIGNATURES .............................................................................................................................................................................................
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PART I
Item 1. Business
Some of the statements under “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this Annual Report constitute forward-looking statements. In some cases, you can identify
forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or
other comparable terminology, although not all forward-looking statements contain these words. Examples of these statements
include, but are not limited to, statements regarding the following: potential future development plans for Gencaro, the expected
features and characteristics of Gencaro, including the potential for genetic variations to predict individual patient response to
Gencaro or AB171, Gencaro’s potential to treat atrial fibrillation, or AF, future treatment options for patients with AF, the potential
for Gencaro to be the first genetically-targeted AF prevention treatment, the expected features and characteristics of AB171 as a
potential genetically-targeted treatment for peripheral arterial disease, or PAD, and for heart failure, or HF, the potential timeline
for development of AB171, including any Investigational New Drug, or IND, application submission related thereto, and the ability of
ARCA’s financial resources to support its operations through the end of 2018, the sufficiency of our current capital to reach certain of
our corporate objectives, our ability to obtain additional funding when needed or enter into a strategic or other transaction, the extent
to which our issued and pending patents may protect our products and technology, the potential of such product candidates to lead to
the development of safe or effective therapies, our ability to enter into collaborations, our ability to maintain listing of our common
stock on a national exchange, our future operating expenses, our future losses, our future expenditures, and the sufficiency of our cash
resources to maintain operations. 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.
In addition, you should refer to the “Risk Factors” section of this Annual Report for a discussion of other important factors that may
cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these
factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our
forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these
forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we
will achieve our objectives and plans in any specified time frame, or at all.
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.
The terms “ARCA,” “the Company,” “we,” “us,” “our” and similar terms refer to ARCA biopharma, Inc.
Overview
We are a biopharmaceutical company applying a precision medicine approach to developing genetically-targeted therapies for
cardiovascular diseases. Precision medicine refers to the tailoring of medical treatment to the individual characteristics of each patient
through the ability to classify individuals into subpopulations that differ in their susceptibility to a particular disease, in the biology
and/or prognosis of those diseases they may develop, or in their response to a specific treatment. Our lead product candidate,
Gencaro™ (bucindolol hydrochloride), is an investigational, pharmacologically unique beta-blocker and mild vasodilator that we are
developing for the potential treatment of patients with chronic heart failure with reduced left ventricular ejection fraction, or HFrEF,
who also have atrial fibrillation, or AF, or at risk of developing AF. HFrEF constitutes an estimated 50-60% of the total heart failure,
or HF, population, with the remainder comprised of HF with preserved ejection fraction, or HFpEF. We believe that Gencaro’s
efficacy is enhanced in a specific genotype that is present in approximately fifty percent of the general population in the United States,
and can be identified by a genetic test. We believe that with this genetic test, we may be able to predict individual patient response to
Gencaro, potentially improving the efficacy of treatment for AF in HFrEF patients with this particular genotype. We believe that
Gencaro, if approved, could potentially be a safer and more effective therapy for treating or preventing AF in patients with HFrEF and
could be the first genetically-targeted AF treatment. We also believe that Gencaro may have market exclusivity based on patents and
new chemical entity status, if approved in the United States, Europe or other markets.
In February 2018, we reported the results of our Phase 2B clinical superiority trial, known as GENETIC-AF, in which we evaluated
Gencaro for the treatment and prevention of AF in patients with HFrEF. The GENETIC-AF trial only enrolled patients with the
beta-1 389 arginine homozygous genotype. In our trial, HFrEF is defined as a left ventricular ejection fraction, or LVEF, of less than
50%. GENETIC-AF compared Gencaro to TOPROL-XL (metoprolol succinate), a drug approved for treating HFrEF that is also
prescribed, but not approved, for treating AF in patients with HFrEF. Overall, Gencaro demonstrated a similar treatment benefit
1
compared to the active comparator, metoprolol succinate (TOPROL-XL). In U.S. patients (127 of 267 total patients), a trend for
potential superior benefit in favor of Gencaro (approximately 30% risk reduction over TOPROL-XL), was observed for the primary
endpoint of time to recurrence of AF. Additionally, in U.S. patients, Gencaro demonstrated a trend for potential superior benefit in
favor of Gencaro (approximately 51% risk reduction over TOPROL-XL) in a subset of patients who underwent continuous heart
rhythm monitoring with Medtronic implanted devices. Safety data indicated that Gencaro was generally safe and well-tolerated in the
AF/HF population investigated with a safety profile similar to TOPROL-XL.
GENETIC-AF enrolled 267 patients from the United States, Canada and Europe. The primary analysis was conducted to evaluate the
evidence of safety and superior efficacy of Gencaro versus an active comparator, TOPROL-XL. The primary endpoint of the trial was
time to recurrent AF, atrial flutter, or AFL, or all-cause mortality, or ACM. The trial was not powered to conventional significance for
this endpoint and utilized Bayesian statistical modeling of predictive probability of success, or PPoS, of the primary endpoint to
estimate outcome if the trial had enrolled 620 patients with 330 primary events.
Overall, Gencaro demonstrated a similar treatment benefit compared to the active comparator, TOPROL-XL (143 total events, hazard
ratio of 1.01 [95% confidence interval: 0.71, 1.42]), which was associated with a PPoS of 14%. In the U.S. patient cohort of 127
patients (approximately 50% of all patients and events), a trend for potential superior benefit in favor of Gencaro over TOPROL-XL
was observed (73 events, hazard ratio 0.70, [95% confidence interval: 0.41, 1.19]), with a PPoS of 61%, which was greater than the
prespecified criteria set by us to proceed to Phase 3 development. We believe the difference in treatment effects between the overall
and U.S. patient cohorts was primarily due to results in two non-U.S. countries exhibiting hazard ratios >1.0. The differences between
patients enrolled at these sites versus the United States and other country cohorts are being investigated.
A subgroup of patients underwent continuous (24/7) heart rhythm monitoring via Medtronic implanted loop recorders or other
Medtronic implanted therapeutic devices (e.g., ICDs, CRTs) to evaluate daily AF burden. AF burden was defined as the amount of
time per day a patient experienced AF, as measured by an implanted device. A prespecified time-to-first event analysis was conducted
using a total AF burden of at least 6 hours per day to define an event of AF recurrence. In this analysis, hazard ratios of 0.75 (0.43,
1.32) and 0.49 (0.24, 1.04) were observed in the overall (n=69) and U.S. patient (n=42) cohorts, respectively.
Gencaro was generally safe and well-tolerated, with 84% of patients attaining their target dose compared to 72% of patients receiving
TOPROL-XL. The most frequently reported adverse events were similar in both groups and consistent with the known safety profile
of the beta-blocker class of drugs. Adverse events assessed as related to study drug by the investigator occurred in 23.8% of patients in
the Gencaro group and in 30.1% of patients in the TOPROL-XL group. Of note, adverse events of bradycardia were less frequently
reported in the Gencaro group (3.7%) compared to patients receiving TOPROL-XL (12.0%). During the 24-week efficacy follow-up
period there were three deaths (ACM) in the TOPROL-XL group and none in the Gencaro group. Three patients died in the long-term
treatment extension period after receiving Gencaro for more than a year.
Our current development of Gencaro is, in part, based on a prospectively designed DNA substudy of adrenergic receptor
polymorphisms in the BEST trial, a previous Phase 3 study of 2,708 HF patients. Based on data from the BEST trial, Gencaro showed
potential evidence of enhanced efficacy in treating AF and in reducing mortality and hospitalizations in HF patients with the beta-1
389 arginine homozygous genotype. In 2015, the U.S. Food and Drug Administration, or FDA, designated the investigation of
Gencaro for the prevention of AF in a genetically targeted heart failure population (HF patients with reduced LVEF) as a Fast Track
development program.
AF, the most common sustained cardiac arrhythmia, is a potentially serious disorder in which the normally regular and coordinated
contraction pattern of the heart’s two small upper chambers, or the atria, becomes irregular, rapid and uncoordinated. AF commonly
occurs together with HFrEF, with AF being both a cause and a result of HFrEF. By increasing heart rate and producing irregular cycle
lengths, AF may contribute to the disease processes that leads to the progression of HFrEF and worsening clinical outcomes.
AF is considered an epidemic cardiovascular disease and a major public health burden. The estimated number of individuals with AF
globally in 2015 was 33.3 million. According to the 2017 American Heart Association report on Cardiovascular Disease,
approximately 5.2 million people in the United States had atrial fibrillation in 2015. Hospitalization rates for AF increased by 23%
among U.S. adults from 2000 to 2010 and hospitalizations account for the majority of the economic cost burden associated with AF.
In a global registry of AF patients, the rates of heart failure (of all types) ranged from 33% in patients with paroxysmal (episodes
lasting 7 days or less) to 56% in patients with permanent AF.
We believe there is a significant need for drug therapies that are safe and effective for HFrEF patients with AF or at risk of developing
it, as the existing drug therapies for the treatment or prevention AF have certain safety disadvantages in HFrEF patients, such as toxic
or cardiovascular adverse effects. Most of the approved drugs for AF are contra indicated or have warnings in their prescribing
information for such patients. Consequently, in the treatment and prevention of AF in HFrEF patients, we believe there is an unmet
medical need for new treatments that have fewer side effects and are more effective than currently available therapies.
2
We believe that data from the BEST trial indicate that Gencaro may have a genetically regulated effect in reducing or preventing AF
in HFrEF patients. A retrospective analysis of data from the BEST trial shows that all patients in the trial treated with Gencaro had a
41% reduction in the risk of new onset AF (time-to-event) compared to placebo (p = 0.0004). In a substudy in the trial, which
considered only patients with the genotype believed to enhance Gencaro’s efficacy (known as the beta-1 389 arginine homozygous
genotype), patients treated with Gencaro experienced a 74% (p = 0.0003) reduction in risk of AF, based on the same analysis. In
addition, the BEST study, the beta-1 389 arginine homozygous genotype Gencaro demonstrated enhanced efficacy in reducing
mortality, hospitalizations, and ventricular tachycardia /ventricular fibrillation, or VT/VF. Furthermore, patients with a beta-1 389
arginine homozygous genotype who entered the trial in AF had statistically significant reductions in major cardiovascular or HF
mortality/hospitalization composite endpoints, which we believe is the first and thus far only demonstration of effectiveness of a beta-
blocker in reducing major HF events in HFrEF patients with permanent AF. The beta-1 389 arginine homozygous genotype was
present in about 50% of the patients screened and all enrolled patients in the GENETIC-AF trial and 47% of the patients in the BEST
pharmacogenetic substudy, and we estimate it is present in about 50% of the North American and European general populations.
GENETIC-AF was completed as a Phase 2B, multi-center, randomized, double-blind, clinical superiority trial comparing the safety
and efficacy of Gencaro against an active comparator, the beta-blocker TOPROL-XL (metoprolol succinate), that enrolled 267
patients. Eligible patients had HFrEF, a history of paroxysmal AF (episodes lasting 7 days or less) or persistent AF (episodes lasting
more than 7 days and less than 1 year) in the past 6 months, and the beta-1 389 arginine homozygous genotype that we believe
responds most favorably to Gencaro. We believe that Gencaro may be potentially unique in the beta-blocker class of drugs due to its
apparent pharmacologic interaction with the beta-1 adrenergic receptor polymorphism. We received guidance from the FDA
regarding the GENETIC-AF clinical trial prior to initiation of the trial. The trial enrolled patients in the United States, Canada and
Europe and completed enrollment in August 2017.
In August 2017, the GENETIC-AF Data and Safety Monitoring Board, or DSMB, conducted a pre-specified interim analysis of
unblinded efficacy and recommended completing the Phase 2B trial with no changes to the trial design. All 267 patients completed
their last study visits and were transitioned off study drug by the end of December 2017.
Our GENETIC-AF clinical trial of Gencaro required a companion diagnostic test to identify the patient’s receptor
genotype. Laboratory Corporation of America, or LabCorp, provided the companion diagnostic test and services to support our
GENETIC-AF trial. LabCorp has developed the genetic test and obtained an Investigational Device Exemption, or IDE, from the
FDA for the companion diagnostic test used in our GENETIC-AF clinical trial. We retain all rights to the genetic test. Future clinical
trials of Gencaro, if any, may use a similar diagnostic test to identify the patient’s receptor genotype.
Medtronic, Inc., or Medtronic, a global healthcare solutions company, collaborated with us on the GENETIC-AF trial in supporting
our AF burden substudy. The collaboration was administered by a joint ARCA-Medtronic committee. Medtronic used its proprietary
CareLink System to collect and analyze the cardiac rhythm data from the implanted Medtronic devices. The AF burden data was used
by the DSMB as part of the interim analysis.
We have been granted patents in the United States, Europe, and other jurisdictions for methods of treating AF and HF patients with
Gencaro based on genetic testing. We believe our patent portfolio and new chemical entity exclusivity may provide market
exclusivity for the indications of Gencaro that we may develop, into approximately 2030 or 2031 in the United States, Europe and
other markets.
Our GENETIC-AF Phase 2B trial was completed in February 2018 and we believe our current cash, cash equivalents and marketable
securities, which includes $3.4 million of net proceeds raised in January 2018 from sales of our common stock, will be sufficient to
fund our operations, at our projected cost structure, through the end of 2018. However, changing circumstances may cause us to
consume capital significantly faster or slower than we currently anticipate.
In January 2017, we entered into a sales agreement with an agent to sell, from time to time, our common stock having an aggregate
offering price of up to $7.3 million, in an “at the market offering.” In August 2017, we amended the sales agreement to increase the
maximum aggregate value of shares which we may issue and sell from time to time under this sales agreement by approximately $2.9
million, from $7.3 million to $10.2 million. As of January 19, 2018, we have sold an aggregate of 4,811,353 shares of our common
stock pursuant to the terms of such sales agreement, as amended, for aggregate gross proceeds of approximately $10.1 million. Net
proceeds received in the period were approximately $9.5 million, after deducting initial expenses for executing the “at the market
offering” and commissions paid to the placement agent. We have sold all shares available under the current prospectus.
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Our Strategy
Our mission is to become a leading biopharmaceutical company developing cardiovascular therapies, using genetic targeting, where
possible, to enhance therapeutic response. To achieve this goal, we are pursuing the following strategies:
•
•
•
•
Advance the development of Gencaro. We may advance the clinical development of Gencaro for HFrEF patients with AF or
at risk of developing it. However, future Gencaro development is dependent upon further analysis of our GENETIC-AF
trial results, the outcome of our requested meeting with the FDA, and our ability to finance additional development through
strategic partnerships or raising capital. Additional development opportunities for Gencaro potentially include indication
expansion or new formulation development.
Raise additional funding or complete a strategic transaction. To support our continued operations, we expect to seek
additional funding through the completion of a strategic transaction, the sale of public or private equity or debt securities, or
a combination thereof.
Advance the development of AB171. We plan to initiate IND-enabling development activities with AB171, a thiol-
substituted isosorbide mononitrate, as a potential genetically-targeted treatment for peripheral arterial disease, or PAD, and
for HF.
Build a cardiovascular pipeline. Our management and employees, including our chief executive officer, are experienced in
cardiovascular research, molecular genetics and clinical development of cardiovascular therapies. We are seeking to
leverage this expertise to identify, acquire and develop other cardiovascular products or candidates, particularly those with
potential for pharmacogenetic based development, such as AB171.
Our strategies are dependent upon our ability to obtain additional funding through the completion of a strategic transaction, the sale of
public or private equity or debt securities, or a combination thereof. Additionally, we are requesting a meeting with the FDA for the
second quarter of 2018 to review GENETIC-AF Phase 2 data and to discuss potential future development plans for Gencaro; however,
this meeting, if and when it occurs, may not leave us with an economical path forward to continue Gencaro development.
Atrial Fibrillation in Heart Failure Market Background and Opportunity
AF is a common and potentially serious cardiac rhythm disorder. In AF, the normally regular and coordinated contraction pattern of
the heart’s two small upper chambers, or the atria, becomes irregular, rapid and uncoordinated. AF may produce uncomfortable
symptoms, but can also have serious consequences. In addition to being a risk factor for stroke, AF can impair heart function by
various mechanisms and lead to reduced cardiac function and progression of HF.
AF is considered an epidemic cardiovascular disease. According to the 2017 American Heart Association report on Cardiovascular
Disease, approximately 5.2 million people in the United States had AF in 2015, with medical and indirect costs totaling an estimated
$31 billion. Hospitalization rates for AF increased by 23% among U.S. adults from 2000 to 2010 and hospitalizations account for the
majority of the economic cost burden associated with AF. The approved therapies for the treatment or prevention AF have certain
safety disadvantages in HFrEF patients, such as toxic or cardiovascular adverse effects, and most of the approved drugs for AF are
contra indicated or have warnings in their prescribing information for such patients. 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 HFrEF
patients.
AF often occurs in patients with HF. HF is also one of the most prevalent and serious cardiac disorders. In HF, cardiac function and
circulatory output become impaired and cannot meet the body's metabolic demands under normal conditions. A common type of HF
is HFrEF, where left ventricular systolic function is reduced and the chamber becomes enlarged. The prevalence of AF in patients
with HFrEF can vary from approximately 5% to over 50%, depending on HF severity and other factors. In an analysis of patients with
new onset HF (of all types) in the Framingham Heart Study, 57% also had AF. In a survey of over 10,000 AF patients from 26
countries conducted in 2009 and 2010, the incidence of HF (of all types) ranged from approximately 33% to over 55%, depending on
whether the patient’s AF was paroxysmal, persistent or permanent. Therefore, there is a significant population of patients with both
HF and AF, as well as HF patients at risk of developing AF.
AF and HFrEF are interrelated and share common disease processes. The presence of HFrEF makes it more likely AF will develop or
perpetuate once it is initiated; in turn, AF in patients with HFrEF may predispose to HF progression including worsening of left
ventricular dysfunction, increased hospitalization burden, and increased risk of death.
In treating AF, the risk of stroke is generally addressed through the use of anticoagulants. Beyond this, the goals of current medical
therapy for AF are to maintain sinus rhythm or to control ventricular rate response in patients who cannot maintain sinus rhythm, in an
effort to minimize patient symptoms and avoid the risk of further complications and disease progression. Current treatments include
pharmaceutical therapy and procedural interventions, such as AF radiofrequency ablation or atrio-ventricular nodal ablation with
pacemaker implantation.
Addressing the rhythm and rate abnormalities of AF is believed to be particularly important in HFrEF patients because of the
relationship between the presence of AF and HF progression. However, the current treatment options for controlling AF in these
4
patients have significant limitations. While anticoagulants are commonly prescribed to address the risk of stroke in AF patients, these
drugs do not address the pathological effects of the irregular and rapid heartbeat that is the hallmark of AF. The drugs that are
commonly used to control the rhythm disorder of AF, known as anti-arrhythmic drugs, have severe limitations in HFrEF patients.
These drugs may have toxic or cardiovascular adverse effects, particularly with chronic use, and most are contraindicated or have
warnings in their labels for use in HF patients.
Drugs in the class known as beta-blockers are commonly prescribed for treating HFrEF and to control rapid heart rate in HF patients
with AF. Beta-blockers are generally safe for chronic use in these patients. However, the beta-blockers currently approved or used in
HF patients are not approved for treating AF and have demonstrated mild efficacy in preventing AF. In addition, analyses of
published trials indicate that current beta-blockers provide no significant benefit in improving clinical outcomes for patients with both
AF and HFrEF.
We believe there is an unmet medical need for new therapeutics that may provide better treatment for patients with HFrEF and AF,
which can safely treat the rhythm and rate disorders in these patients with greater efficacy, while improving their clinical outcomes
and prognoses.
Gencaro
Gencaro (bucindolol hydrochloride) is an investigational, pharmacologically unique beta-blocker and mild vasodilator being
developed for the treatment of AF. Gencaro is considered part of the beta-blocker class of compounds because of its property of
blocking both beta-1 and beta-2, receptors in the heart. The blocking of these receptors prevents them from binding with other
molecules, primarily the neurotransmitter norepinephrine, or NE, which activate these receptors. We believe that Gencaro is well-
tolerated in cardiovascular patients because of its mild vasodilator effects. Originally developed by Bristol-Myers Squibb, or BMS, the
active pharmaceutical ingredient, or API, in Gencaro, bucindolol hydrochloride, has been tested clinically in approximately 4,500
patients, including over 3,000 patients in seven clinical trials in HFrEF patients. Gencaro was the subject of a Phase 3 HF mortality
trial in 2,708 patients, mostly in the United States, or the BEST trial. The BEST trial included a DNA bank of over 1,000 patients,
which was used to evaluate the effect of genetic variation on patients’ response to Gencaro.
At the time of the BEST trial, our scientific co-founders, Dr. Michael Bristow and Dr. Stephen Liggett, hypothesized that the unique
pharmacologic properties of Gencaro would interact with common genetic variations of beta-1, beta-2 and alpha-2C, adrenergic
receptors, which are important receptors that regulate cardiac or adrenergic (sympathetic) nerve function. They tested this hypothesis
prospectively in a substudy conducted using data from the BEST DNA bank. On the basis of this study, Drs. Bristow and Liggett have
determined that patients with certain variations in these receptors had substantially improved outcomes on primary and certain
secondary clinical endpoints in the trial, such as mortality, HF progression, hospitalization and prevention of arrhythmias, relative to
the counterpart genotype groups and the general patient population of the BEST trial. We believe that these genetically determined
receptor variations, which are detectable using standard DNA testing technology, can serve as diagnostic markers for predicting
enhanced therapeutic response to Gencaro, and potentially avoiding adverse events, in individual patients. We have patented our
methods for treating AF and HF patients with Gencaro in the United States, Europe and other markets based on genetic testing.
Pharmacology and Pharmacogenetics
Gencaro’s pharmacology appears to be different from other compounds in the beta-blocker class in several fundamental respects.
First, the National Heart, Lung and Blood Institute of the National Institutes of Health, or NHLBI, and the Cooperative Studies
Program of the Department of Veterans Affairs sponsored studies, or the Liggett-Bristow investigations, conducted by Drs. Bristow
and Liggett indicated that in human myocardial preparations, Gencaro, but not other tested beta-blockers used to treat HF, predisposes
to a shift in equilibrium of beta-1 389 arginine but not 389 glycine receptors from a constitutively active to an inactive state, a property
known as inverse agonism. Second, other studies, including BEST, indicated that Gencaro lowers the systemic levels of the
neurotransmitter norepinephrine, or NE, released by cardiac and other adrenergic nerves. The beta-1 389 arginine receptor, 100% of
the receptor population in patients with a 389 arginine homozygous genotype, has much higher affinity for binding to NE compared to
389 glycine receptors, and published data indicate that NE lowering from Gencaro is beneficial in patients who have only beta-1 389
arginine receptors. In contrast, patients with lower NE affinity beta-1 389 glycine genotypes may have blunting of efficacy from
greater amounts of NE lowering. Third, Drs. Liggett and Bristow's investigations have revealed that NE lowering by Gencaro is in
turn regulated by an adrenergic receptor polymorphism present in adrenergic nerve terminals, alpha-2C 322-325 insertion
(Ins)/deletion (Del). The presence of 322-325 Del genotypes predisposes to greater amounts of Gencaro related NE lowering, which in
the presence of beta-1 389 glycine genotypes can lead to compromise of efficacy. However, for patients with a beta-1 389 arginine
homozygous genotype the high affinity of this receptor for NE means that any amount of NE lowering may be beneficial, and that it is
not necessary to take the alpha-2C 322-325 Ins/ Del genotype into consideration. As a result, the GENETIC-AF trial was targeted at
patients with a beta-1 389 arginine homozygous genotype, which was present in approximately 50% of screened patients. We believe
that these properties and their pharmacogenetic implications for modulating effectiveness are unique to Gencaro, and if the drug is
approved, will be described in in the prescribing information.
5
Gencaro has an important interaction with the beta-1 receptor found on muscle cells, or cardiac myocytes, of the heart. The general
role of the beta-1 receptor and its downstream signaling cascades is to regulate the strength and rate of the heart’s contractions. NE
serves as an activator of the beta-1 receptor, causing the receptor to initiate signaling to the cardiac myocyte. Although this signaling
may be beneficial to the failing heart in the short term, in chronic HFrEF patients the beta-1 receptor also initiates harmful, or
cardiomyopathic, signaling which, over time, exacerbates the heart’s structural and functional decline. Beta-blockers counteract this
destructive process by reducing beta-1 receptor signaling and reversing abnormal patterns of gene expression. They do this by binding
to the receptor and blocking NE molecules from binding and activating the signaling activity and, in Gencaro’s case, by inactivating
constitutively active (i.e. active in the absence of NE stimulation) beta-1 389 arginine receptors and lowering NE levels.
We believe Gencaro has a powerful interaction with the higher-function beta-1 389 arginine variation of the beta-1 receptor.
Laboratory studies show that constitutively active receptors will continue to signal in the presence of standard beta-blockade with
neutral antagonists. The Liggett-Bristow investigations have demonstrated that in isolated preparations of human ventricular
myocardium, in beta-1 389 arginine receptors carvedilol and metoprolol are neutral antagonists, and that metoprolol can block the
inverse agonist effects of Gencaro that reduce the signaling of constitutively active receptors. We believe that Gencaro's inverse
agonist property contributes to the enhanced lowering of heart failure and arrhythmia event rates in HFrEF patients who are beta-1 389
arginine homozygous genotype relative to individuals who are beta-1 389 Gly carriers or to the general population. In addition, we
believe the unique NE lowering properties of Gencaro have a selectively beneficial effect in patients who have only beta-1 389
arginine receptors, because of the high affinity of these receptors for NE.
The BEST trial
The NHLBI and Veterans Affairs Cooperative Studies funded BEST trial began in 1995. It was a double-blind, placebo-controlled,
multi-center study of bucindolol’s effect on reduction of mortality and morbidity in an advanced chronic HFrEF population. The
primary endpoint of the BEST trial was all cause mortality, or ACM, and the pre-specified main secondary endpoint was progression
of HF, defined as death from HF, cardiac transplant, HF hospitalization, or emergency room visit for the treatment of worsening HF
not requiring hospitalization. The trial was planned to run four and one-half years, and enroll 2,800 patients. The trial enrolled a total
of 2,708 chronic HF patients, who were mostly from the United States. Under the umbrella of the BEST trial substudies program, a
DNA bank and substudy was created, and 1,040 of the BEST patients participated by providing blood for DNA analysis. The DNA
bank provided data for the DNA substudy of BEST patients conducted by Drs. Bristow and Liggett.
In 1999, the BEST trial was terminated prior to the completion of follow-up, in response to a recommendation of the BEST trial
DSMB. The primary reason for termination was loss of investigator equipoise; in other words, the fact that the BEST investigators
were no longer uncertain regarding the comparative therapeutic merits of giving a placebo versus giving a beta-blocker to a HFrEF
patient. Positive mortality results from two other HF trials involving other beta-blockers had been reported, and a substantial number
of BEST trial investigators concluded that it was unethical to continue to give placebo to BEST trial participants. As a result, some
investigators began to prescribe these other beta-blockers to patients in the trial, which threatened to destroy the trial’s integrity;
therefore the trial was terminated early.
Clinical Results and the DNA Substudy
Following termination, the preliminary results of the study were analyzed and published. The preliminary determination and general
perception were that the BEST trial had failed on the basis of not meeting its primary endpoint of ACM. The published values were a
10% risk reduction in mortality with a p-value of 0.10. Subsequently, we reanalyzed the results from BEST, in accordance with the
FDA approved, pre-specified statistical analysis plans, which had not been performed by the sponsors of BEST when the trial was
terminated. Our reanalysis demonstrated a 13% risk reduction on the primary endpoint of all-cause mortality in the BEST trial with a
p-value of 0.053.
In 2003 and 2004, the results of the DNA substudy conducted by Drs. Bristow and Liggett began to be analyzed and released. The
DNA substudy results indicated a significant enhancement of response on the major heart failure clinical endpoints from the BEST
trial in patients with the beta-1 389 arginine homozygous genotype. The risk reduction on HF clinical efficacy endpoints such as
mortality and hospitalization ranged from 34% to 48% in this genotype. In addition, in arrhythmia endpoints of atrial fibrillation or
VT/VF, tracked by adverse events, or AEs, and surveillance electrocardiograms, or ECGs, the risk reduction by bucindolol in the
beta-1 389 arginine homozygous genotype appeared to be even greater, with risk reductions of 74% for both endpoints.
6
Shown below are certain of the primary and secondary endpoint data from the BEST HF DNA substudy results, by genotype:
BEST Trial Clinical Responses† by Genotype Groups
Endpoint (entire BEST DNA substudy, n = 1040 patients)
All Cause Mortality (ACM), TTE ..........................
Cardiovascular Mortality (CVM), TTE ..................
ACM + transplantation ...........................................
HF (HF) Progression...............................................
HF Hosp days/patient .............................................
AF prevention (from AE and ECG db) ‡.................
VT/VF prevention (from AE db) ............................
Entered DNA substudy in AF, n = 111
ACM/HF Hosp, TTE...............................................
Cardiovascular (CV) mortality/CV Hosp ...............
{beta-1 389 Arg/
Arg + any alpha-2C}
“Very Favorable”
Patient Type
(47%)
↓ 38%*
↓ 48%*
↓ 43%*
↓ 34%**
↓ 48%**
↓ 74%**
↓ 74%**
beta-1 Arg/Arg,
any alpha-2C
↓ 77%*
↓ 72%*
{beta-1 389 Gly
carrier+ alpha-2C
Ins/Ins} “Favorable”
Patient Type
(40%)
↓ 25%
↓ 40%*
↓ 24%
↓ 20%
↓ 17%
↓ 6%
↓ 49%*
{beta-1 389 Gly
carrier + alpha-2C
Del carrier}
“Unfavorable”
Patient Type
(13%)
↑ 4%
↑ 11%
↑ 4%
↓ 1%
↑ 19%
↑ 33%
↓ 24%
beta-1 389 Gly C, any alpha-2C
↑ 52%
↑ 7%
†
*
Covariate adjusted, transplant censored analysis with 1 – hazard ratio estimates presented; ‡in 925 patients who entered in SR
p<0.05; **p ≤ 0.007; TTE: Time To Event
Analysis of BEST trial for AF
The BEST study data were further analyzed focusing on AF prevention, rate control in patients with established AF, and on clinical
outcomes of patients with AF. Although there was no pre-determined AF endpoint, including reduction in risk of AF, in the BEST
trial, according to our analysis of adverse events and surveillance ECG’s during the trial, 7.9% of patients developed new onset AF,
with a greater incidence observed in the placebo group (9.7%) compared to the bucindolol group (6.2%). This corresponded to a 36%
reduction in the incidence of new onset AF (based on crude event rates) for patients receiving bucindolol (p = 0.002). In a time to
event analysis, the risk of new onset AF was reduced by 41% (p = 0.0004) with bucindolol treatment. Patients in the BEST study with
the beta-1 389 Arg/Arg genotype who received Gencaro had a 74% reduction in the risk of developing new onset AF (p = 0.0003).
Further published analyses of the data from BEST suggest that Gencaro may also have potential efficacy for other clinical endpoints
and outcomes related to AF. A published analysis of the BEST data revealed that of the 303 patients in the BEST trial with established
AF, 67% of those who received Gencaro achieved ventricular response rate control, defined as a resting heart rate of less than or equal
to 80 beats per minute without symptomatic bradycardia (p < 0.005). In AF patients who achieved ventricular response rate control,
Gencaro produced a 39% reduction (p = 0.025) in cardiovascular mortality/cardiovascular hospitalizations. In addition, Gencaro also
improved cardiovascular clinical endpoints for those AF patients possessing the beta-1 389 arginine genotype that ARCA believes is
most favorable for Gencaro response. In a substudy of 1,040 patients in BEST in which patient genotypes were analyzed, Gencaro was
associated with a 72% decrease (p = 0.039) in cardiovascular mortality/cardiovascular hospitalizations in those 52 AF patients in the
substudy with the beta-1 389 arginine homozygous genotype.
Analysis of the BEST Study data also shows that Gencaro has potential efficacy against the serious arrhythmias of VT/VF, which also
appears to be genetically regulated. A published report demonstrated that patients in the BEST Trial who received Gencaro
experienced a 58% reduction in the incidence of VT/VF (p = 0.00006), adjusted for the competing risk of mortality. In addition, the
authors of this report determined that Gencaro reduced the incidence of VT/VF by 74% (p = 0.00005) in patients with the beta-1 389
arginine homozygous genotype.
As with the overall study cohort, most patients (89%) in the 1,040 patient DNA substudy were free of AF (91% sinus rhythm, 9%
other non-AF rhythms) at baseline. The proportion of patients free of AF at baseline was also similar in the two treatment groups for
the overall DNA substudy cohort, as well as in the beta-1 389 genotype subgroups. In the BEST DNA substudy, the proportion of
patients who developed new onset AF was similar compared to the overall study cohort for both the placebo group (11% and 10%,
respectively) and the Gencaro group in the DNA substudy population compared to the overall study cohort (7% and 6%, respectively).
Also, there was a similar reduction in new onset AF observed in the bucindolol group compared to placebo (43% and 41%,
respectively, by time to event analysis). Therefore, the overall results from the genetic substudy population are consistent with the
results from the overall study population.
7
In patients with all genotypes, the AF risk reduction of 41-43% by Gencaro in BEST is based on an analysis of adverse events and
surveillance ECG’s which was similar to AF risk reductions observed in a meta-analysis of data regarding seven placebo-controlled
beta-blocker trials in HFrEF patients. In the meta-analysis, beta-blockers appeared to reduce the incidence of new onset AF in all but
one trial, with an overall relative risk reduction of 27%. Despite what we believe to be potential evidence for the prevention of AF in
HFrEF trials, no beta-blocker has FDA approval for use in this indication. However, the evidence of modest efficacy by beta-blockers
approved for other indications will require that any Phase 3 trials with Gencaro will have an active beta-blocker comparator instead of
a comparison against placebo. The Phase 2B trial GENETIC-AF trial only enrolled patients with the beta-1 389 arginine homozygous
genotype. In the BEST trial, the post hoc analysis of patients with the beta-1 389 arginine homozygous genotype who received
Gencaro had a 74% reduction in the risk of developing AF.
Clinical and Regulatory Strategy
The regulatory strategy for Gencaro is to obtain an AF approval in a genotype specific HFrEF population. We enrolled certain patients
with the beta-1 389 arginine homozygous genotype in our AF clinical trial, GENETIC-AF, because our analysis of the BEST DNA
substudy indicated this group had a 74% reduction in risk for new AF events, in addition to reducing event rates for mortality and HF
hospitalizations.
In February 2018, we reported the top-line results of our GENETIC-AF clinical trial of Gencaro. The primary analysis was conducted
for evidence of safety and detection of superior efficacy of Gencaro versus the active comparator, TOPROL-XL. Overall, Gencaro
demonstrated a similar treatment benefit compared to the active comparator, TOPROL-XL. In U.S. patients (127 of 267 total patients),
a trend for potential superior benefit in favor of Gencaro (approximately 30% risk reduction over TOPROL-XL), was observed for the
primary endpoint of time to recurrence of AF. Additionally, in U.S. patients, Gencaro demonstrated a trend for potential superior
benefit in favor of Gencaro (approximately 51% risk reduction over TOPROL-XL) in a subset of patients who underwent continuous
heart rhythm monitoring with Medtronic implanted devices. Safety data indicated that Gencaro was generally safe and well-tolerated
in the AF/HF population investigated with a safety profile similar to TOPROL-XL.
We are requesting a meeting with the FDA for the second quarter of 2018 to review GENETIC-AF Phase 2 data and to discuss
potential future development plans for Gencaro.
In 2015, the FDA designated the investigation of Gencaro for the prevention of atrial fibrillation/atrial flutter in a genetically targeted
heart failure population (heart failure patients with reduced left ventricular ejection fraction) as a Fast Track development program.
Fast Track drug development designation was included in the FDA Modernization Act of 1997, or FDAMA, as a formal process to
enhance interactions with the FDA during drug development. A drug development program with Fast Track designation is eligible for
consideration for some or all of the following programs for expediting development and review: scheduled meetings to seek FDA
input into development plans, priority review of the NDA the option of submitting portions of an NDA for review prior to submission
of the complete application and potential accelerated approval.
The Gencaro Test
If approved, we believe that Gencaro will be the first cardiovascular drug to be integrated with a companion diagnostic to predict
enhanced efficacy. We believe the drug label we will propose for Gencaro would identify the patient receptor genotype studied in the
trial that can expect enhanced efficacy and, and that the label would recommend receptor genotype testing prior to initiation of
therapy. Therefore, the commercialization of Gencaro may require an FDA approved diagnostic test for this genotype be available.
Such a test, or the Gencaro Test, could be performed by a variety of laboratory processes or platforms. We used one such platform for
the GENETIC-AF trial, and retain all rights to it. We believe the Genaro Test could be developed and commercialized through a
preferred diagnostic provider, by the company marketing Gencaro, or a combination of approaches. We also believe that point of care
genetic tests, which could be performed during the patient’s visit to the physician, may be feasible as part of the commercialization
strategy.
For our GENETIC-AF clinical trial, we had an agreement with LabCorp to provide the companion diagnostic test and services to
support the trial. To provide those services, LabCorp developed the genetic test and obtained from the FDA an IDE for the companion
diagnostic test that we used in our GENETIC-AF clinical trial.
Licensing and Royalty Obligations
We have licensed worldwide rights to all preclinical and clinical data from development of bucindolol through the BEST trial from
Cardiovascular Pharmacology and Engineering Consultants, LLC, or CPEC, who has licensed rights to this data from BMS. In
addition, we have sublicensed CPEC’s rights from BMS. CPEC is a licensing entity which holds the rights of the biotechnology
companies that were the commercial sponsors of the BEST trial. If the FDA grants marketing approval for Gencaro, the license
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agreements state that we are required to make a milestone payment of $8.0 million within six months after FDA approval. The license
agreements also state that we are required to make milestone payments of up to $5.0 million in the aggregate upon regulatory
marketing approval in Europe and Japan. The licenses state that our royalty obligations range from 12.5% to 25% of revenue from the
related product based on achievement of specified product sales levels including a 5% royalty that CPEC is obligated to pay BMS.
The agreements state that we have the right to buy down the royalties to a range of 12.5% to 17% by making a payment to CPEC
within six months of regulatory approval. In October 2017, we entered into an agreement with CPEC’s minority owner, Aeolus
Pharmaceuticals, Inc., or Aeolus, pursuant to which we acquired Aeolus’ minority membership interest in CPEC. The transaction
effectively buys-out Aeolus’ royalty interest thereby reducing or eliminating the stated milestone and royalty obligations by 35% that
could be payable by us, if Gencaro receives regulatory approval and is commercialized. In the transaction, we also acquired all of
CPEC’s rights to milestones and royalties for Europe and certain other territories outside of the United States.
We also have licensed worldwide rights to intellectual property covering the pharmacogenetic response of Gencaro based on the
cardiac receptor polymorphisms, which is owned by the University of Colorado. We have no material future financial obligations
under this license. We also have licensed exclusive, worldwide rights to develop and commercialize diagnostics for these receptor
polymorphisms, for the purpose of prescribing Gencaro.
Development Pipeline
Our development activities are substantially focused on our lead product candidate, Gencaro, for the potential treatment of HF patients
with AF. The primary endpoint of the GENETIC-AF trial was the prevention of AF in these patients. We also believe, based upon
data from the BEST trial, that Gencaro may have additional potential in providing rate control and clinical benefit for patients with
permanent AF, in preventing VT/VF and in treating HF generally. We also have developed and patented an isomer version of
bucindolol, which appears to be substantially more potent than the current formulation. We do not expect to pursue development of
Gencaro for disease indications beyond HFrEF patients with AF without obtaining additional funding or entering into a strategic
partnership or collaboration. We believe Gencaro has potential to address these additional indications, and that the clinical response of
patients with these diseases may be genetically influenced, based on the same genetic markers we have identified for our proposed
treatment of AF with Gencaro.
AB171 is a thiol-containing derivative of isosorbide mononitrate. Pre-clinical data indicate that AB171 may have anti-oxidant
properties and may be favorably differentiated from other nitrates for prevention of myocardial remodeling, anti-atherosclerotic effects
and the development of tolerance. We believe the unique pharmacology of AB171, coupled with targeting to genetically-identified
enhanced response subpopulations, has the potential to translate to better long-term responses than treatment with traditional
pharmacotherapy. We have discovered what we believe to be a pharmacogenetic target for AB171 that is the basis for our patents and
which we believe may enable genetically-targeted cardiovascular development programs. In November 2017, we announced our
intent to develop the compound based on our genetic use patent approach. We plan to advance development of AB171, a potential
New Chemical Entity, or NCE, for the treatment of two cardiovascular indications: peripheral arterial disease, or PAD, and chronic
HF. The European Patent Office has issued to us a patent on methods of treating cardiovascular disease and conditions with a thiol-
substituted isosorbide mononitrate based on genetic targeting. The European patent has been validated in ten countries: Denmark,
France, Germany, Ireland, Italy, Netherlands, Spain, Sweden, Switzerland and the United Kingdom. ARCA has related patent
applications pending in the United States Patent Office and Canadian Intellectual Property Office.
We are currently designing the preclinical development plan for AB171 and intend to initiate chemistry, manufacturing and controls,
or CMC, activities in the second quarter of 2018, followed by nonclinical studies with AB171 to support future submission of an IND
application.
We also have exclusive pharmacogenetic and other patent rights to drug candidates that have potential indications in cardiovascular
disease, oncology and other therapeutic areas. We may seek partners to assist us in the development of these candidates or who may
license them. We may also seek funds to advance the development of the compounds on our own.
Competition
Current AF treatments include pharmaceutical, procedural or device intervention. There are several antiarrhythmic drugs approved by
the FDA for the treatment and/or prevention of recurrent AF. However, these drugs have safety and/or administration concerns and all
but one have contraindications or label warnings regarding their prescription in patients with heart failure.
Drugs that are currently approved or used for the treatment or prevention of AF in HFrEF have notable risks due to adverse side
effects or lack sufficient efficacy. Therefore, in HFrEF we believe there is a substantial unmet medical need for new AF treatments
that have fewer side effects and are more effective than currently available therapies. We believe that Gencaro’s prevention of AF in
HFrEF patients would provide this patient population a safer treatment option than other treatments currently or approved by FDA.
9
The pharmaceutical industry is highly competitive. We face significant competition from pharmaceutical companies and
biotechnology companies that are researching and selling products designed to treat cardiovascular conditions. Most of these
companies have significantly greater financial, product development, manufacturing, and commercial resources than we have.
In addition, our proposed prescribing information for Gencaro includes a recommendation for genetic testing, which will add
additional cost and procedures to the process of prescribing Gencaro, and which could make it more difficult for us to compete against
existing or future therapies.
Manufacturing and Product Supply
Gencaro is a small molecule drug with an established manufacturing history. Multiple manufacturers of both the API and drug product
have successfully produced Gencaro for use in clinical trials over the course of its clinical development. We outsource all
manufacturing and analytical testing of the Gencaro API and drug product. We have selected third party contract manufacturing
organizations on the basis of their technical and regulatory expertise. Our approach with our contract manufacturing partners has been
to replicate the manufacturing processes that were used to support the prior pivotal clinical trial with Gencaro, and to minimize any
changes from these baseline processes, thereby reducing technical and regulatory risk. We contracted with Groupe Novasep to
complete the drug substance registration batches required for the Gencaro NDA. These batches were successful, and the resulting drug
substance was used to supply the drug product registration campaign. Remaining inventory was placed in current Good Manufacturing
Practice, or cGMP, storage to provide a backup supply for the GENETIC-AF trial, and for use as an initial source of drug substance to
support eventual product launch, if approved.
For drug product production, we have contracted with Patheon, Inc. to manufacture the Gencaro tablets. Gencaro is produced in a
tablet form, utilizing standard solid oral dosage processing techniques. Six separate dosage strengths are manufactured, with the
maximum recommended dose of 50mg twice daily for patients weighing 75kg or less and 100mg twice daily for patients weighing
more than 75kg. Registration batches were successfully completed by Patheon, Inc. and tablets from these runs were placed in cGMP
storage to supply the GENETIC-AF trial. In addition, we contracted with a separate service provider for packaging and distribution of
our clinical trial materials.
Research and Development Expenses
Our research and development expenses were $14.1 million for the year ended December 31, 2017 as compared to $12.3 million for
2016, an increase of approximately $1.7 million. R&D expense in 2018 is expected to be lower than 2017, as we have completed our
GENETIC-AF clinical trial.
Government Regulation
Governmental authorities in the United States at the federal, state, and local levels and foreign countries extensively regulate, among
other things, the research, development, testing, manufacture, labeling, promotion, advertising, marketing, distribution, sampling, and
import and export of pharmaceutical and medical device products. In the United States, the FDA regulates these activities at the
federal level pursuant to the Federal Food Drug and Cosmetic Act, or the FDCA, and the regulations promulgated thereunder. In
Canada, Health Canada regulates these activities. In Europe, the Competent Authorities and Ethics Committees of the respective
countries regulate these activities. We anticipate that all of our product candidates will require regulatory approval by governmental
agencies prior to commercialization. The process of obtaining approval and the subsequent process of maintaining compliance with
appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.
In addition, these statutes, rules, regulations and policies may change and our products may be subject to new legislation or
regulations. Both before and after approval or clearance, failure to comply with the requirements of the FDA and other state and
federal statutes can lead to significant penalties or could disrupt our ability to manufacture and sell these products. In addition, the
FDA could refuse to provide certificates needed to export our products if the agency determines that we are not in compliance.
Premarket Approval of Drugs
FDA approval is required for marketing of any new drug, dosage form, indication, or strength. The steps required before new human
therapeutic drug products are marketed in the United States and foreign countries include rigorous preclinical and clinical testing and
other approval requirements by regulatory agencies, such as the FDA and comparable agencies in foreign countries. There is no
guarantee that products will be approved in a specific timeframe or at all.
Preclinical Phase. Preclinical studies are generally conducted in the laboratory to identify potential drug candidates and to evaluate
their potential efficacy and safety. These studies include laboratory evaluation of product chemistry, formulation and stability, as well
as studies to evaluate short and long-term toxicity in animals. Preclinical studies are governed by numerous regulations, including but
not limited to FDA’s Good Laboratory Practices.
10
Clinical Phase. Before human clinical trials can commence, an Investigational New Drug, or IND, application, submitted to FDA
must become effective. For an IND to become effective, the applicant must submit, among other things, information on design of the
proposed investigation, reports necessary to assess the safety of the drug for use in clinical investigation, and information on the
chemistry and manufacturing of the drug, controls available for the drug, and primary data tabulations from animal or human studies.
The clinical phase of development involves the performance of human studies, including adequate and well-controlled human clinical
trials to establish the safety and efficacy of the product candidate for each proposed indication. Typically, clinical evaluation involves
three sequential phases, which may overlap. During Phase 1, clinical trials are conducted with a relatively small number of subjects or
patients to determine the early safety profile of a product candidate, as well as dose tolerance, absorption, and the pattern of drug
distribution and drug metabolism. Phase 2 trials are conducted with groups of patients afflicted by a specific target disease to
determine preliminary efficacy, optimal dosages and dosage tolerance and to identify possible adverse effects and safety risks. In
Phase 3, larger-scale, multi- center trials are conducted with patients afflicted with a specific target disease over a longer term to
confirm Phase 2 results and provide reliable and conclusive data supporting efficacy and safety of a drug as required by regulatory
agencies for drug approval. The conduct of clinical trials is subject to extensive regulation. FDA may delay or suspend clinical trials
through clinical holds.
NDA Submission. In the United States, the results of preclinical and clinical testing along with chemistry, manufacturing and controls
information, are submitted to the FDA in the form of an NDA. Under the current Prescription Drug User Fee Act, or PDUFA, after
submission of an NDA and payment, or waiver, of the required fee, the FDA’s goal is to review most standard NDAs within 10
months from the time that a sponsor’s application is accepted as filed by the FDA, which can occur within a 60-day window following
the initial submission of the application. At the end of the 10 months, the FDA’s goal is to issue a “complete response,” or approve the
NDA. While FDA’s goal is to issue a complete response within 10 months, the process may take longer than 10 months, particularly if
multiple review cycles are required. Gencaro has been granted Fast Track Designation which allows for a rolling review of a
marketing application. A rolling review allows FDA to consider reviewing portions of a NDA before the sponsor submits the
complete application.
In responding to an NDA, the FDA may grant marketing approval or deny the application if the FDA determines that the application
does not satisfy the statutory and regulatory approval criteria. A denial may include a request for additional information, including
additional clinical data and/or an additional Phase 3 clinical trial. Data from clinical trials are not always conclusive and FDA may
interpret data differently than we interpret data. Under the Food and Drug Modernization Act of 1997, the FDA is authorized to
approve a drug based on a single adequate and well-controlled study if such study and other confirmatory data are sufficient to
establish the drug’s effectiveness. However, it has long been the FDA’s general position that the standard of proof of a drug’s
effectiveness generally requires at least two well-controlled and adequate Phase 3 clinical studies demonstrating statistically
significant results as compared to a placebo or active control (with p-values of less than 0.05) with respect to the primary endpoint or
endpoints of the trial.
In addition, in accordance with current FDA law and regulations, the FDA may refer a drug to an advisory committee for review prior
to approval. Most new compounds are referred to an FDA advisory committee, which could add additional time to the review process.
There is no guarantee that the advisory committee will recommend approval of a drug candidate. In some cases, FDA may require
completion, within a specified time period, of additional clinical studies after approval, referred to as Phase 4 clinical studies, to
monitor the effect of a new product and may prevent or limit future marketing of the product based on the results of these post-
marketing programs. Furthermore, prior to granting approval, the FDA generally conducts an inspection of the facilities, including
outsourced facilities that will be involved in the manufacture, production, packaging, testing and control of the drug substance and
finished drug product for compliance with current Good Manufacturing Practice, or cGMP, requirements.
If the FDA approves the NDA, the sponsor is authorized to begin commercialization of the drug in accordance with the approval.
Even if the FDA approves the NDA, the FDA may decide later to suspend or withdraw product approval if compliance with regulatory
standards is not maintained or if safety problems are recognized after the product reaches the market. In addition, the FDA requires
surveillance programs to monitor approved products that have been commercialized, and the agency has the power to require
additional clinical studies, to require changes in labeling or to prevent further marketing of a product based on the results of these
post-marketing programs. The FDA also has authority to request implementation of a risk evaluation and mitigation strategy, or
REMS, that could restrict distribution of Gencaro or require us to provide additional risk information to prescribers. Whether or not
FDA approval has been obtained, approval of a product candidate by comparable foreign regulatory authorities is necessary prior to
the commencement of marketing of a product candidate in those countries. The approval procedures vary among countries and can
involve additional testing. The time required to obtain approval may differ from that required for FDA approval.
Post-approval Compliance. If regulatory approval for a drug or medical device is obtained, the product and the facilities manufacturing
the product are subject to periodic inspection and continued regulation by regulatory authorities, including compliance with cGMP, as
well as labeling, advertising, promotion, recordkeeping, and reporting requirements, including the reporting of adverse events. In
addition, the FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for labeling,
promotion to health care professionals, direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities and promotional activities involving the Internet. Drugs may be marketed only for the approved indications and in accordance
11
with the provisions of the approved labeling. Companies are responsible for compliance with such requirements and would be responsible
to ensure that all contract manufacturing organizations who perform work for them also comply with such requirements. Similarly, if a
drug manufacturer hires contract sales representatives or consultants to promote its products, such organizations or individuals must
comply with all of the same requirements applicable to the drug manufacturer. The FDA regularly inspects companies to determine
compliance with cGMPs and other post-market requirements. Failure to comply with statutory requirements and the FDA’s regulations
can result in a variety of administrative or enforcement actions, including but not limited to an FDA Form 483 (which is issued by the
FDA at the conclusions of an inspection when an investigator has observed any conditions that may constitute violations), a public
warning letter, suspension or withdrawal of regulatory approvals, product recalls, product detentions, refusal to provide export
certificates, seizure of products and criminal prosecution.
Drug Price Competition and Patent Term Restoration Act of 1984. Under the Drug Price Competition and Patent Term Restoration
Act of 1984, also known as the Hatch-Waxman Act, Congress created an abbreviated FDA review process for generic versions of
pioneer (brand name) drug products. The Hatch-Waxman Act also provides for patent term restoration and the award, in certain
circumstances, of non-patent marketing exclusivities.
Generic Drug Approval. The Hatch-Waxman Act established an abbreviated FDA review process for drugs that are shown to be
equivalent to approved pioneer drugs. Approval for a generic drug is obtained by filing an abbreviated NDA, or ANDA. Generic drug
applications are “abbreviated” because they generally do not include clinical data to demonstrate safety and effectiveness. Instead, an
ANDA applicant must establish that its product is bioequivalent to an approved drug and that it is the same as the approved drug with
respect to active ingredient(s), route of administration, dosage form, strength and recommended conditions of use (labeling). The FDA
will approve the generic as suitable for an ANDA if it finds that the generic does not raise questions of safety and effectiveness as
compared to the pioneer drug. A drug is not eligible for ANDA approval if the FDA determines that it is not equivalent to the pioneer
drug or if it is intended for a different use. Any applicant who files an ANDA seeking approval of a generic version of an approved
drug listed in FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, or the Orange Book, must certify to the
FDA that (i) no patent information on the drug has been listed in the Orange Book; (ii) that each patent listed in the Orange Book for
that approved drug has expired; (iii) FDA should approve the product on the date on which a listed patent expires; or (iv) that such
patent is invalid, unenforceable or will not be infringed by the manufacture, use or sale of the generic drug. If the ANDA applicant
makes a certification pursuant to (iv) above, or a Paragraph IV certification, and the NDA holder files an infringement suit against the
ANDA applicant within 45 days of receiving the Paragraph IV notification, the NDA owner is entitled to an automatic 30-month stay
of FDA’s ability to approve the ANDA. This 30-month stay will end early upon any decision by a court that the patent is invalid,
unenforceable or not infringed by the generic drug.
Patent Term Extension. While the term of a U.S. patent is generally 20 years from the earliest priority date of a patent application
(excluding a provisional patent application), a U.S. patent that covers subject matter requiring regulatory approval to market is eligible
for an extension of that patent term. The Hatch-Waxman Act provides for the restoration of a portion of the patent term lost during
product development and FDA review of an application. Patent Term Extension, or PTE, extends the term of an issued patent for
generally (i) the length of the FDA approval process, i.e., the complete period of NDA review, and (ii) half of the time spent in clinical
trials, i.e., the IND period. However, the maximum period of restoration cannot exceed five years, or restore the total remaining term
of the patent to greater than 14 years from the date of FDA approval of the product.
Under 35 U.S.C. § 156(a), a patent covering a method of using a product is eligible for PTE if the following conditions are met:
1)
2)
3)
4)
5)
the patent has not yet expired;
the patent was not previously extended;
the patent owner submits an application for PTE that includes all necessary supporting information within 60 days of FDA
approval;
the product was subject to regulatory review before its commercial marketing or use; and
the drug application is for the first permitted commercial marketing of the product.
We have obtained four U.S. patents (U.S. Patent Nos. 7,678,824; 8,080,578; 8,093,286; 8,946,284). We believe that, if Gencaro is
approved by the FDA, any one of the U.S. patents may be eligible for PTE, which could provide approximately 5 years of additional
patent life based on our current clinical trial plans.
A Supplementary Protection Certificate, or SPC, is a form of patent term extension that is available for pharmaceutical products
approved for marketing in the European Union, or EU. We obtained a patent in Europe on methods for using Gencaro that is similar to
US Patent 7,678,824 (EP 1802775); this EP patent is in force in certain countries in Europe, including the United Kingdom, France,
Germany, Italy and Spain. We believe that this patent may be eligible for an SPC, if Gencaro is approved for marketing in any
European country in which the patent is in force, which could provide up to five years of additional patent life. We believe that our
patents in other jurisdictions may also be eligible for similar term extensions.
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Non-Patent Marketing Exclusivities. Separate and apart from patent protection, the Hatch-Waxman Act entitles approved drugs to
various periods of non-patent statutory protection, known as marketing exclusivity. The Hatch-Waxman Act provides five years of
“new chemical entity” marketing exclusivity to the first applicant to gain approval of an NDA for a product that contains an active
moiety not found in any other approved product. This exclusivity means that another manufacturer cannot submit an ANDA or
505(b)(2) NDA until the marketing exclusivity period ends. This exclusivity protects the entire new chemical entity franchise,
including all products containing the active ingredient for any use and in any strength or dosage form, but will not prevent the
submission or approval of stand-alone NDAs where the applicants have conducted their own clinical studies to demonstrate safety and
effectiveness. There is an exception, however, for a competitor that seeks to challenge a patent with a Paragraph IV certification. Four
years into the five-year exclusivity period, a manufacturer who alleges that one or more of the patents listed with the NDA is invalid,
unenforceable or not infringed may submit an ANDA or 505(b)(2) NDA for a generic or modified version of the product.
The Hatch-Waxman Act also provides three years of “new use” marketing exclusivity for the approval of NDAs, and supplements,
where those applications contain the results of new clinical investigations (other than bioavailability studies) essential to the FDA’s
approval of the applications. Such applications may be submitted for new indications, dosage forms, strengths, or new conditions of
use of approved products. So long as the studies are essential to the FDA’s approval or were conducted by or for the applicant, this
three-year exclusivity prohibits the final approval of ANDAs or 505(b)(2) NDAs for products with the specific changes associated
with those studies. It does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for other products containing the same
active ingredient, without those changes.
Similar non-patent market exclusivity is provided for in the EU and other international jurisdictions. We believe that, if approved in
the EU, Gencaro may be eligible for ten years of market exclusivity in the EU, measured from the date of approval there.
FDA Premarket Review of Medical Devices
Unless an exemption applies, each medical device that a company wishes to market in the United States requires either approval of a
premarket approval application, or PMA, or clearance of a premarket notification, commonly known as a “510(k)” from the FDA. The
FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which
may require the manufacturer to submit to the FDA a 510(k) requesting permission to commercially distribute the device. Clearance of
a 510(k) usually requires between three months and one year from the time of submission of the 510(k), although the process may take
longer. The FDA’s 510(k) clearance procedure is less rigorous than the PMA approval procedure, but is available only to companies
who can establish that their device is substantially equivalent to a legally-marketed “predicate” device that was (i) on the market prior
to the enactment of the Medical Device Amendments of 1976, (ii) reclassified from Class III to Class II, or (iii) has been cleared
through the 510(k) procedure. 510(k)s must typically be supported by performance data, including preclinical data, bench testing, and
in some cases, clinical data. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the
greatest risks, or for which there is no predicate, are placed in class III, and require a PMA.
PMA Pathway. Generally, a PMA must be supported by extensive data and valid scientific evidence, including, but not limited to,
technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction a reasonable assurance of the
safety and effectiveness of the device for its intended use. After a PMA is sufficiently complete, the FDA will accept the application
and begin an in-depth review of the submitted information and will generally conduct a pre-approval inspection of the manufacturing
facility or facilities to ensure compliance with FDA’s Quality System Regulations, or QSR. By statute, the FDA has 180 days to
review the “accepted application”, although, generally, review of the application can take between one and three years, and it may take
significantly longer. The PMA application process can be expensive, and there is a substantial “user fee” that must be paid to FDA in
connection with the submission of a PMA application. If the FDA’s evaluation of the PMA application or the manufacturing facility is
not favorable, the FDA may deny approval of the PMA application or issue a “not approvable” letter. The FDA may also require
additional clinical trials, which can delay the PMA approval process by several years. In addition, if FDA discovers that an applicant
has submitted false or misleading information, FDA may refuse to review submissions until certain requirements are met pursuant to
its Application Integrity Policy, or AIP. If the FDA approves the PMA, it may place restrictions on the device. After the PMA is
approved, if significant changes are made to a device, its manufacturing or labeling, a PMA supplement containing additional
information must be filed for prior FDA approval. PMA supplements often must be approved by the FDA before the modification to
the device, the labeling, or the manufacturing process may be implemented. Delays in receipt of or failure to receive such clearances
or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory
requirements could have a material adverse effect on our business, financial condition and results of operations.
Clinical Trials. Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) clearance.
These trials generally require an Investigational Device Exemption, or IDE, application approved in advance by the FDA for a
specified number of patients, unless the proposed study is deemed a non-significant risk study, which is eligible for an exemption from
the IDE requirements. The IDE application must be supported by appropriate data, such as animal and laboratory testing results.
Clinical trials may begin if the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the
clinical trial sites. Submission of an IDE application does not give assurance that the FDA will issue the IDE. If the IDE application is
approved, there can be no assurance the FDA will determine that the data derived from the trials support the safety and effectiveness
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of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or investigator may make a change to the investigational plan in such a way that may affect its scientific soundness, study
indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s regulations, including the
requirement that informed consent be obtained from each subject. Even if a trial is completed, the results of clinical testing may not
adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the
product in the United States.
In Vitro Diagnostic Companion Diagnostic Devices. FDA has described IVD companion diagnostic devices as in vitro diagnostic
devices that provide information that is essential for the safe and effective use of a corresponding therapeutic product. The use of an
IVD companion diagnostic device with a particular therapeutic product is stipulated in the instructions for use in the labeling of both
the diagnostic device and the corresponding therapeutic product, as well as in the labeling of any generic equivalents of the therapeutic
product. An IVD companion diagnostic device could be used to (i) identify patients who are most likely to benefit from a particular
therapeutic product; (ii) identify patients likely to be at increased risk for serious adverse reactions as a result of treatment with a
particular therapeutic product; or (iii) monitor response to treatment for the purpose of adjusting treatment (e.g., schedule, dose,
discontinuation) to achieve improved safety or effectiveness. Although FDA’s regulation of IVD companion diagnostic devices is
evolving and implemented on a case-by-case basis, FDA’s stated policy for a novel therapeutic product is that an IVD companion
diagnostic device should be developed and approved or cleared contemporaneously to support the therapeutic product’s safe and
effective use. The clinical performance and clinical significance of the IVD companion diagnostic device is to be established using
data from the clinical development program of the corresponding therapeutic product. FDA recognizes, however, that there may be
cases where contemporaneous development may not be possible. With respect to the Gencaro Test, there is no assurance that we will
be able to develop and obtain approval or clearance contemporaneously with Gencaro. Failure to develop the Gencaro Test or obtain
clearance or approval could delay approval of Gencaro, if FDA regards the Gencaro Test as an IVD companion diagnostic test that is
essential to the safe and effective use of Gencaro.
Continuing Regulation. After a device is placed on the market, numerous regulatory requirements apply to the manufacturer, or holder
of a PMA approval. Unless subject to an exemption, medical devices distributed in the United States must be manufactured in
compliance with the FDA’s Quality System Regulations, or QSRs, and current good manufacturing practices. These regulations
govern the manufacturing process, including design, manufacture, testing, release, packaging, distribution, documentation and
purchasing, as well as complaint handling, corrective and preventative actions and internal auditing. In complying with the QSRs,
manufacturers must expend significant time, money and effort. Companies are also subject to other post-market and general
requirements, including but not limited to product listing and establishment registration, post-market surveillance requirements,
limitations on promotion, and requirements for recordkeeping and reporting of certain adverse events, malfunctions, corrections and
removals. As discussed above, FDA regularly inspects companies to assess compliance with the QSRs and other post-market
requirements. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, and
potential civil and criminal penalties. With respect to the Gencaro Test, we intend to seek a new or amended collaborative
arrangement with a diagnostic company in which we could license them certain rights to perform the diagnostic test for patients with
AF. As part of such arrangement, we will seek to have the diagnostic company take responsibility for compliance with the FDA’s
device approval and on-going regulatory requirements.
International Marketing Approvals. International sales of medical devices are subject to foreign government regulations, which vary
substantially from country to country and are subject to change. The time required to obtain approval by a foreign country may be
longer or shorter than that required for FDA clearance or approval, and the requirements may differ.
Other Regulatory Requirements. We are also subject to various federal, state and local laws, regulations and recommendations relating
to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection
with our work. The extent and character of governmental regulation that might result from future legislation or administrative action
cannot be accurately predicted.
Medical Device Tax
In March 2010, the U.S. Congress adopted and President Obama signed into law comprehensive health care reform legislation.
Among other initiatives, these laws impose significant new taxes on medical device makers in the form of a 2.3% excise tax on U.S.
medical device sales, with certain exemptions, beginning on January 1, 2013. On January 22, 2018, legislation was enacted
suspending the medical device tax in 2018 and 2019. It will be reinstated on January 1, 2020, unless a permanent repeal takes place
before that date. The Gencaro Test is likely to be subject to this tax if this tax is reinstated in the future.
Intellectual Property
The future success of our business will partly depend on our ability to maintain market exclusivity for Gencaro in the United States
and important international markets, and for other products or product candidates that we may acquire or develop. We will rely on
14
statutory protection, patent protection, trade secrets, know-how, and in-licensing of technology rights to maintain protection for our
products.
We believe that both patent protection and data exclusivity statutes will give Gencaro market exclusivity in the United States and in
major international markets. If approved by the FDA or international regulatory agencies, Gencaro will qualify as a New Chemical
Entity, or NCE, as it has never received regulatory approval in any jurisdiction. As an NCE, Gencaro will enjoy market exclusivity in
the United States and most international markets under data exclusivity statutes. These laws provide for an exclusivity period
beginning from regulatory approval, during which any generic competitor is barred from submitting an application that relies on the
data that has been submitted in connection with the approval of the NCE. In the United States, the Hatch-Waxman Act provides for an
initial period of up to five years from approval of the NCE, during which a generic application attempting to rely on the data submitted
for the NCE cannot be filed with the FDA. This period can be effectively extended to seven and one-half years from FDA approval
because a provision of the Hatch-Waxman Act provides for an automatic 30-month extension of the exclusivity period if we promptly
pursue litigation against a company attempting to enter the market with a generic for a drug that is covered by a composition of matter
or method of use patent.
Many international markets have data exclusivity statutes that are analogous to Hatch-Waxman and often more protective. The
analogous statute in the European Medicines Evaluation Agency will, in general, provide Gencaro with a minimum of ten years of
protection before such a generic application may be approved. Protection under Hatch-Waxman and other data exclusivity statutes is
sometimes considered superior to patent protection, as the generic cannot be marketed during the period of exclusivity, thus
eliminating the need to initiate patent infringement litigation with its accompanying risks and costs.
In addition to protection under data exclusivity statutes, we believe that Gencaro’s patent portfolio will also provide market
exclusivity. We have been granted patents in the United States and Europe that claim the use of Gencaro in patients predicted to have
a favorable response to the drug based on genetic polymorphisms in the genes encoding the beta-1 and/or alpha-2C receptors. We
believe that this patent strategy may deter generic competition because of the threat of patent litigation or may exclude generic
competition from the market until the patents expire if we are successful in litigation. Consequently, if our patent strategy is
successful, we believe we may avoid generic competition with Gencaro in the United States or certain countries in Europe until at
least the expiration of these patents, which would be no earlier than 2026 in the United States and into 2025 in Europe. In addition, we
believe that if Gencaro is approved, any one of our U.S. patents may be entitled to an extension of its term and the European patent
may be entitled to an extension through a supplemental protection certificate in one or more countries in Europe. The length of any
such extension may vary by country. We cannot predict whether any such extensions will be granted, but if they are, they may provide
market exclusivity for Gencaro into approximately 2030 or 2031 in the United States and Europe. In addition, we were granted a
patent on the S-isomer formulation of Gencaro, which we believe could be important in Gencaro’s future development.
For AB171, the European Patent Office issued patent (EPO # 2515899) on methods of treating cardiovascular disease and conditions
with a thiol-substituted isosorbide mononitrate based on genetic targeting. The European patent, entitled “Methods and Compositions
for Cardiovascular Diseases and Conditions,” provides protection for this novel approach to treating patients with cardiovascular
disease and conditions. The European patent has been validated in ten countries: Denmark, France, Germany, Ireland, Italy,
Netherlands, Spain, Sweden, Switzerland and the United Kingdom. We have related patent applications pending in the United States
Patent Office and Canadian Intellectual Property Office.
We also have other patent rights in additional drug candidates having possible indications in cardiovascular disease, oncology, and
other therapeutic areas; these are in both early and later stages of development. We may seek collaborators to assist us in the
development of these candidates or we may seek to raise funds to advance the development of the compounds on our own.
Employees
As of December 31, 2017, we had 20 full-time employees. None of our employees are represented by any collective bargaining unit.
We believe that we maintain good relations with our employees.
Corporate Information
On January 27, 2009, we completed a business combination, or the Merger, between Nuvelo, Inc., or Nuvelo, a corporation originally
incorporated in 1992, and its subsidiary, ARCA biopharma, Inc. Immediately following the Merger, we changed our name from
Nuvelo, Inc. to ARCA biopharma, Inc. Our principal offices are located in Westminster, Colorado.
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We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, electronically with the U.S. Securities and
Exchange Commission, or the SEC. The public may read or copy any materials that have been filed with the SEC at the SEC’s Public
Reference Rooms at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10:00 a.m. and
3:00 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC. The address of that site is http://www.sec.gov.
You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports on our website at http://www.arcabiopharma.com on the earliest practicable date following the filing
with the SEC or by contacting the Investor Relations Department at our corporate office by calling (720) 940-2200. Information found
on our website is not incorporated by reference into this report.
Item 1A. Risk Factors
An investment in our securities involves certain risks, including those set forth below and elsewhere in this report. In addition to the
risks set forth below and elsewhere in this report, other risks and uncertainties not known to us, that are beyond its control or that we
deem to be immaterial may also materially adversely affect our business operations. You should carefully consider the risks described
below as well as other information and data included in this report.
Risks Related to Our Business and Financial Condition
We will need to raise substantial additional funds through public or private equity transactions and/or complete one or more
strategic transactions, to continue development of Gencaro or any of our other product candidates. If we are unable to raise such
financing or complete such a transaction, we may not be able to continue operations.
In light of the expected development timeline to potentially obtain FDA approval for Gencaro, if at all, the substantial additional costs
associated with the development of Gencaro and our other product candidates, including the costs associated with clinical trials related
thereto, and the substantial cost of commercializing Gencaro, if it is approved, we will need to raise substantial additional funding
through public or private equity or debt transactions or a strategic combination or partnership. If we are delayed in obtaining funding
or are unable to complete a strategic transaction, we may discontinue our development activities on Gencaro and our other product
candidates or discontinue our operations. Even if we are able to fund continued development and Gencaro or any of our other product
candidates is approved, we expect that we will need to complete a strategic transaction or raise substantial additional funding through
public or private debt or equity securities to successfully commercialize Gencaro or any other product candidate.
We believe our cash, cash equivalents and marketable securities balance as of December 31, 2017, together with the $3.4 million of
net proceeds raised in January 2018 from sales of our common stock, will be sufficient to fund our operations, at our projected cost
structure, through the end of 2018. In January 2017, we entered into a sales agreement with an agent to sell, from time to time, our
common stock having an aggregate offering price of up to $7.3 million, in an “at the market offering.” In August 2017, we amended
our sales agreement to increase the maximum aggregate value of shares which we may issue and sell from time to time under this
sales agreement by approximately $2.9 million, from $7.3 million to $10.2 million. Pursuant to the terms of such sales agreement, as
amended, we have sold an aggregate of 4,811,353 shares of our common stock for aggregate gross proceeds of approximately
$10.1 million. Net proceeds received in the period were approximately $9.5 million, after deducting initial expenses for executing the
“at the market offering” and commissions paid to the placement agent. As of January 19, 2018, we have sold all shares available
under our prospectus to our registration statement on Form S-3 (No. 333-217459) and do not currently anticipate making any
additional sales under this sales agreement at this time. Sales of our common stock dilute the ownership interest of our stockholders
and may cause the price per share of our common stock to decrease. 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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Our liquidity, and our 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 potential additional clinical trials in order to gain possible regulatory approval for Gencaro and
our other product candidates;
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 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, 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 our cash resources.
Our management and our independent registered public accounting firm, in their report on our financial statements as of and for
the fiscal year ended December 31, 2017, have concluded that due to our need for additional capital, and the uncertainties
surrounding our ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern.
Our audited financial statements for the fiscal year ended December 31, 2017 were prepared assuming that we will continue as a going
concern. The going concern basis of presentation assumes that we will continue in operation for the foreseeable future and will be able
to realize our assets and discharge our liabilities and commitments 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. Our management and our independent registered public
accounting firm concluded as of December 31, 2017 that due to our need for additional capital and the uncertainties surrounding our
ability to raise such funding, substantial doubt exists as to our ability to continue as a going concern for a period from one year after
our financial statements have been issued. We believe our cash, cash equivalents and marketable securities balance as of
December 31, 2017, together with the $3.4 million of net proceeds raised in January 2018 from sales of our common stock, will be
sufficient to fund our operations, at our projected cost structure, through the end of 2018. In January 2017, we entered into a sales
agreement with an agent to sell, from time to time, our common stock having an aggregate offering price of up to $7.3 million, in an
“at the market offering.” In August 2017, we amended our sales agreement to increase the maximum aggregate value of shares which
we may issue and sell from time to time under this agreement by approximately $2.9 million, from $7.3 million to $10.2 million.
Pursuant to the terms of such sales agreement, as amended, we have sold an aggregate of 4,811,353 shares of our common stock for
aggregate gross proceeds of approximately $10.1 million. Net proceeds received in the period were approximately $9.5 million, after
deducting initial expenses for executing the “at the market offering” and commissions paid to the placement agent. We have sold all
shares available to us under the sales agreement and cannot be certain that we will be able to make any other sale of our common
stock in any future offering to cover our future capital needs, or at all. Changing circumstances may cause us to consume capital
significantly faster or slower than we currently anticipate. If we are delayed in completing or are unable to complete additional
funding and/or a strategic transaction, we may discontinue our development activities or operations, but there are no assurances that
these reductions would be sufficient to allow us to continue to operate as a going concern. Therefore, even if we resolve this
uncertainty, our independent registered public accountants and/or management could conclude that uncertainty as to our ability to
continue as a going concern could exist at a future date.
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. We may be forced to reduce our operating expenses and raise additional funds to meet our
working capital needs, principally through the additional sales of our securities or debt financings. However, we cannot guarantee that
will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory
to us. If we are unable to raise sufficient additional capital or complete a strategic transaction, we may be unable to continue to fund
our operations, develop Gencaro or our other product candidates, or realize value from our assets and discharge our liabilities in the
normal course of business. If we cannot raise sufficient funds, we may have to liquidate our assets, and might realize significantly less
than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our
common stock.
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If we encounter difficulties enrolling patients in any future clinical trials, our future trials could be delayed or otherwise adversely
affected.
Patient enrollment is affected by factors including: if we have difficulty enrolling a sufficient number of patients in any future clinical
trial, we may need to delay or terminate our trial, which would have a negative impact on our business. Delays in enrolling patients in
any future clinical trials would also adversely affect our ability to generate any product, milestone and royalty revenues under
collaboration agreements, if any, and could impose significant additional costs on us or on any future collaborators.
The GENETIC-AF clinical trial required that we identify and enroll a large number of patients with the condition under investigation
and the trial enrolled only those patients having a specific genotype, and certain patients who have or are willing to have a Medtronic
device implanted for monitoring and recording AF burden data. Because of the rigorous enrollment criteria, our clinical trial timelines
were delayed from our original projections. We cannot guarantee that we will not have similar issues in any future clinical trials.
If we are not able to successfully develop, obtain FDA approval for, and provide for the commercialization of Gencaro in a timely
manner, we may not be able to continue our business operations.
We currently have no products that have received regulatory approval for commercial sale. The process to develop, obtain regulatory
approval for and commercialize potential product candidates is long, complex and costly. We began screening patients for our
Phase 2B GENETIC-AF clinical trial in April 2014 and enrolled our first patient in June 2014. Enrollment was completed in August
2017 having randomized 267 HFrEF patients with AF. The Phase 2B trial completed the patient treatment phase in December 2017
and we reported top-line data in February 2018. We are requesting a meeting with the FDA for the second quarter of 2018 to review
GENETIC-AF Phase 2 data and to discuss potential future development plans for Gencaro. This meeting with the FDA, if and when it
occurs, may not leave us with an economical path forward to continue the development of Gencaro.
Failure to demonstrate that a product candidate, including Gencaro, is safe and effective, or significant delays in demonstrating such
safety and efficacy, would adversely affect our business. For instance, in February 2018, we announced the top-line results of our
Phase 2B GENETIC-AF clinical trial in which Gencaro demonstrated a similar treatment benefit compared to the active comparator,
metoprolol succinate (TOPROL-XL). Failure to obtain marketing approval of Gencaro from appropriate regulatory authorities, or
significant delays in obtaining such approval, would also adversely affect our business and could, among other things, preclude us
from completing a strategic transaction or obtaining additional financing necessary to continue as a going concern.
Even if approved for sale, a product candidate must be successfully commercialized to generate value. We do not currently have the
capital resources or management expertise to commercialize Gencaro or any of our other product candidates and, as a result, will need
to complete a strategic transaction, or, alternatively, raise substantial additional funds to enable commercialization of Gencaro or any
of our other product candidates, if approved. Failure to successfully provide for the commercialization of Gencaro or any other
product candidate, if approved, would damage our business.
Our clinical trials for our product candidates may not yield results that will enable us to further develop our products and obtain
regulatory approvals necessary to sell them.
We will receive regulatory approval for our product candidates only if we can demonstrate in carefully designed and conducted
clinical trials that the product candidate is safe and effective. We do not know whether any current or future clinical trials, including
the GENETIC-AF clinical trial for Gencaro, will demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals
or will result in marketable products.
For example, GENETIC-AF was designed as an adaptive trial. The DSMB conducted a pre-specified interim analysis of study
endpoints for efficacy, safety and futility. Based on the efficacy and safety data of the interim analysis, the DSMB recommended
completing the Phase 2B trial with no changes to the trial design, rather than transition GENETIC-AF to a Phase 3 trial. In
February 2018, we announced top-line results of the Phase 2B trial, which indicated that Gencaro demonstrated a similar treatment
benefit compared to the active comparator, metoprolol succinate (TOPROL-XL). We have not determined if these results of
GENETIC-AF are sufficient to justify a Phase 3 trial in the future, or if another clinical trial, would allow us to obtain regulatory
approval for Gencaro.
Clinical trials are lengthy, complex and expensive processes with uncertain results. We have spent, and expect to continue to spend,
significant amounts of time and money in the clinical development of our product candidates. We have never conducted a Phase 3
clinical trial and have limited staff with the requisite experience to do so. We therefore rely on contract research organizations, or
CROs, to conduct certain aspects of our clinical trial. While certain of our employees have experience in designing and administering
clinical trials, these employees have no such experience as employees of ARCA.
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The results we obtain in preclinical testing and early clinical trials may not be predictive of results that are obtained in later studies.
We may suffer significant setbacks in advanced clinical trials, even after seeing promising results in earlier studies. Based on results at
any stage of clinical trials, we may decide to repeat or redesign a trial or discontinue development of one or more of our product
candidates. If we fail to adequately demonstrate the safety and efficacy of our products under development, we will not be able to
obtain the required regulatory approvals to commercialize our product candidates, and our business, results of operations and financial
condition would be materially adversely affected.
Administering our product candidates to humans may produce undesirable side effects. These side effects could interrupt, delay or halt
clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying approval of our product
candidates for any or all targeted indications.
If clinical trials for a product candidate are unsuccessful, we will be unable to commercialize the product candidate. If one or more of
our clinical trials are delayed, we will be unable to meet our anticipated development timelines. Either circumstance could cause the
market price of our common stock to decline.
We will rely on contract research organizations to conduct substantial portions of our clinical trials, including any future clinical
trial of Gencaro, and as a result, we will be unable to directly control the timing, conduct and expense of all aspects of our clinical
trials.
We do not currently have sufficient staff with the requisite experience to conduct our clinical trials and are therefore will rely on third
parties to conduct certain aspects of any future clinical trials. We previously contracted with a CRO to conduct components of our
GENETIC-AF trial and anticipate contracting with a CRO to conduct components of any future clinical trial for Gencaro or any future
clinical trials for our other product candidates. As a result, we will have less control over many details and steps of any trial, the
timing and completion of any trial, the required reporting of adverse events and the management of data developed through any trial
than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging,
potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties, such as CROs, may have staffing
difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to
conduct our trial. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of
the work of a CRO may lead us to seek to terminate the relationship and use an alternative service provider. However, making any
change may be costly and may delay ongoing trials, if any, and contractual restrictions may make such a change difficult or
impossible. Additionally, it may be impossible to find a replacement organization that can conduct clinical trials in an acceptable
manner and at an acceptable cost.
Even though we anticipate relying on CROs in the future, we will likely have to devote substantial resources and rely on the expertise
of our employees to manage the work being done by the CROs.
We may not achieve our projected development goals in the time frames we announce and expect.
We set goals for, and make public statements regarding, the timing of certain accomplishments, such as, the commencement and
completion of clinical trials, particularly with respect to steps for commencing and continuing our clinical trials, the disclosure of trial
results, the obtainment of regulatory approval and the sale of drug product, which we sometimes refer to as milestones. These
milestones may not be achieved, and the actual timing of these events can vary dramatically due to a number of factors such as delays
or failures in our clinical trials, disagreements with any collaborative partners, the uncertainties inherent in the regulatory approval
process and manufacturing scale-up and delays in achieving manufacturing or marketing arrangements sufficient to commercialize our
products. FDA approval of Gencaro or any other product candidate, if it occurs, is expected to require years of additional clinical
development, including the completion of genetic trials. There can be no assurance that we will make regulatory submissions or
receive regulatory approvals as planned. If we fail to achieve one or more of these milestones as planned, our business will be
materially adversely affected.
If we are not able to maintain the requirements for listing on the Nasdaq Capital Market, we could be delisted, which could have a
material adverse effect on our ability to raise additional funds as well as the price and liquidity of our common stock.
Our common stock is currently listed on the Nasdaq Capital Market. To maintain the listing of our common stock on the Nasdaq
Capital Market we are required to meet certain listing requirements, including, among others, (i) a minimum closing bid price of $1.00
per share, (ii) a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more
stockholders) of at least $1 million and (iii) either: (x) stockholders’ equity of at least $2.5 million; or (y) a total market value of
listed securities of at least $35 million.
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We have received two potential delisting notices from Nasdaq since 2012. In 2012 and 2015, we received notification from Nasdaq of
potential delisting of our shares from the Nasdaq Capital Market because the closing bid price of our common stock had not met the
minimum closing bid price of $1.00 per share during the preceding 30 days. While we subsequently regained compliance with
Nasdaq’s minimum closing bid price requirements, and despite effecting a 1-for-6 reverse split of our common stock in March 2013
and a 1-for-7 reverse split of our common stock in September 2015, there can be no assurance that the market price per share of our
common stock will remain in excess of the $1.00 minimum bid price for a sustained period of time. For instance, on March 19, 2018,
the closing price of our common stock on the Nasdaq Capital Market was $0.65 per share. We cannot guarantee when or if the closing
bid price of our common stock will again be greater than $1.00. The market price of our common stock may vary based on other
factors that are unrelated to the number of shares outstanding, including our future performance.
The delisting of our common stock from a national exchange could impair the liquidity and market price of the common stock. It
could also materially, adversely affect our access to the capital markets, and any limitation on market liquidity or reduction in the
price of the common stock as a result of that delisting could adversely affect our ability to raise capital on terms acceptable to us, or at
all.
In future periods, if we do not meet the minimum stockholders’ equity, minimum closing bid price requirements, or any other listing
requirements, we would be subject to delisting from the Nasdaq Capital Market.
As of March 19, 2018, the closing price of our common stock was $0.65 per share, and the total market value of our listed securities
was approximately $9.0 million. As of December 31, 2017, we had stockholders’ equity of $10.3 million.
We expect to depend on existing and future collaborations with third parties for the development of some of our product
candidates. If those collaborations are not successful, we may not be able to complete the development of these product candidates.
We had a collaboration agreement with Medtronic that supported our GENETIC-AF clinical trial. If our arrangement with Medtronic,
as amended, is continued as part of our future development of Gencaro, we will have limited control over the amount and timing of
resources that they dedicate to the development of Gencaro. This is also likely to be true in any future collaboration with third parties
and we may seek additional third party collaborators for the development of Gencaro or other product candidates. Our ability to
benefit from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in
these arrangements.
Collaborations involving our product candidates pose the following risks to us:
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collaborators have significant discretion in determining the efforts and resources that they will apply to these
collaborations;
collaborators may not pursue development and commercialization of our product candidates or may elect not to continue
or renew development or commercialization programs based on clinical trial results, changes in the collaborator’s strategic
focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or
abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for
clinical testing;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with
our product candidates if the collaborators believe that competitive products are more likely to be successfully developed
or can be commercialized under terms that are more economically attractive than ours;
collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information
in such a way as to invite litigation that could jeopardize or invalidate our proprietary information or expose us to
potential litigation;
disputes may arise between the collaborators and us that result in the delay or termination of the research, development or
commercialization of our product candidates or that result in costly litigation or arbitration that diverts management
attention and resources;
collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further
development or commercialization of the applicable product candidates;
collaborators may elect to take over manufacturing rather than retain us as manufacturers and may encounter problems in
starting up or gaining approval for their manufacturing facility and so be unable to continue development of product
candidates;
we may be required to undertake the expenditure of substantial operational, financial and management resources in
connection with any collaboration;
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we may be required to issue equity securities to collaborators that would dilute our existing stockholders’ percentage
ownership;
we may be required to assume substantial actual or contingent liabilities;
collaborators may not commit adequate resources to the marketing and distribution of our product candidates, limiting our
potential revenues from these products; and
collaborators may experience financial difficulties.
We face a number of challenges in seeking additional collaborations. Collaborations are complex and any potential discussions may
not result in a definitive agreement for many reasons. For example, whether we reach a definitive agreement for a collaboration will
depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the
proposed collaboration, and the proposed collaborator’s evaluation of a number of factors, such as the design or results of our clinical
trials, the potential market for our product candidates, the costs and complexities of manufacturing and delivering our product
candidates to patients, the potential of competing products, the existence of uncertainty with respect to ownership or the coverage of
our intellectual property, and industry and market conditions generally. If we were to determine that additional collaborations for our
Gencaro development is necessary and were unable to enter into such collaborations on acceptable terms, we might elect to delay or
scale back the development or commercialization of Gencaro in order to preserve our financial resources or to allow us adequate time
to develop the required physical resources and systems and expertise ourselves.
Collaboration agreements may not lead to development or commercialization of our product candidates in the most efficient manner,
or at all. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies
that have resulted in a reduced number of potential future collaborators. If a present or future collaborator of ours were to be involved
in a business combination, the continued pursuit and emphasis on our product development or commercialization program could be
delayed, diminished or terminated.
Any future clinical trial for Gencaro will require the use of a third-party diagnostic services provider to administer a genetic test
needed to identify the patient receptor genotypes of clinical trial participants, and as a result, we will be unable to directly control
the timing, conduct and expense of the genetic test.
We anticipate that any future clinical trial of Gencaro, if any, will require a companion diagnostic test that identifies the patient’s
receptor genotype. The trial would only enroll those patients with the receptor that has the potential for enhanced efficacy, the beta-1
389 Arg receptor as detected by a beta-1 389 Arg/Arg genotype. Accordingly, we anticipate that any future clinical trial for Gencaro
will require the use of a third-party diagnostic service to perform the genetic testing. There has been limited experience in our industry
in prospective development of companion diagnostics required to perform the required molecular profiling. We entered into an
agreement with LabCorp to provide the diagnostic services of the genetic test needed to support our GENETIC-AF trial. To provide
those services, LabCorp obtained from the FDA an IDE for the companion diagnostic test being used in our GENETIC-AF clinical
trial. We would expect a similar agreement and approval would be necessary for any companion diagnostic used in any future clinical
trials for Gencaro.
The FDA and similar regulatory authorities outside the United States regulate companion diagnostics. Companion diagnostics require
separate or coordinated regulatory approval prior to commercialization. Changes to regulatory advice could delay our development
programs or delay or prevent eventual marketing approval for our product candidates that may otherwise be approvable. In July 2011,
the FDA issued draft guidance that stated that if safe and effective use of a therapeutic depends on an in vitro diagnostic, the FDA
generally will not approve the therapeutic unless the FDA approves or clears this “in vitro companion diagnostic device” at the same
time that the FDA approves the therapeutic. The approval or clearance of the companion diagnostic would occur through the FDA’s
Center for Devices and Radiological Health. In 2014, the FDA issued guidance on in vitro companion diagnostic devices. It is
difficult to predict how FDA will implement the guidance. For example, the guidance allows for flexibility by the FDA in the case of
therapeutic products to treat serious conditions for which no alternative treatment exists and the benefits of using the companion
diagnostic outweigh the risk, but it is unclear how this discretion will be applied by the agency. The FDA’s evolving position on the
topic of companion diagnostics could affect our clinical development programs that utilize companion diagnostics. In particular, the
FDA may limit our ability to use retrospective data, otherwise disagree with our approaches to trial design, biomarker qualification,
clinical and analytical validity, and clinical utility, or make us repeat aspects of a trial or initiate new trials.
Given our limited experience in developing diagnostics, we expect to rely primarily on third parties for the design and manufacture of
the companion diagnostics for our product candidates. If we, or any third parties that we engage to assist us, are unable to successfully
develop companion diagnostics for our product candidates that require such diagnostics, or experience delays in doing so, the
development of our product candidates may be adversely affected, our product candidates may not receive marketing approval and we
may not realize the full commercial potential of any products that receive marketing approval. As a result, our business could be
materially harmed.
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We will need to establish a collaborative arrangement with a third-party diagnostics services provider to obtain marketing
clearance or approval of the companion genetic test. There is no guarantee that the FDA will grant timely clearance or approval of
the genetic test, if at all, and failure to obtain such timely clearance or approval would adversely affect our ability to market
Gencaro.
The drug label we intend to seek for Gencaro would identify the patient receptor genotype for which the drug is approved.
Accordingly, we believe developing a genetic test that is simple to administer and widely available will be critical to the successful
commercialization of Gencaro. The genetic test will be subject to regulation by the FDA and by comparable agencies in various
foreign countries. The process of complying with the requirements of the FDA and comparable agencies is costly, time consuming and
burdensome.
Despite the time and expense expended, regulatory clearance or approval is never guaranteed. If regulatory clearance or approval is
delayed, or if one or more third-party diagnostic services providers are unable to obtain FDA approval of the genetic test at all or in
parallel with the approval of Gencaro, or are unable to commercialize the test successfully and in a manner that effectively supports
the commercial efforts for Gencaro, or if the information concerning the differential response to Gencaro resulting from certain
genetic variation is not included in the approval label for Gencaro, the commercial launch of Gencaro may be significantly and
adversely affected.
Regulatory approval is required for the genetic test to be used in our Gencaro clinical trials and to support the commercialization
of the test, if approved. Delays or failures in obtaining such regulatory approval, including any required validation analyses may
prevent a third-party diagnostics provider from commercializing such genetic test and will adversely affect our business, operating
results and prospects.
Before a genetic test can be used commercially, including in conjunction with Gencaro, if it is approved for marketing, the third-party
diagnostics provider must obtain FDA Premarket Approval, or PMA, for such test. The FDA may require additional validation of the
genetic test we used in GENETIC-AF prior to any approval of Gencaro or the genetic test or prior to the use of such test in any future
clinical trials for Gencaro. We anticipate the genetic test will be required as a condition to prescribing Gencaro. There is no guarantee
the FDA will approve the anticipated PMA submission for the genetic test. Even if the genetic test is eventually approved, performing
additional validation work necessary to support the PMA, if required, for current or future genetic test products, including one
associated with Gencaro, would require additional time and expense and the outcome would be uncertain. Moreover, such delays or
increased costs or failures could adversely affect our business, operating results and prospects for commercializing the genetic test.
If a third-party diagnostics provider responsible for the genetic test or certain of its third-party suppliers fails to comply with
ongoing FDA or other foreign regulatory authority requirements, or if there are unanticipated problems with the genetic test, these
products could be subject to restrictions or withdrawal from use in a trial or from the market.
Any diagnostic for which a third-party diagnostics provider obtains clearance or approval, and the manufacturing processes, reporting
requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review,
oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. With respect to the genetic test, to
the extent applicable, any third-party diagnostics provider and certain of its suppliers will be required to comply with the FDA’s
Quality System Regulation, or QSR, and International Standards Organization, or ISO, requirements which cover the methods and
documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product
for which clearance or approval is obtained. Regulatory bodies, such as the FDA, enforce the QSR and other regulations through
periodic inspections. The failure by a third-party diagnostics provider, or certain of its third-party manufacturers or suppliers, as the
case may be, to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies, or the failure to
timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things,
enforcement actions. If any of these actions were to occur, it could harm our reputation and cause product sales and profitability of
Gencaro, if approved, to suffer and may prevent us from generating revenue or utilizing the genetic test further in any clinical trial.
Even if regulatory clearance or approval is granted, such clearance or approval may be subject to limitations on the intended uses for
which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the
product.
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Future sales of Gencaro may suffer if its marketplace acceptance is negatively affected by the genetic test.
The genetic test is an important component of the commercial strategy for Gencaro in addition to being required for our clinical trials.
We believe that the genetic test helps predict patient response to Gencaro, and that this aspect of the drug is important to its ability to
compete effectively with current therapies. The genetic test adds an additional step in the prescribing process, an additional cost for
the patient and payors, the risk that the test results may not be rapidly available and the possibility that it may not be available at all to
hospitals and medical centers. Although we anticipate that Gencaro, if approved in a timely manner, would be the first genetically-
targeted cardiovascular drug, Gencaro will be one of a number of successful drugs in the beta-blocker class currently on the market.
Prescribers may be more familiar with these other beta-blockers, and may be resistant to prescribing Gencaro as an AF therapy in
patients with HF. For instance, the top-line results of our Phase 2B GENETIC-AF clinical trial indicated that Gencaro demonstrated a
similar treatment benefit compared to the active comparator, metoprolol succinate (TOPROL-XL). If our future clinical trials in
Gencaro do not show that Gencaro has a clear therapeutic benefit as compared to other drugs in the beta-blocker class currently on the
market, then prescribers may be unlikely to prescribe Gencaro to patients, even if approved. Any one of these factors could affect
prescriber behavior, which in turn may substantially impede market acceptance of the genetic test, which could cause significant harm
to Gencaro’s ability to compete, and in turn harm our business.
Our failure to raise substantial additional funding or enter into a strategic transaction may materially and adversely affect our
business.
Unless we are able to raise substantial additional funding for the development of Gencaro through other means, we will need to
complete a strategic transaction to continue the development of Gencaro through its next phase of clinical development, the regulatory
submission process, the commercialization phase, and to continue our other operations. The strategic transactions that we may
consider include a potential combination or partnership. Our board of directors and management team have and will continue to
devote substantial time and resources to obtaining additional capital or the consideration and implementation of any such strategic
transaction. In addition, conditions in the financial markets may lead to an increased number of biotechnology companies that are also
seeking to enter into strategic transactions, which may limit our ability to negotiate favorable terms for any such transaction. Further,
our current employees do not have experience in the strategic transaction process, and our previous efforts to enter into a strategic
transaction have not been successful. As a result of these and other factors, there is substantial risk that we may not be able to
complete a strategic transaction on favorable terms, or at all. The failure to complete such a strategic transaction may materially and
adversely affect our business.
We may be limited in our ability to access sufficient funding through a private equity or convertible debt offering.
Nasdaq rules impose restrictions on our ability to raise funds through a private offering of our common stock, convertible debt or
similar instruments without obtaining stockholder approval. Under Nasdaq rules, an offering of more than 20% of our total shares
outstanding for less than the greater of book or market value requires stockholder approval unless the offering qualifies as a
“public offering” for purposes of the Nasdaq rules. As of December 31, 2017, we had approximately 11.8 million shares of common
stock outstanding, 20% of which is approximately 2.4 million shares. SEC rules impose restrictions on our ability to raise funds
through the registered offering of our securities pursuant to a “shelf” registration statement on Form S-3. Under SEC rules, we are
prohibited from selling securities under such a registration statement if the aggregate market value of the securities sold thereunder in
any twelve-month period exceeds one-third of the market value of our outstanding common stock held by non-affiliates. In
January 2017, we entered into a sales agreement with an agent to sell, from time to time, our common stock having an aggregate
offering price of up to $7.3 million, in an “at the market offering.” In August 2017, we amended our sales agreement to increase the
maximum aggregate value of shares which we may issue and sell from time to time under this sales agreement by approximately
$2.9 million, from $7.3 million to $10.2 million. Pursuant to the terms of such sales agreement, as amended, we have sold an
aggregate of 4,811,353 shares of our common stock for aggregate gross proceeds of approximately $10.1 million. Net proceeds
received in the period were approximately $9.5 million, after deducting initial expenses for executing the “at the market offering” and
commissions paid to the placement agent. Due to these sales, we may be limited in our ability to sell securities registered on Form S-3
over the next 12 months, which may substantially limit our ability to effect future financings. In addition, we are currently subject to
certain contractual rights of investors arising from our public and private equity financing transactions that limit the nature and price
of future public and private financing transactions that we may effect. For example, in January 2013, we entered into separate
subscription agreements with certain institutional investors in connection with a private investment in public equity, pursuant to which
we sold shares of our common stock and warrants to purchase shares of our common stock to the investors. In connection with this
transaction, we agreed that, subject to certain exceptions, we would not, while the warrants issued in such financing are outstanding,
effect or enter into an agreement to effect any issuance of common stock or securities convertible into, exercisable for or exchangeable
for common stock in a “variable rate transaction,” which means a transaction in which we issue or sell any convertible securities either
(A) at a conversion price, exercise price or exchange rate or other price that is based upon and/or varies with the trading prices of, or
quotations for, the shares of common stock at any time after the initial issuance of such convertible securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of the convertible
securities or upon the occurrence of the specified or contingent events directly or indirectly related to our business or the market for
our common stock. The restrictions imposed by the terms of our previous offerings, and that could be imposed in future offerings, may
limit our access to capital on agreeable terms and delay or make impossible certain otherwise available equity financing opportunities
and could severely restrict our access to the capital necessary to conduct our business.
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Unless we are able to generate sufficient product revenue, we will continue to incur losses from operations and will not achieve or
maintain profitability. We are years away from commercializing a product and generating product revenue.
Our historical losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital, among
other things. We are years away from commercializing a product and generating any product revenue. As a result, we expect to
continue to incur significant operating losses for the foreseeable future. Even if we ultimately receive regulatory approval for Gencaro
or our other product candidates, sales of such products may not generate sufficient revenue for it to achieve or maintain profitability.
Because of the numerous risks and uncertainties associated with developing therapeutic drugs, we may experience larger than
expected future losses and may never reach profitability.
Our product candidates are subject to extensive regulation, which can be costly and time-consuming, and unsuccessful or delayed
regulatory approvals could increase our future development costs or impair our future revenue.
The preclinical and clinical development, testing, manufacture, safety, efficacy, labeling, storage, recordkeeping, and subsequent
advertising, promotion, sale, marketing, and distribution, if approved, of our product candidates are subject to extensive regulation by
the FDA and other regulatory authorities in the United States and elsewhere. These regulations also vary in important, meaningful
ways from country to country. We are not permitted to market a potential drug in the United States until we receive approval of an
NDA from the FDA for such drug. We have not received an NDA approval from the FDA for Gencaro or any of our other product
candidates. There can be no guarantees with respect to our product candidates that clinical studies will adequately support an NDA,
that the products will receive necessary regulatory approvals, or that they will prove to be commercially successful.
To receive regulatory approval for the commercial sale of any product candidates, we must demonstrate safety and efficacy in humans
to the satisfaction of regulatory authorities through preclinical studies and adequate and well-controlled clinical trials of the product
candidates. This process is expensive and can take many years, and failure can occur at any stage of the testing. Our failure to
adequately demonstrate the safety and efficacy of our product candidates will prevent regulatory approval and commercialization of
such products. In 2008, we submitted and the FDA accepted our NDA filing for Gencaro for the treatment of chronic HF. In 2009, the
FDA issued a Complete Response Letter, or CRL, in which the FDA stated that it could not approve the Gencaro NDA in its current
form and specified actions required for approval of the NDA, including conducting an additional Phase 3 clinical trial of Gencaro in
patients with HF. We completed a Phase 2B clinical study of Gencaro in HFrEF patients to assess its efficacy in reducing or
preventing AF. We enrolled 267 HFrEF patients with AF in the Phase 2B trial. We reported top-line Phase 2B data in February 2018.
This product candidate will require years of additional clinical development. Even if we conduct additional studies in accordance with
further FDA guidance and submit or file a new or amended NDA, the FDA may ultimately decide that the NDA does not satisfy the
criteria for approval.
In the event that we or our collaborators conduct preclinical studies that do not comply with Good Laboratory Practices, or GLP, or
incorrectly design or carry out human clinical trials in accordance with Good Clinical Practices, or GCP, or those clinical trials fail to
demonstrate clinical significance, it is unlikely that we will be able to obtain FDA approval for product development candidates. Our
inability to successfully initiate and effectively complete clinical trials for any product candidate on schedule, or at all, will severely
harm our business. Significant delays in clinical development could materially increase product development costs or allow our
competitors to bring products to market before we do, impairing our ability to effectively commercialize any future product candidate.
We do not know whether planned clinical trials will begin on time, will need to be redesigned or will be completed on schedule, if at
all. Clinical trials can be delayed for a variety of reasons, including:
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delays or failures in obtaining regulatory authorization to commence a trial because of safety concerns of regulators relating
to our product candidates or similar product candidates of our competitors or failure to follow regulatory guidelines;
delays or failures in obtaining clinical materials and manufacturing sufficient quantities of the product candidates for use in
trials;
delays or failures in reaching agreement on acceptable terms with prospective study sites;
delays or failures in obtaining approval of our clinical trial protocol from an IRB to conduct a clinical trial at a prospective
study site;
delays in recruiting patients to participate in a clinical trial, which may be due to the size of the patient population,
eligibility criteria, protocol design, perceived risks and benefits of the drug, availability of other approved and standard of
care therapies or, availability of clinical trial sites;
other clinical trials seeking to enroll subjects with similar profile;
failure of our clinical trials and clinical investigators to be in compliance with GCP;
unforeseen safety issues, including negative results from ongoing preclinical studies;
inability to monitor patients adequately during or after treatment;
difficulty recruiting and monitoring multiple study sites;
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failure of our third-party contract research organizations, clinical site organizations and other clinical trial managers, to
satisfy their contractual duties, comply with regulations or meet expected deadlines; and
an insufficient number of patients who have, or are willing to have, a Medtronic device implanted for monitoring and
recording AF burden data.
In addition, any approvals we may obtain may not cover all of the clinical indications for which we seek approval or permit us to
make claims of superiority over currently marketed competitive products. Also, an approval might contain significant limitations in
the form of narrow indications, warnings, precautions or contraindications with respect to conditions of use. If the FDA determines
that a risk evaluation and mitigation strategy, or REMS, is necessary to ensure that the benefits of the drug outweigh the risks, we may
be required to include as part of the NDA a proposed REMS that may include a package insert directed to patients, a plan for
communication with healthcare providers, restrictions on a drug’s distribution, or a Medication Guide, to provide better information to
consumers about the drug’s risks and benefits. Finally, an approval could be conditioned on our commitment to conduct further
clinical trials, which we may not have the resources to conduct or which may negatively impact our financial situation.
The manufacture and tableting of Gencaro is done by third party suppliers, who must also meet cGMP requirements and pass a pre-
approval inspection of their facilities before we can obtain marketing approval.
All of our product candidates are prone to the risks of failure inherent in drug development. The results from preclinical animal testing
and early human clinical trials may not be predictive of results obtained in later human clinical trials. Further, although a new product
may show promising results in preclinical or early human clinical trials, it may subsequently prove unfeasible or impossible to
generate sufficient safety and efficacy data to obtain necessary regulatory approvals. The data obtained from preclinical and clinical
studies are susceptible to varying interpretations that may delay, limit or prevent regulatory approval, and the FDA and other
regulatory authorities in the United States and elsewhere exercise substantial discretion in the drug approval process. The numbers,
size and design of preclinical studies and clinical trials that will be required for FDA or other regulatory approval will vary depending
on the product candidate, the disease or condition for which the product candidate is intended to be used and the regulations and
guidance documents applicable to any particular product candidate. The FDA or other regulators can delay, limit or deny approval of
any product candidate for many reasons, including, but not limited to:
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side effects;
safety and efficacy;
defects in the design of clinical trials;
the fact that the FDA or other regulatory officials may not approve our or our third party manufacturer’s processes or
facilities; or
the fact that new regulations may be enacted by the FDA or other regulators may change their approval policies or adopt
new regulations requiring new or different evidence of safety and efficacy for the intended use of a product candidate.
In light of widely publicized events concerning the safety of certain drug products, regulatory authorities, members of Congress, the
Government Accountability Office, medical professionals and the general public have raised concerns about potential drug safety
issues. These events have resulted in the withdrawal of certain drug products, revisions to certain drug labeling that further limit use of
the drug products and establishment of risk management programs that may, for instance, restrict distribution of drug products. The
increased attention to drug safety issues may result in a more cautious approach by the FDA to clinical trials and approval. Data from
clinical trials may receive greater scrutiny with respect to safety and the product’s risk/benefit profile, which may make the FDA or
other regulatory authorities more likely to terminate clinical trials before completion, or require longer or additional clinical trials that
may result in substantial additional expense, and a delay or failure in obtaining approval or approval for a more limited indication than
originally sought. Aside from issues concerning the quality and sufficiency of submitted preclinical and clinical data, the FDA may be
constrained by limited resources from reviewing and determining the approvability of the Gencaro NDA in a timely manner.
In pursuing clinical development of Gencaro for an AF indication, we will be required to amend the Gencaro HF NDA or prepare a
new NDA. The FDA could approve Gencaro, but without including some or all of the prescribing information that we have requested.
For instance, the FDA could approve Gencaro for AF in a more limited patient population or include additional warnings in the drug’s
label. This, in turn, could substantially and detrimentally impact our ability to successfully commercialize Gencaro and effectively
protect our intellectual property rights in Gencaro.
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If our product candidates receive regulatory approval, we would be subject to ongoing regulatory obligations and restrictions,
which may result in significant expenses and limit our ability to develop and commercialize other potential products.
If a product candidate of ours is approved by the FDA or by another regulatory authority, we would be held to extensive regulatory
requirements over product manufacturing, testing, distribution, labeling, packaging, adverse event reporting and other reporting to
regulatory authorities, storage, advertising, marketing, promotion, distribution, and record keeping. Regulatory approvals may also be
subject to significant limitations on the indicated uses or marketing of the product candidates. Potentially costly follow-up or post-
marketing clinical studies may be required as a condition of approval to further substantiate safety or efficacy, or to investigate
specific issues of interest to the regulatory authority. Previously unknown problems with the product candidate, including adverse
events of unanticipated severity or frequency, may result in additional regulatory controls or restrictions on the marketing or use of the
product or the need for post marketing studies, and could include suspension or withdrawal of the products from the market.
Furthermore, our third-party manufacturers and the manufacturing facilities that they use to make our product candidates are regulated
by the FDA. Quality control and manufacturing procedures must continue to conform to cGMP after approval. Drug manufacturers
and their subcontractors are required to register their facilities and products manufactured annually with the FDA and certain state
agencies and are subject to periodic unannounced inspections by the FDA, state and/or other foreign authorities. Any subsequent
discovery of problems with a product, or a manufacturing or laboratory facility used by us or our collaborators, may result in
restrictions on the product, or on the manufacturing or laboratory facility, including a withdrawal of the drug from the market or
suspension of manufacturing. Any changes to an approved product, including the way it is manufactured or promoted, often require
FDA approval before the product, as modified, can be marketed. We and our third-party manufacturers will also be subject to ongoing
FDA requirements for submission of safety and other post-market information.
The marketing and advertising of our drug products by our collaborators or us will be regulated by the FDA, certain state agencies or
foreign regulatory authorities. Violations of these laws and regulations, including promotion of our products for unapproved uses or
failing to disclose risk information, are punishable by criminal and civil sanctions and may result in the issuance of enforcement letters
or other enforcement action by the FDA, U.S. Department of Justice, state agencies, or foreign regulatory authorities that could
jeopardize our ability to market the product.
In addition to the FDA, state or foreign regulations, the marketing of our drug products by us or our collaborators will be regulated by
federal, state or foreign laws pertaining to health care “fraud and abuse,” such as the federal anti-kickback law prohibiting bribes,
kickbacks or other remuneration for the order or recommendation of items or services reimbursed by federal health care programs.
Many states have similar laws applicable to items or services reimbursed by commercial insurers. Violations of these laws are
punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and
state health care programs, including the Medicare, Medicaid and Veterans Affairs healthcare programs. Because of the far-reaching
nature of these laws, we may be required to discontinue one or more of our practices to be in compliance with these laws. Healthcare
fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition
has been violated. Any violations of these laws, or any action against us for violations of these laws, even if we successfully defend
against it, could have a material adverse effect on our business, financial condition and results of operations.
We could also become subject to false claims litigation under federal statutes, which can lead to civil money penalties, restitution,
criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state health care
programs. These false claims statutes include the False Claims Act, which allows any person to bring a suit on behalf of the federal
government alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal
programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines
or settlement. These suits against pharmaceutical companies have increased significantly in volume and breadth in recent years. Some
of these suits have been brought on the basis of certain sales practices promoting drug products for unapproved uses. This new growth
in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay fines or restitution, or
be excluded from the Medicare, Medicaid, Veterans Affairs and other federal and state healthcare programs as a result of an
investigation arising out of such action. We may become subject to such litigation and, if we are not successful in defending against
such actions, those actions may have a material adverse effect on our business, financial condition and results of operations. We could
also become subject to false claims litigation and consumer protection claims under state statutes, which also could lead to civil
monetary penalties, restitution, criminal fines and imprisonment, and exclusion from participation in state health care programs. Of
note, over the past few years there has been an increased focus on the sales and marketing practices of the pharmaceutical industry at
both the federal and state level. Additionally, the law or regulatory policies governing pharmaceuticals may change. New statutory
requirements may be enacted or additional regulations may be adopted that could prevent or delay regulatory approval of our product
candidates or limit our ability to commercialize our products. We cannot predict the likelihood, nature or extent of adverse
government regulation that may arise from future legislation or administrative action, either in the United States or elsewhere.
If we, our collaborators or our third-party manufacturers fail to comply with applicable continuing regulatory requirements, our
business could be seriously harmed because a regulatory agency may:
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issue untitled or warning letters;
suspend or withdraw our regulatory approval for approved products;
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seize or detain products or recommend a product recall of a drug or medical device, or issue a mandatory recall of a medical
device;
refuse to approve pending applications or supplements to approved applications filed by us;
suspend our ongoing clinical trials;
restrict our operations, including costly new manufacturing requirements, or restrict the sale, marketing and/or distribution
of our products;
seek an injunction;
pursue criminal prosecutions;
close the facilities of our contract manufacturers; or
impose civil or criminal penalties.
Reliance on third parties to commercialize Gencaro or our other product candidates could negatively impact our business. If we
are required to establish a direct sales force in the United States and are unable to do so, our business may be harmed.
Commercialization of Gencaro or any other product candidate, if approved, particularly the establishment of a sales organization, will
require substantial additional capital resources. We currently intend to pursue a strategic partnership alternative for the
commercialization of Gencaro, if it is approved, and we have suspended our efforts to build internal sales, marketing and distribution
capabilities. If we elect to rely on third parties to sell Gencaro and any other products, then we may receive less revenue than if we
sold such products directly. In addition, we may have little or no control over the sales efforts of those third parties. If we are unable
to complete a strategic transaction, we would be unable to commercialize Gencaro or any other product candidate without substantial
additional capital. Even if such capital were secured, we would be required to build internal sales, marketing and distribution
capabilities to market Gencaro in the United States. None of our current employees have experience in establishing and managing a
sales force.
In the event we are unable to sell Gencaro and other selected product candidates, either directly or through third parties via a strategic
transaction, the commercialization of Gencaro, if it is approved, may be delayed indefinitely.
We are dependent on our key personnel.
The success of our business is highly dependent on the principal members of our board of directors and executive management,
including our President and Chief Executive Officer, Michael R. Bristow. The loss of the services of any such individual might
seriously harm our product development, partnering and financing efforts. Recruiting and training personnel with the requisite skills is
challenging and we compete for talent with companies that are larger and have more financial resources.
27
We have no manufacturing capacity which puts us at risk of lengthy and costly delays of bringing our products to market.
We do not currently operate manufacturing facilities for clinical or commercial production of our product candidates, including their
active pharmaceutical ingredients, or API. We have no experience in drug formulation or manufacturing, and we lack the resources
and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. We do not intend to develop
facilities for the manufacture of product candidates for clinical trials or commercial purposes in the foreseeable future. We have
contracted with Groupe Novasep to manufacture the API for Gencaro. For drug production, we have contracted with Patheon, Inc. to
manufacture the Gencaro tablets. In addition, we have contracted with a separate service provider for packaging and distribution of
our clinical trial materials. These contract manufacturers may not perform as agreed or may not remain in the contract manufacturing
business for the time required to successfully produce, store and distribute our products. In addition, these manufacturers may have
staffing difficulties, may not be able to manufacture our products on a timely basis or may become financially distressed. In the event
of errors in forecasting production quantities required to meet demand, natural disaster, equipment malfunctions or failures,
technology malfunctions, strikes, lock-outs or work stoppages, regional power outages, product tampering, war or terrorist activities,
actions of regulatory authorities, business failure, strike or other difficulty, we may be unable to find an alternative third-party
manufacturer in a timely manner and the production of our product candidates would be interrupted, resulting in delays and additional
costs, which could impact our ability to commercialize and sell our product candidates. We or our contract manufacturers may also
fail to achieve and maintain required manufacturing standards, which could result in patient injury or death, product recalls or
withdrawals, an order by governmental authorities to halt production, delays or failures in product testing or delivery, stability testing
failures, cost overruns or other problems that could seriously hurt our business. Contract manufacturers also often encounter
difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. In addition,
our contract manufacturers are subject to ongoing inspections and regulation by the FDA, the U.S. Drug Enforcement Agency and
corresponding foreign and state agencies and they may fail to meet these agencies’ acceptable standards of compliance. If our contract
manufacturers fail to comply with applicable governmental regulations, such as quality control, quality assurance and the maintenance
of records and documentation, we may not be able to continue production of the API or finished product. If the safety of any API or
product supplied is compromised due to failure to adhere to applicable laws or for other reasons, this may jeopardize our regulatory
approval for Gencaro and other product candidates, and we may be held liable for any injuries sustained as a result. Upon the
occurrence of one of the aforementioned events, the ability to switch manufacturers may be difficult for a number of reasons,
including:
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the number of potential manufacturers is limited and we may not be able to negotiate agreements with alternative
manufacturers on commercially reasonable terms, if at all;
long lead times are often needed to manufacture drugs;
the manufacturing process is complex and may require a significant learning curve; and
the FDA must approve any replacement prior to manufacturing, which requires new testing and compliance inspections.
Transitioning from a clinical development stage company will require successful completion of a number of steps, many of which
are outside of our control and, consequently, we can provide no assurance of our successful and timely transition from a clinical
development stage company.
We are a clinical development stage biopharmaceutical company with a limited operating history. To date we have not generated any
product revenue and have historically funded our operations through investment capital. Our future growth depends on our ability to
emerge from the clinical development stage and successfully commercialize or provide for the commercialization of Gencaro and our
other product candidates which in turn, will depend, among other things, on our ability to:
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conduct an additional clinical trial and develop and obtain regulatory approval for Gencaro or other product candidates;
successfully partner a companion genetic test with the commercial launch of Gencaro;
enter into a strategic transaction enabling the continued development and commercialization of Gencaro, or alternatively,
raise significant additional capital to enable these activities;
pursue additional indications for Gencaro and develop other product candidates, including other cardiovascular therapies;
and
obtain commercial quantities of Gencaro or other product candidates at acceptable cost levels.
Any one of these factors or other factors discussed in this report could affect our ability to successfully commercialize Gencaro and
other product candidates, which could impact our ability to earn sufficient revenues to transition from a clinical development stage
company and continue our business.
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If approved by the FDA, Gencaro will be entering a competitive marketplace and may not succeed.
Gencaro is a new type of beta-blocker and vasodilator being developed for AF. While we anticipate that this drug, if approved, would
be the first genetically-targeted cardiovascular drug, and potentially the only beta-blocker approved for AF, Gencaro will be one of a
number of accepted treatments for AF. In addition, our proposed prescribing information for Gencaro is expected to include a
requirement for genetic testing of the patient to ascertain if they have the genotype that we believe responds most favorably to
Gencaro. This additional step will add incremental cost and procedures to prescribing Gencaro, which could make it more difficult to
compete against existing therapies.
Our commercial opportunity may be reduced or eliminated if competitors develop and commercialize products that are safer, more
effective, have fewer side effects, are more convenient or are less expensive than Gencaro. If products with any of these properties are
developed, or any of the existing products are better marketed, then prescriptions of Gencaro by physicians and patient use of Gencaro
could be significantly reduced or rendered obsolete and noncompetitive. Further, public announcements regarding the development of
any such competing drugs could adversely affect the market price of our common stock and the value of our assets.
Future sales of our products may suffer if they are not accepted in the marketplace by physicians, patients and the medical
community.
Gencaro or our other product candidates may not gain market acceptance among physicians, patients and the medical community. The
degree of market acceptance of Gencaro or our other product candidates will depend on a number of factors, such as its effectiveness
and tolerability, as compared with competitive drugs. For instance, the top-line results of our Phase 2B GENETIC-AF clinical trial
indicated that Gencaro demonstrated a similar treatment benefit compared to the active comparator, metoprolol succinate (TOPROL-
XL). If our future clinical trials in Gencaro do not show that Gencaro has a clear therapeutic benefit as compared to other drugs in the
beta-blocker class currently on the market, then prescribers may be unlikely to prescribe Gencaro to patients, even if approved. Also,
prevalence and severity of side-effects could negatively affect market acceptance of Gencaro or our other product candidates. Failure
to achieve market acceptance of Gencaro would significantly harm our business.
If we are unable to obtain acceptable prices or adequate reimbursement from third-party payors for Gencaro, or any other product
candidates that we may seek to commercialize, then our revenues and prospects for profitability will suffer.
Our or any strategic partner’s ability to commercialize Gencaro, or any other product candidates that we may seek to commercialize, is
highly dependent on the extent to which coverage and reimbursement for these product candidates will be available from:
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governmental payors, such as Medicare and Medicaid;
private health insurers, including managed-care organizations; and
other third-party payors.
Many patients will not be capable of paying for our potential products themselves and will rely on third-party payors to pay for their
medical needs. A primary current trend in the U.S. health care industry is toward cost containment. Large private payors, managed-
care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding
the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are challenging the prices
charged for medical products and services, and many third-party payors limit reimbursement for newly approved health care products.
Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues lower than
anticipated. If the prices for our product candidates decrease, or if governmental and other third-party payors do not provide adequate
coverage and reimbursement levels, then our revenue and prospects for profitability will suffer.
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Health care reform measures could materially and adversely affect our business.
The business and financial condition of pharmaceutical and biotechnology companies are affected by the efforts of governmental and
third-party payors to contain or reduce the costs of health care. The U.S. Congress has enacted legislation to reform the health care
system. While we anticipate that this legislation may, over time, increase the number of patients who have insurance coverage for
pharmaceutical products, it also imposes cost containment measures that may adversely affect the amount of reimbursement for
pharmaceutical products. These measures include increasing the minimum rebates for products covered by Medicaid programs and
extending such rebates to drugs dispensed to Medicaid beneficiaries enrolled in Medicaid managed care organizations as well as
expansion of the 340(B) Public Health Services drug discount program. In addition, such legislation contains a number of provisions
designed to generate the revenues necessary to fund the coverage expansion, including new fees or taxes on certain health-related
industries, including medical device manufacturers. Each medical device manufacturer has to pay an excise tax (or sales tax) in an
amount equal to 2.3% of the price for which such manufacturer sells its medical devices. Such excise taxes may impact any potential
sales of the genetic test if it is approved for marketing. On January 22, 2018, legislation was enacted suspending the medical device
tax in 2018 and 2019. It will be reinstated on January 1, 2020, unless a permanent repeal takes place before that date. In foreign
jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at
changing the health care system. For example, in some countries other than the United States, pricing of prescription drugs is subject
to government control and we expect to see continued efforts to reduce healthcare costs in international markets.
Some states are also considering legislation that would control the prices of drugs, and state Medicaid programs are increasingly
requesting manufacturers to pay supplemental rebates and requiring prior authorization by the state program for use of any drug for
which supplemental rebates are not being paid. Managed care organizations continue to seek price discounts and, in some cases, to
impose restrictions on the coverage of particular drugs. Government efforts to reduce Medicaid expenses may lead to increased use of
managed care organizations by Medicaid programs. This may result in managed care organizations influencing prescription decisions
for a larger segment of the population and a corresponding constraint on prices and reimbursement for drugs. It is likely that federal
and state legislatures and health agencies will continue to focus on additional health care reform in the future although we are unable
to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. We or any
strategic partner’s ability to commercialize Gencaro, or any other product candidates that we may seek to commercialize, is highly
dependent on the extent to which coverage and reimbursement for these product candidates will be available from government payors,
such as Medicare and Medicaid, private health insurers, including managed care organizations, and other third-party payors, and any
change in reimbursement levels could materially and adversely affect our business. Further, the pendency or approval of future
proposals or reforms could result in a decrease in our stock price or limit our ability to raise capital or to obtain strategic partnerships
or licenses.
Our competitors may be better positioned in the marketplace and thereby may be more successful than us at developing,
manufacturing and marketing approved products.
Many of our competitors currently have significantly greater financial resources and expertise in conducting clinical trials, obtaining
regulatory approvals, managing manufacturing and marketing approved products than us. Other early-stage companies may also prove
to be significant competitors, particularly through collaborative arrangements with large and established companies. In addition, these
third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites
and patient registration for clinical trials, as well as in acquiring therapies and therapy licenses complementary to our programs or
advantageous to our business. We expect that our ability to compete effectively will depend upon our ability to:
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successfully and rapidly complete clinical trials for any product candidates and obtain all requisite regulatory approvals in a
cost-effective manner;
build an adequate sales and marketing infrastructure, raise additional funding, or enter into strategic transactions enabling
the commercialization of our products;
develop competitive formulations of our product candidates;
attract and retain key personnel; and
identify and obtain other product candidates on commercially reasonable terms.
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If we fail to identify and license or acquire other products or product candidates, then we may be unable to expand our business,
and the acquisition or licensing of other products or product candidates may put a strain on our operations and will likely require
us to seek additional financing.
One of our strategies is to license or acquire clinical-stage products or product candidates and further develop them for
commercialization. The market for licensing and acquiring products and product candidates is intensely competitive and many of our
competitors may have greater resources than we do. If we undertake any additional acquisitions, whether of product candidates or
other biopharmaceutical companies, the process of integrating an acquired product candidate or complementary company into our
business may put a strain on our operations, divert personnel, financial resources and management’s attention. In 2017, our research
and development activities were dedicated to Gencaro. We expect our research and development activities in 2018 will be focused on
regulatory activities related to Gencaro and initiating IND-enabling development activities with AB171. If we are not able to
substantially expand our research and development efforts, or identify, or license or acquire other products or product candidates or
complete future acquisitions, then we will likely be unable expand our pipeline of product candidates. In addition, any future
acquisition would give rise to additional operating costs and will likely require us to seek additional financing. Future acquisitions
could result in additional issuances of equity securities that would dilute the ownership of existing stockholders. Future acquisitions
could also result in the incurrence of debt, contingent liabilities or the amortization of expenses related to other intangible assets, any
of which could adversely affect our operating results.
We would be subject to applicable regulatory approval requirements of the foreign countries in which we market our products,
which are costly and may prevent or delay us from marketing our products in those countries.
In addition to regulatory requirements in the United States, we would be subject to the regulatory approval requirements in each
foreign country where we market our products. In addition, we might be required to identify one or more collaborators in these foreign
countries to develop, seek approval for and manufacture our products and any companion genetic test for Gencaro. If we decide to
pursue regulatory approvals and commercialization of our product candidates internationally, we may not be able to obtain the
required foreign regulatory approvals on a timely basis, if at all, and any failure to do so may cause us to incur additional costs or
prevent us from marketing our products in foreign countries, which may have a material adverse effect on our business, financial
condition and results of operations.
If our internal control over financial reporting is not considered effective, our business and stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting
as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial
reporting in our annual report on Form 10-K for that fiscal year. Our management, including our principal executive officer and
principal financial officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. We
continue to operate with a small staff for financial reporting. Though the process and design of our internal controls over financial
reporting have not been altered, the small number of staff involved in financial reporting may limit our ability to properly segregate
internal control procedures which could result in deficiencies or material weaknesses in our internal controls in the future. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud involving a company have been, or will be,
detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we
cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls
may become ineffective because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be
detected. We cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in
our internal control over financial reporting in the future. A material weakness in our internal control over financial reporting would
require management to consider our internal control over financial reporting as ineffective. If our internal control over financial
reporting is not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our
business and on the market price of our common stock.
Comprehensive tax reform bills could adversely affect our business and financial condition.
On December 22, 2017, and effective January 1, 2018, the U.S. government enacted H.R. 1, “An Act to provide for reconciliation
pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (informally titled the Tax Cuts and Jobs Act)
which includes significant changes to the taxation of business entities. The Tax Cuts and Jobs Act, among other things, contains
significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of
21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation
of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one
time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign
earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for
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depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in
the corporate income tax rate, the Tax Cuts and Jobs Act remains subject to interpretation and further guidance from U.S. taxing
authorities and as a result, the overall impact of this tax reform is uncertain and may change due to interpretation changes, and our
business and financial condition could be adversely affected. The impact of the Tax Cuts and Jobs Act on holders of our common
stock is also uncertain and could be adverse. We are unable to predict what tax reform may be proposed or enacted in the future or
what effect such changes would have on our business, but such changes, to the extent they are brought into tax legislation, regulations,
policies or practices, could affect our effective tax rates in the future in countries where we have operations and have an adverse effect
on our overall tax rate in the future, along with increasing the complexity, burden and cost of tax compliance. We urge our
stockholders to consult with their legal and tax advisors with respect to the Tax Cuts and Jobs Act and the potential tax consequences
of investing in or holding our common stock.
Failure to comply with data protection laws and regulations could lead to government enforcement actions (which could include
civil or criminal penalties), private litigation, and/or adverse publicity and could negatively affect our operating results and
business.
We and our partners may be subject to federal, state, and foreign data protection laws and regulations (i.e., laws and regulations that
address privacy and data security). In the United States, numerous federal and state laws and regulations, including state data breach
notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the FTC
Act), that govern the collection, use, disclosure, and protection of health-related and other personal information could apply to our
operations or the operations of our partners. In addition, we may obtain health information from third parties (including research
institutions from which we obtain clinical trial data) that are subject to privacy and security requirements under HIPAA, as amended.
Depending on the facts and circumstances, we could be subject to criminal penalties if we knowingly obtain, use, or disclose
individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by
HIPAA.
International data protection laws, including the European Union Directive 95/46/EC (the EU Data Protection Directive) and member
state implementing legislation, may also apply to health-related and other personal information obtained outside of the United States
The EU Data Protection Directive and the national implementing legislation of the individual European Union Member States impose
strict obligations on the ability to process health-related and other personal information of EU data subjects, including in relation to
collection, analysis and transfer. These include several requirements relating to the consent of the individuals to whom the personal
data relates, the information provided to the individuals, notification of data processing obligations to the competent national data
protection authorities and the security and confidentiality of the personal data. The EU Data Protection Directive prohibits the transfer
of personal data to countries outside of the European Economic Area, or EEA, such as the United States, which are not considered by
the European Commission to provide an adequate level of data protection. Switzerland has adopted similar restrictions.
Although there are legal mechanisms to allow for the transfer of personal data from the EEA and Switzerland to the United States,
uncertainty about compliance with EU data protection laws remains and data protection authorities from the different EU Member
States may interpret the EU Data Protection Directive and national laws differently, and guidance on implementation and compliance
practices are often updated or otherwise revised, which adds to the complexity of processing personal data in the EU.
In December 2015, a proposal for an EU General Data Protection Regulation, intended to replace the current EU Data Protection
Directive, was agreed between the European Parliament, the Council of the European Union and the European Commission. The EU
General Data Protection Regulation, which was officially adopted in April 2016 and will be applicable in May 2018, will introduce
new data protection requirements in the EU, as well as substantial fines for breaches of the data protection rules. The EU General Data
Protection Regulation will increase our responsibility and liability in relation to personal data that we process, and we may be required
to put in place additional mechanisms to ensure compliance with the new EU data protection rules.
Failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions
(which could include civil or criminal penalties), private litigation, and/or adverse publicity and could negatively affect our operating
results and business. Moreover, patients about whom we or our partners obtain information, as well as the providers who share this
information with us, may contractually limit our ability to use and disclose the information. Claims that we have violated individuals’
privacy rights, failed to comply with data protection laws, or breached our contractual obligations, even if we are not found liable,
could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.
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Risks Related to Intellectual Property and Other Legal Matters
If product liability lawsuits are successfully brought against us, then we will incur substantial liabilities and may be required to
limit commercialization of Gencaro or other product candidates.
We face product liability exposure related to the testing of our product candidates in human clinical trials, and may face exposure to
claims by an even greater number of persons once we begin marketing and distributing our products commercially. If we cannot
successfully defend against product liability claims, then we will incur substantial liabilities.
Regardless of merit or eventual outcome, liability claims may result in:
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decreased demand for our products and product candidates;
injury to our reputation;
• withdrawal of clinical trial participants;
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costs of related litigation;
substantial monetary awards to patients and others;
loss of revenues; and
the inability to commercialize our products and product candidates.
We have obtained limited product liability insurance coverage. Such coverage, however, may not be adequate or may not continue to
be available to us in sufficient amounts or at an acceptable cost, or at all. We may not be able to obtain commercially reasonable
product liability insurance for any product candidate.
Defending against claims relating to improper handling, storage or disposal of hazardous chemicals, radioactive or biological
materials could be time consuming and expensive.
Our research and development of product candidates may involve the controlled use of hazardous materials, including chemicals,
radioactive and biological materials. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury
from the materials. Various laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials.
We may be sued or be required to pay fines for any injury or contamination that results from our use or the use by third parties of
these materials. Compliance with environmental laws and regulations may be expensive, and current or future environmental
regulations may impair our research, development and production efforts.
The loss of any rights to market key products would significantly impair our operating results.
We have licensed from CPEC, who has licensed rights to all preclinical and clinical data from development of bucindolol through the
BEST trial from Bristol Meyers Squibb, or BMS, the exclusive rights to Gencaro for all therapeutic and diagnostic uses in any country
until the later of (i) 10 years from the first commercial sale of Gencaro in such country, or (ii) the termination of our commercial
exclusivity in such country. This license includes a sublicense to us from BMS. We are obligated to use commercially reasonable
efforts to develop and commercialize Gencaro, including obtaining regulatory approvals. Our ability to develop and commercialize
Gencaro is dependent on numerous factors, including some factors that are outside of our control. CPEC has the right to terminate our
license if we materially breach our obligations under the license agreement and fail to cure any such breach within the terms of the
license. In October 2017, we entered into an agreement with Aeolus pursuant to which we acquired Aeolus’ minority membership
interest in CPEC. The transaction effectively buys-out Aeolus’ royalty interest thereby reducing or eliminating the stated milestone
and royalty obligations that could be payable by us, if Gencaro receives regulatory approval and is commercialized.
If our license agreement with CPEC is terminated for reasons related to non-payment of fees, or for any other breach, then we would
have no further rights to develop and commercialize Gencaro for any indication. The termination of this license, or of any other
agreement which enables us to market a key product or product candidate, could significantly and adversely affect our business.
Certain intellectual property licensed by us is the subject of additional licensing arrangements to which the party that has licensed
rights to us is subject. If such parties were to breach the terms of such licenses or such licenses were otherwise to terminate, our and
our partners’ rights to use such technology and develop and commercialize their products such as the genetic test may terminate and
our business would be materially harmed.
33
Third parties may own or control patents or patent applications that we may be required to license to commercialize our product
candidates or that could result in litigation that would be costly and time consuming.
Our or any strategic partner’s ability to commercialize Gencaro and other product candidates depends upon our ability to develop,
manufacture, market and sell these drugs without infringing the proprietary rights of third parties. A number of pharmaceutical and
biotechnology companies, universities and research institutions have or may be granted patents that cover technologies similar to the
technologies owned by or licensed to us. We may choose to seek, or be required to seek, licenses under third party patents, which
would likely require the payment of license fees or royalties or both. We may also be unaware of existing patents that may be
infringed by Gencaro, the genetic testing we intend to use in connection with Gencaro or our other product candidates. Because patent
applications can take many years to issue, there may be other currently pending applications that may later result in issued patents that
are infringed by Gencaro or our other product candidates. Moreover, a license may not be available to us on commercially reasonable
terms, or at all.
There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and
biopharmaceutical industries generally. If a third party claims that we are infringing on its technology, then our business and results of
operations could be harmed by a number of factors, including:
•
infringement and other intellectual property claims, even if without merit, are expensive and time-consuming to litigate and
can divert management’s attention from our core business;
• monetary damage awards for past infringement can be substantial;
•
•
a court may prohibit us from selling or licensing product candidates unless the patent holder chooses to license the patent to
us; and
if a license is available from a patent holder, we may have to pay substantial royalties.
We may also be forced to bring an infringement action if we believe that a competitor is infringing our protected intellectual property.
Any such litigation will be costly, time-consuming and divert management’s attention, and the outcome of any such litigation may not
be favorable to us.
Our intellectual property rights may not preclude competitors from developing competing products and our business may suffer.
Our competitive success will depend, in part, on our ability to obtain and maintain patent protection for our inventions, technologies
and discoveries, including intellectual property that we license. The patent positions of biotechnology companies involve complex
legal and factual questions, and we cannot be certain that our patents and licenses will successfully preclude others from using our
technology. Consequently, we cannot be certain that any of our patents will provide significant market protection or will not be
circumvented or challenged and found to be unenforceable or invalid. In some cases, patent applications in the United States and
certain other jurisdictions are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, we cannot be certain of the priority of inventions covered by pending patent
applications. Moreover, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to
determine priority of invention, in opposition proceedings in a foreign patent office, or in a post-grant challenge proceeding such as an
ex parte reexamination or inter partes review at the U.S. Patent and Trademark Office, any of which could result in substantial cost to
us, even if the eventual outcome is favorable. There can be no assurance that a court of competent jurisdiction would hold any claims
in any issued patent to be valid. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require us to cease using such technology. Regardless of merit, the listing of patents in the FDA
Orange Book for Gencaro may be challenged as being improperly listed. We may have to defend against such claims and possible
associated antitrust issues. We could also incur substantial costs in seeking to enforce our proprietary rights against infringement.
While the composition of matter patents on the compound that comprises Gencaro have expired, we hold the intellectual property
concerning the interaction of Gencaro with the polymorphisms of the beta-1 and alpha-2C receptors. We have obtained patents that
claim methods involving Gencaro after a patient’s receptor genotype has been determined. We anticipate that any NDA for Gencaro
will request a label including a claim that efficacy varies based on receptor genotype and a recommendation in the prescribing
information that prospective patients be tested for their receptor genotype. We believe that under applicable law, a generic bucindolol
label would likely be required to include this recommendation as it pertains directly to the safe or efficacious use of the drug. Such a
label may be considered as inducing infringement, carrying the same liability as direct infringement. If the label with the genotype
information for Gencaro is not approved, or if generic labels are not required to copy the approved label, competitors could have an
easier path to introduce competing products and our business may suffer. The approved label may not contain language covered by the
patents, or we may be unsuccessful in enforcing them.
We may not be able to effectively protect our intellectual property rights in some foreign countries, as our patents are limited by
jurisdiction and many countries do not offer the same level of legal protection for intellectual property as the United States.
34
We require our employees, consultants, business partners and members of our scientific advisory board to execute confidentiality
agreements upon the commencement of employment, consulting or business relationships with us. These agreements provide that all
confidential information developed or made known during the course of the relationship with us be kept confidential and not disclosed
to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions resulting from
work performed for us, utilizing the property or relating to our business and conceived or completed by the individual during
employment shall be our exclusive property to the extent permitted by applicable law.
Third parties may breach these and other agreements with us regarding our intellectual property and we may not have adequate
remedies for the breach. Third parties could also fail to take necessary steps to protect our licensed intellectual property, which could
seriously harm our intellectual property position.
If we are not able to protect our proprietary technology, trade secrets and know-how, then our competitors may develop competing
products. Any issued patent may not be sufficient to prevent others from competing with us. Further, we have trade secrets relating to
Gencaro, and such trade secrets may become known or independently discovered. Our issued patents and those that may issue in the
future, or those licensed to us, may be challenged, opposed, invalidated or circumvented, which could allow competitors to market
similar products or limit the patent protection term of our product candidates. All of these factors may affect our competitive position.
If the manufacture, use or sale of our products infringe on the intellectual property rights of others, we could face costly litigation,
which could cause us to pay substantial damages or licensing fees and limit our ability to sell some or all of our products.
Extensive litigation regarding patents and other intellectual property rights has been common in the biopharmaceutical industry.
Litigation may be necessary to assert infringement claims, enforce patent rights, protect trade secrets or know-how and determine the
enforceability, scope and validity of certain proprietary rights. Litigation may even be necessary to defend disputes of inventorship or
ownership of proprietary rights. The defense and prosecution of intellectual property lawsuits, U.S. Patent and Trademark Office
interference proceedings, and related legal and administrative proceedings (e.g., a reexamination, inter partes review, or post-grant
review) in the United States and internationally involve complex legal and factual questions. As a result, such proceedings are costly
and time-consuming to pursue, and their outcome is uncertain.
Regardless of merit or outcome, our involvement in any litigation, interference or other administrative proceedings could cause us to
incur substantial expense and could significantly divert the efforts of our technical and management personnel. Any public
announcements related to litigation or interference proceedings initiated or threatened against us could cause our stock price to
decline. Adverse outcomes in patent litigation may potentially subject us to antitrust litigation which, regardless of the outcome,
would adversely affect our business. An adverse determination may subject us to the loss of our proprietary position or to significant
liabilities, or require us to seek licenses that may include substantial cost and ongoing royalties. Licenses may not be available from
third parties, or may not be obtainable on satisfactory terms. An adverse determination or a failure to obtain necessary licenses may
restrict or prevent us from manufacturing and selling our products, if any. These outcomes could materially harm our business,
financial condition and results of operations.
Risks Related to Stock Price Volatility
Our stock price is expected to be volatile.
Our common stock could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical,
biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the
market price of our common stock to fluctuate include:
•
•
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•
•
•
•
the regulatory status of Gencaro and the genetic test, and whether and when they are approved for sale, if at all, and the
labeling or other conditions of use imposed by the FDA;
our ability to secure additional funding or complete a strategic transaction or to complete development of and
commercialize Gencaro;
progress of any future clinical trials for Gencaro or our other product candidate, including enrollment and any data that may
become available;
the results of our future clinical trials and any future NDAs of our current and future product candidates;
the entry into, or termination of, key agreements, including key strategic alliance agreements;
the results and timing of regulatory reviews relating to our product candidates;
failure of any of our product candidates, if approved, to achieve commercial success;
general and industry-specific economic conditions that may affect our research and development expenditures;
the results of clinical trials conducted by others on drugs that would compete with our product candidates;
35
•
•
•
•
•
•
•
•
•
issues in manufacturing our product candidates or any approved products;
the initiation of or material developments in or the conclusion of litigation to enforce or defend any of our intellectual
property rights;
the loss of key employees;
the introduction of technological innovations or new commercial products by our competitors;
changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
future sales of our common stock;
changes in the structure of health care payment systems;
period-to-period fluctuations in our financial results; and
our ability to retain the listing of our common stock on the Nasdaq Capital Market.
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating
performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common
stock. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class
action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of
management attention and resources, which could significantly harm our profitability and reputation.
Future sales or the possibility of future sales of our common stock may depress the market price of our common stock.
Sales in the public market of substantial amounts of our common stock could depress prevailing market prices of our common stock.
As of December 31, 2017, approximately 11.8 million shares of common stock were outstanding, and all of these shares are freely
transferable without restriction or further registration under the Securities Act, except for shares held by our directors, officers and
other affiliates and unregistered shares held by non-affiliates. The sale of these additional shares, or the perception that such sales may
occur, could depress the market price of our common stock.
As of December 31, 2017, approximately 3.6 million shares of our common stock were issuable upon the exercise of outstanding
warrants. Once a warrant is exercised, if the shares of our common stock issued upon the exercise of any such warrant are not
available for sale in the open market without further registration under the Securities Act, then the holder can arrange for the resale of
shares either by invoking any applicable registration rights, causing the shares to be registered under the Securities Act and thus freely
transferable, or by relying on an exemption to the Securities Act. For instance, in July 2015, we filed a registration statement on
Form S-3 which registered for resale an aggregate of 2.4 million shares of our common stock issuable upon exercise of outstanding
warrants. If these registration rights, or similar registration rights that may apply to securities we may issue in the future, are
exercised, it could result in additional sales of our common stock in the market, which may have an adverse effect on our stock price.
As of December 31, 2017, there were approximately 627,000 shares of our common stock which may be issued upon the exercise of
outstanding stock options and the vesting of restricted stock units, and we anticipate that we will continue to issue stock option and
restricted stock unit awards to our employees and consultants in the fiscal year ended December 31, 2018 and thereafter. If and when
these options are exercised and these restricted stock units are vested, such shares will be available for sale in the open market without
further registration under the Securities Act. The existence of these outstanding options and restricted stock units may negatively
affect our ability to complete future equity financings at acceptable prices and on acceptable terms. The exercise of those options and
vesting of the restricted stock units, and the prompt resale of shares of our common stock received, may also result in downward
pressure on the price of our common stock.
In the absence of a significant strategic transaction, we will need to raise significant additional capital to finance the research,
development and commercialization of Gencaro and our other product candidate. If future securities offerings occur, they would dilute
our current stockholders’ equity interests and could reduce the market price of our common stock.
We do not expect to pay cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their
investment.
We anticipate that we will retain our earnings, if any, for future growth and therefore do not anticipate paying cash dividends in the
future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash
dividends should not invest in our common stock.
36
We have implemented anti-takeover provisions that could discourage, prevent or delay a takeover, even if the acquisition would be
beneficial to our stockholders.
Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a
third party to acquire us, even if doing so would benefit our stockholders. These provisions:
•
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•
establish a classified board of directors so that not all members of our board may be elected at one time;
authorize the issuance of up to approximately 5 million additional shares of preferred stock that could be issued by our
board of directors to increase the number of outstanding shares and hinder a takeover attempt;
limit who may call a special meeting of stockholders;
prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our
stockholders; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that
can be acted upon at a stockholder meeting.
Specifically, our certificate of incorporation provides that all stockholder action must be effected at a duly called meeting and not by a
written consent. The bylaws provide, however, that our stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 50% of our outstanding common stock. These provisions of our certificate of incorporation and bylaws
could discourage potential acquisition proposals and could delay or prevent a change in control. We designed these provisions to
reduce our vulnerability to unsolicited acquisition proposals and to discourage certain tactics that may be used in proxy fights. These
provisions, however, could also have the effect of discouraging others from making tender offers for our shares. As a consequence,
they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in our management.
We are permitted to issue shares of our preferred stock without stockholder approval upon such terms as our board of directors
determines. Therefore, the rights of the holders of our common stock are subject to, and may be adversely affected by, the rights of the
holders of our preferred stock that may be issued in the future. In addition, the issuance of preferred stock could have a dilutive effect
on the holdings of our current stockholders.
We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent a Delaware
corporation from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and
associates of the stockholder, who owns 15% or more of the corporation’s outstanding voting stock, for three years following the date
that the stockholder acquired 15% or more of the corporation’s stock unless:
•
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•
the board of directors approved the transaction where the stockholder acquired 15% or more of the corporation’s stock;
after the transaction in which the stockholder acquired 15% or more of the corporation’s stock, the stockholder owned at
least 85% of the corporation’s outstanding voting stock, excluding shares owned by directors, officers and employee stock
plans in which employee participants do not have the right to determine confidentially whether shares held under the plan
will be tendered in a tender or exchange offer; or
on or after this date, the merger or sale is approved by the board of directors and the holders of at least two-thirds of the
outstanding voting stock that is not owned by the stockholder.
The provisions of our governing documents and current Delaware law may, collectively:
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lengthen the time required for a person or entity to acquire control of us through a proxy contest for the election of a
majority of our board of directors;
discourage bids for our common stock at a premium over market price; and
generally deter efforts to obtain control of us.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our headquarters facility consists of approximately 5,300 square feet of office space in Westminster, Colorado, which is leased until
November 2019. We believe that this facility is adequate to meet our current needs.
37
Item 3. Legal Proceedings
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
38
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 7, 2011, our common stock began trading on The Nasdaq Capital Market under the symbol “ABIO”, and was previously
traded under the same symbol on The Nasdaq Global Market. Prior to completion of the merger with Nuvelo, Nuvelo’s common stock
traded under the symbol “NUVO” on The Nasdaq Global Market from January 31, 2003 to January 27, 2009 (except for the period
between June 19, 2003 and March 19, 2004, where it temporarily traded under the symbol “NUVOD”).
The following table sets forth, for the periods indicated, the high and low sales prices for our common stock, as reported by The
Nasdaq Capital Market in 2017 and 2016:
Year ended December 31, 2017
First quarter .......................................................................................................... $
Second quarter...................................................................................................... $
Third quarter......................................................................................................... $
Fourth quarter....................................................................................................... $
High
Low
2.90 $
2.76 $
2.71 $
2.00 $
2.35
2.15
1.05
1.10
Year ended December 31, 2016
First quarter .......................................................................................................... $
Second quarter...................................................................................................... $
Third quarter......................................................................................................... $
Fourth quarter....................................................................................................... $
High
Low
4.92 $
4.35 $
3.36 $
3.00 $
3.05
2.73
2.75
2.15
Stockholders
As of March 19, 2018, we had approximately 47 stockholders of record of our common stock, and the last sale price reported on The
Nasdaq Capital Market for our common stock was $0.65 per share.
Dividend Policy
The holders of our common stock are entitled to dividends in such amounts and at such times, if any, as may be declared by our Board
of Directors out of legally available funds. We have not paid any dividends on our common stock and do not anticipate paying any
cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Information relating to our equity compensation plans as of December 31, 2017, under which our equity securities were authorized for
issuance, is included in Item 12 of Part III of this Annual Report.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
None.
Item 6. Selected Financial Data
Not applicable.
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 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
39
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 applying a precision medicine approach to developing genetically-targeted therapies for
cardiovascular diseases. Precision medicine refers to the tailoring of medical treatment to the individual characteristics of each patient
through the ability to classify individuals into subpopulations that differ in their susceptibility to a particular disease, in the biology
and/or prognosis of those diseases they may develop, or in their response to a specific treatment. Our lead product candidate,
Gencaro™ (bucindolol hydrochloride), is an investigational, pharmacologically unique beta-blocker and mild vasodilator that we are
developing for the potential treatment of patients with chronic heart failure with reduced left ventricular ejection fraction, or HFrEF,
who also have atrial fibrillation, or AF, or at risk of developing AF. HFrEF constitutes an estimated 50-60% of the total heart failure,
or HF, population, with the remainder comprised of HF with preserved ejection fraction, or HFpEF. We believe that Gencaro’s
efficacy is enhanced in a specific genotype that is present in approximately fifty percent of the general population in the United States,
and can be identified by a genetic test. We believe that with this genetic test, we may be able to predict individual patient response to
Gencaro, potentially improving the efficacy of treatment for AF in HFrEF patients with this particular genotype. We believe that
Gencaro, if approved, could potentially be a safer and more effective therapy for treating or preventing AF in patients with HFrEF and
could be the first genetically-targeted AF treatment. We also believe that Gencaro may have market exclusivity based on patents and
new chemical entity status, if approved in the United States, Europe or other markets.
In February 2018, we reported the results of our Phase 2B clinical superiority trial, known as GENETIC-AF, in which we evaluated
Gencaro for the treatment and prevention of AF in patients with HFrEF. The GENETIC-AF trial only enrolled patients with the
beta-1 389 arginine homozygous genotype. In our trial, HFrEF is defined as a left ventricular ejection fraction, or LVEF, of less than
50%. GENETIC-AF compared Gencaro to TOPROL-XL (metoprolol succinate), a drug approved for treating HFrEF that is also
prescribed, but not approved, for treating AF in patients with HFrEF. Overall, Gencaro demonstrated a similar treatment benefit
compared to the active comparator, metoprolol succinate (TOPROL-XL). In U.S. patients (127 of 267 total patients), a trend for
potential superior benefit in favor of Gencaro (approximately 30% risk reduction over TOPROL-XL), was observed for the primary
endpoint of time to recurrence of AF. Additionally, in U.S. patients, Gencaro demonstrated a trend for potential superior benefit in
favor of Gencaro (approximately 51% risk reduction over TOPROL-XL) in a subset of patients who underwent continuous heart
rhythm monitoring with Medtronic implanted devices. Safety data indicated that Gencaro was generally safe and well-tolerated in the
AF/HF population investigated with a safety profile similar to TOPROL-XL.
GENETIC-AF enrolled 267 patients from the United States, Canada and Europe. The primary analysis was conducted to evaluate the
evidence of safety and superior efficacy of Gencaro versus an active comparator, TOPROL-XL. The primary endpoint of the trial was
time to recurrent AF, atrial flutter, or AFL, or all-cause mortality, or ACM. The trial was not powered to conventional significance for
this endpoint and utilized Bayesian statistical modeling of predictive probability of success, or PPoS, of the primary endpoint to
estimate outcome if the trial had enrolled 620 patients with 330 primary events.
Overall, Gencaro demonstrated a similar treatment benefit compared to the active comparator, TOPROL-XL (143 total events, hazard
ratio of 1.01 [95% confidence interval: 0.71, 1.42]), which was associated with a PPoS of 14%. In the U.S. patient cohort of 127
patients (approximately 50% of all patients and events), a trend for potential superior benefit in favor of Gencaro over TOPROL-XL
was observed (73 events, hazard ratio 0.70, [95% confidence interval: 0.41, 1.19]), with a PPoS of 61%, which was greater than the
prespecified criteria set by us to proceed to Phase 3 development. We believe the difference in treatment effects between the overall
and U.S. patient cohorts was primarily due to results in two non-U.S. countries exhibiting hazard ratios >1.0. The differences between
patients enrolled at these sites versus the United States and other country cohorts are being investigated.
A subgroup of patients underwent continuous (24/7) heart rhythm monitoring via Medtronic implanted loop recorders or other
Medtronic implanted therapeutic devices (e.g., ICDs, CRTs) to evaluate daily AF burden. AF burden was defined as the amount of
time per day a patient experienced AF, as measured by an implanted device. A prespecified time-to-first event analysis was conducted
using a total AF burden of at least 6 hours per day to define an event of AF recurrence. In this analysis, hazard ratios of 0.75 (0.43,
1.32) and 0.49 (0.24, 1.04) were observed in the overall (n=69) and U.S. patient (n=42) cohorts, respectively.
Gencaro was generally safe and well-tolerated, with 84% of patients attaining their target dose compared to 72% of patients receiving
TOPROL-XL. The most frequently reported adverse events were similar in both groups and consistent with the known safety profile
of the beta-blocker class of drugs. Adverse events assessed as related to study drug by the investigator occurred in 23.8% of patients in
the Gencaro group and in 30.1% of patients in the TOPROL-XL group. Of note, adverse events of bradycardia were less frequently
40
reported in the Gencaro group (3.7%) compared to patients receiving TOPROL-XL (12.0%). During the 24-week efficacy follow-up
period there were three deaths (ACM) in the TOPROL-XL group and none in the Gencaro group. Three patients died in the long-term
treatment extension period after receiving Gencaro for more than a year.
Our current development of Gencaro is, in part, based on a prospectively designed DNA substudy of adrenergic receptor
polymorphisms in the BEST trial, a previous Phase 3 study of 2,708 HF patients. Based on data from the BEST trial, Gencaro showed
potential evidence of enhanced efficacy in treating AF and in reducing mortality and hospitalizations in HF patients with the beta-1
389 arginine homozygous genotype. In 2015, the U.S. Food and Drug Administration, or FDA, designated the investigation of
Gencaro for the prevention of AF in a genetically targeted heart failure population (HF patients with reduced LVEF) as a Fast Track
development program.
AF, the most common sustained cardiac arrhythmia, is a potentially serious disorder in which the normally regular and coordinated
contraction pattern of the heart’s two small upper chambers, or the atria, becomes irregular, rapid and uncoordinated. AF commonly
occurs together with HFrEF, with AF being both a cause and a result of HFrEF. By increasing heart rate and producing irregular cycle
lengths, AF may contribute to the disease processes that leads to the progression of HFrEF and worsening clinical outcomes.
AF is considered an epidemic cardiovascular disease and a major public health burden. The estimated number of individuals with AF
globally in 2015 was 33.3 million. According to the 2017 American Heart Association report on Cardiovascular Disease,
approximately 5.2 million people in the United States had atrial fibrillation in 2015. Hospitalization rates for AF increased by 23%
among U.S. adults from 2000 to 2010 and hospitalizations account for the majority of the economic cost burden associated with AF.
In a global registry of AF patients, the rates of heart failure (of all types) ranged from 33% in patients with paroxysmal (episodes
lasting 7 days or less) to 56% in patients with permanent AF.
We believe there is a significant need for drug therapies that are safe and effective for HFrEF patients with AF or at risk of developing
it, as the existing drug therapies for the treatment or prevention AF have certain safety disadvantages in HFrEF patients, such as toxic
or cardiovascular adverse effects. Most of the approved drugs for AF are contra indicated or have warnings in their prescribing
information for such patients. Consequently, in the treatment and prevention of AF in HFrEF patients, we believe there is an unmet
medical need for new treatments that have fewer side effects and are more effective than currently available therapies.
We believe that data from the BEST trial indicate that Gencaro may have a genetically regulated effect in reducing or preventing AF
in HFrEF patients. A retrospective analysis of data from the BEST trial shows that all patients in the trial treated with Gencaro had a
41% reduction in the risk of new onset AF (time-to-event) compared to placebo (p = 0.0004). In a substudy in the trial, which
considered only patients with the genotype believed to enhance Gencaro’s efficacy (known as the beta-1 389 arginine homozygous
genotype), patients treated with Gencaro experienced a 74% (p = 0.0003) reduction in risk of AF, based on the same analysis. In
addition, the BEST study, the beta-1 389 arginine homozygous genotype Gencaro demonstrated enhanced efficacy in reducing
mortality, hospitalizations, and ventricular tachycardia /ventricular fibrillation, or VT/VF. Furthermore, patients with a beta-1 389
arginine homozygous genotype who entered the trial in AF had statistically significant reductions in major cardiovascular or HF
mortality/hospitalization composite endpoints, which we believe is the first and thus far only demonstration of effectiveness of a beta-
blocker in reducing major HF events in HFrEF patients with permanent AF. The beta-1 389 arginine homozygous genotype was
present in about 50% of the patients screened and all enrolled patients in the GENETIC-AF trial and 47% of the patients in the BEST
pharmacogenetic substudy, and we estimate it is present in about 50% of the North American and European general populations.
GENETIC-AF was completed as a Phase 2B, multi-center, randomized, double-blind, clinical superiority trial comparing the safety
and efficacy of Gencaro against an active comparator, the beta-blocker TOPROL-XL (metoprolol succinate), that enrolled 267
patients. Eligible patients had HFrEF, a history of paroxysmal AF (episodes lasting 7 days or less) or persistent AF (episodes lasting
more than 7 days and less than 1 year) in the past 6 months, and the beta-1 389 arginine homozygous genotype that we believe
responds most favorably to Gencaro. We believe that Gencaro may be potentially unique in the beta-blocker class of drugs due to its
apparent pharmacologic interaction with the beta-1 adrenergic receptor polymorphism. We received guidance from the FDA
regarding the GENETIC-AF clinical trial prior to initiation of the trial. The trial enrolled patients in the United States, Canada and
Europe and completed enrollment in August 2017.
In August 2017, the GENETIC-AF Data and Safety Monitoring Board, or DSMB, conducted a pre-specified interim analysis of
unblinded efficacy and recommended completing the Phase 2B trial with no changes to the trial design. All 267 patients completed
their last study visits and were transitioned off study drug by the end of December 2017.
We have been granted patents in the United States, Europe, and other jurisdictions for methods of treating AF and HF patients with
Gencaro based on genetic testing. We believe our patent portfolio and new chemical entity exclusivity may provide market
exclusivity for the indications of Gencaro that we may develop, into approximately 2030 or 2031 in the United States, Europe and
other markets.
41
Our GENETIC-AF Phase 2B trial was completed in February 2018 and we believe that our current cash, cash equivalents and
marketable securities, which includes $3.4 million of net proceeds raised in January 2018 from sales of our common stock, will be
sufficient to fund our operations, at our projected cost structure, through the end of 2018. However, changing circumstances may
cause us to consume capital significantly faster or slower than we currently anticipate.
In January 2017, we entered into a sales agreement with an agent to sell, from time to time, our common stock having an aggregate
offering price of up to $7.3 million, in an “at the market offering.” In August 2017, we amended our sales agreement to increase the
maximum aggregate value of shares which we may issue and sell from time to time under this sales agreement by approximately $2.9
million, from $7.3 million to $10.2 million. As of January 19, 2018, we have sold an aggregate of 4,811,353 shares of our common
stock pursuant to the terms of such sales agreement, as amended, for aggregate gross proceeds of approximately $10.1 million. Net
proceeds received in the period were approximately $9.5 million, after deducting initial expenses for executing the “at the market
offering” and commissions paid to the placement agent. We have sold all shares available under the current prospectus.
Results of Operations
Research and Development Expenses
Research and development, or R&D, expense is comprised primarily of clinical development, manufacturing process development,
and regulatory activities and costs. Our R&D expense continues to be almost entirely generated by our activities relating to the
development of Gencaro.
Our research and development expenses were $14.1 million for the year ended December 31, 2017 as compared to $12.3 million for
2016. The $1.7 million increase in research and development expenses in 2017 as compared to 2016 was primarily due to the
increased expense of our GENETIC-AF clinical trial.
Clinical expense increased approximately $2.2 million during the year ended December 31, 2017. The cost increase was primarily
due to clinical trial cost activities, as well as increased personnel costs. The increase in costs were related to our GENETIC-AF
clinical trial, including contract research organization, or CRO, costs, clinical site monitoring activities, patient visit costs and
increased costs to support expanding into Europe.
Manufacturing process development costs decreased approximately $0.6 million for the year ended December 31, 2017 compared to
the corresponding period of 2016. The decrease was a result of decreased of production of clinical trial materials used in our
GENETIC-AF clinical trial, completed in 2017.
We expect R&D expense in 2018 to be lower than 2017 as our GENETIC-AF clinical trial has been completed.
General and Administrative Expenses
General and administrative expenses, or G&A, primarily consist of personnel costs, consulting and professional fees, insurance,
facilities and depreciation expenses, and various other administrative costs.
G&A expenses were $4.6 million for the year ended December 31, 2017, compared to $4.3 million for 2016, an increase of
approximately $0.4 million. The increase in expenses during 2017 was comprised primarily of costs incurred to acquire Aeolus’
minority membership interest in CPEC and higher consulting costs and professional fees, partially offset by decreased non-cash,
stock-based compensation expense in 2017, as compared to the corresponding period in 2016.
G&A expenses in 2018 are expected to be consistent with those in 2017 as we maintain administrative activities to support our
ongoing operations.
Interest and Other Income
Interest and other income was $167,000 for the year ended December 31, 2017 as compared to $169,000 for 2016, resulting in an
decrease of $2,000. This decrease was due lower marketable securities balances as we funded our operations. We expect interest
income to be lower in 2018 than in 2017, as we continue to use our cash, cash equivalents and marketable securities to fund our
operations.
Interest Expense
Interest expense was $6,000 for the year ended December 31, 2017. We had no interest expense during the year ended December 31,
2016. The amounts were nominal to our overall operations. Based on our current capital structure, interest expense is expected to be
negligible in 2018.
42
Income Tax Benefit
Income tax benefit was $61,000 for the year ended December 31, 2017, related to the Protecting Americans from Tax Hikes Act of
2015, or PATH Act, which allows qualified small businesses to monetize up to $250,000 of research and experimentation tax credits
through payroll tax refunds. We had no income tax benefit during the year ended December 31, 2016, as the PATH Act refunds were
not effective until 2017.
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
December 31,
2017
2016
Cash and cash equivalents........................................... $
Marketable securities, short and long-term.................
Cash, cash equivalents and marketable securities....... $
$
(in thousands)
8,702
3,050
11,752
$
7,401
16,114
23,515
As of December 31, 2017, we had total cash, cash equivalents and marketable securities of approximately $11.8 million, as compared
to $23.5 million as of December 31, 2016. The net decrease of $11.8 million during the year primarily reflects the approximately
$17.5 million of cash used to fund operating activities during year ended December 31, 2017, partially offset by $6.1 million of cash
proceeds from the sale of common stock.
Cash Flows from Operating, Investing and Financing Activities
Years Ended December 31,
2017
2016
(in thousands)
Net cash provided by (used in):
Operating activities................................................. $
Investing activities..................................................
Financing activities.................................................
Net increase (decrease) in cash and cash equivalents..... $
(17,472) $
12,926
5,847
1,301
$
(14,987)
(16,414)
—
(31,401)
Net cash used in operating activities for the year ended December 31, 2017 increased approximately $2.5 million compared with the
2016 period. This is primarily due to a higher net loss in 2017, as discussed in more detail above, offset by changes in operating assets
and liabilities.
Net cash provided by investing activities for the year ended December 31, 2017 was $12.9 million. This is related to $18.4 million of
proceeds from the maturities of marketable securities, offset by $5.5 million for the purchases of marketable securities and $3,000 for
the purchase of property and equipment. Net cash used in investing activities for the year ended December 31, 2016 was
$16.4 million. This is related to $20.5 million for the purchases of marketable securities and $12,000 for the purchase of property and
equipment, offset by $4.1 million of proceeds from the maturities of marketable securities
Net cash provided by financing activities was $5.8 million for the year ended December 31, 2017 representing $6.1 million of net
proceeds from our “at the market” equity offering executed in January 2017, less $256,000 in payments on a vendor financing
arrangement. There was no net cash provided by financing activities for the year ended December 31, 2016.
Sources and Uses of Capital
Our primary sources of liquidity to date have been capital raised from issuances of shares of our preferred and common stock. 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.
43
In January 2017, we entered into a sales agreement with an agent to sell, from time to time, our common stock having an aggregate
offering price of up to $7.3 million, in an “at the market offering.” In August 2017, we amended our sales agreement to increase the
maximum aggregate value of shares which we may issue and sell from time to time under this sales agreement by approximately
$2.9 million, from $7.3 million to $10.2 million. Pursuant to the terms of such sales agreement, as amended, we have sold an
aggregate of 4,811,353 shares of our common stock for aggregate gross proceeds of approximately $10.1 million through
January 19, 2018. Net proceeds received in the period were approximately $9.5 million, after deducting initial expenses for executing
the “at the market offering” and commissions paid to the placement agent.
Our ability to execute our Gencaro development program in accordance with our projected time line depends on a number of factors,
including, but not limited to, the following:
•
•
•
•
•
•
our ability to control costs associated with the clinical trial and our operations;
our ability to retain the listing of our common stock on the Nasdaq Capital Market;
the market price of our stock and the availability and cost of additional equity capital from existing and potential new
investors;
general economic and industry conditions affecting the availability and cost of capital;
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.
We believe that our current cash, cash equivalents and marketable securities, which includes the $3.4 million of net proceeds raised in
January 2018 from sales of our common stock, will be sufficient to fund our operations, at our projected cost structure, through the
end of 2018. However, our forecast of the period of time through which our financial resources will be adequate to support our
current and forecasted operations could vary materially. We will need to raise additional capital to fund future operations and any
additional development of Gencaro or any other product candidates. Such financing would likely result in dilution to our existing
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. The significant
uncertainties surrounding the clinical development timelines and costs and the ability to raise a significant amount of capital raises
substantial doubt about our ability to continue as a going concern from one year after the Company’s financial statements have been
issued.
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 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 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 financial statements and, therefore, is important in understanding
our financial condition and results of operations.
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.
44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
45
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm, KPMG LLP .................................................................................................
Balance Sheets as of December 31, 2017 and 2016....................................................................................................................................
Statements of Operations and Comprehensive Loss for the years ended December 31, 2017 and 2016 ...................................................
Statements of Stockholders’ Equity for the years ended December 31, 2017 and 2016 ...........................................................................
Statements of Cash Flows for the years ended December 31, 2017 and 2016 ...........................................................................................
Notes to Financial Statements .....................................................................................................................................................................
Page
47
48
49
50
51
52
46
Report of Independent Registered Public Accounting Firm
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, 2017 and 2016, the
related statements of operations and comprehensive loss, 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, 2017 and 2016, and the results of its operations and its cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in note 1 to the financial statements, the Company has incurred recurring losses from operations and needs to raise capital to
fund its clinical development programs. The Company’s ability to raise such capital is uncertain. As a result, there is substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in
note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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.
We have served as the Company’s auditor since 2006.
/s/ KPMG LLP
Denver, Colorado
March 22, 2018
47
ARCA BIOPHARMA, INC.
BALANCE SHEETS
Current assets:
ASSETS
Cash and cash equivalents .......................................................................................... $
Marketable securities ..................................................................................................
Other current assets.....................................................................................................
Total current assets................................................................................................
Marketable securities........................................................................................................
Property and equipment, net.............................................................................................
Other assets ......................................................................................................................
Total assets ........................................................................................................... $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable........................................................................................................ $
Accrued compensation and employee benefits...........................................................
Accrued expenses and other liabilities........................................................................
Total current liabilities ..........................................................................................
Deferred rent, net of current portion ................................................................................
Total liabilities .....................................................................................................
Commitments and contingencies
Stockholders’ equity:
As of December 31,
2017
2016
(in thousands, except share
and per share amounts)
$
$
$
8,702
3,050
547
12,299
—
42
24
12,365
622
757
691
2,070
20
2,090
7,401
13,762
282
21,445
2,352
66
766
24,629
1,205
719
472
2,396
39
2,435
Preferred stock, $0.001 par value; 5 million shares authorized;
no shares issued or outstanding at December 31, 2017 and 2016 ...........................
—
—
Common stock, $0.001 par value; 100 million shares authorized
at December 31, 2017 and 2016; 11,775,062 and 9,082,366
shares issued and outstanding at December 31, 2017 and
2016, respectively ....................................................................................................
Additional paid-in capital ...........................................................................................
Accumulated other comprehensive loss .....................................................................
Accumulated deficit....................................................................................................
Total stockholders’ equity ..................................................................................
Total liabilities and stockholders’ equity .......................................................... $
12
141,266
(2)
(131,001)
10,275
12,365
$
9
134,715
(19)
(112,511)
22,194
24,629
See accompanying Notes to Financial Statements
48
ARCA BIOPHARMA, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Costs and expenses:
Research and development.......................................................................................... $
General and administrative..........................................................................................
Total costs and expenses ..................................................................................
Loss from operations........................................................................................
Interest and other income..................................................................................................
Interest expense ................................................................................................................
Loss before income taxes .................................................................................
Income tax benefit ............................................................................................................
Net loss............................................................................................................. $
Change in unrealized loss on marketable securities .........................................................
Comprehensive loss .......................................................................................................... $
Years Ended December 31,
2016
2017
(in thousands, except share
and per share amounts)
$
14,076
4,636
18,712
(18,712)
167
(6)
(18,551)
61
(18,490) $
17
(18,473) $
12,348
4,265
16,613
(16,613)
169
—
(16,444)
—
(16,444)
(19)
(16,463)
Net loss per share:
Basic and diluted.................................................................................................... $
(1.77) $
(1.81)
Weighted average shares outstanding:
Basic and diluted....................................................................................................
10,431,391
9,067,438
See accompanying Notes to Financial Statements
49
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5
ARCA BIOPHARMA, INC.
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net loss .....................................................................................................................
Adjustments to reconcile net loss to net cash used
$
(18,490) $
(16,444)
Years Ended December 31,
2016
2017
(in thousands)
in operating activities:
Depreciation ........................................................................................................
Amortization of other assets ...............................................................................
Amortization of premiums and discounts on marketable securities ...................
Share-based compensation
Change in operating assets and liabilities:
Other current assets .......................................................................................
Other assets....................................................................................................
Accounts payable...........................................................................................
Accrued compensation and employee benefits .............................................
Accrued expenses and other liabilities ..........................................................
Other ..............................................................................................................
Net cash used in operating activities ...............................................................
Cash flows from investing activities:
Purchase of property and equipment ........................................................................
Purchases of marketable securities...........................................................................
Proceeds from maturities of marketable securities...................................................
Net cash provided by (used in) investing activities ........................................
Cash flows from financing activities:
Proceeds from the issuance of common stock..........................................................
Common stock offering costs...................................................................................
Repayment of principal on vendor finance agreement.............................................
Net cash provided by financing activities .......................................................
Net increase (decrease) in cash and cash equivalents ...............................................
Cash and cash equivalents, beginning of year ...............................................................
Cash and cash equivalents, end of year .....................................................................
Supplemental cash flow information:
Interest paid.........................................................................................................
Income tax refund received.................................................................................
Supplemental disclosure of noncash investing and financing
transactions:
Common stock offering costs accrued but not yet paid ......................................
Change in unrealized loss on marketable securities ...........................................
Leasehold improvement lease incentive .............................................................
$
$
$
$
$
$
See accompanying Notes to Financial Statements
27
329
119
458
437
—
(583)
38
193
—
(17,472)
(3)
(5,471)
18,400
12,926
6,551
(448)
(256)
5,847
1,301
7,401
8,702
6
38
$
$
$
$
7
$
17
— $
24
296
161
576
(47)
(432)
841
50
(3)
(9)
(14,987)
(12)
(20,504)
4,102
(16,414)
—
—
—
—
(31,401)
38,802
7,401
—
—
(11)
(19)
48
51
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 biopharmaceutical company applying a precision medicine approach to developing genetically-targeted therapies for
cardiovascular diseases. The Company’s lead product candidate, Gencaro™ (bucindolol hydrochloride), is an investigational,
pharmacologically unique beta-blocker and mild vasodilator that ARCA is developing for the potential treatment of patients with atrial
fibrillation (AF) and chronic heart failure (HF).
The Company completed a Phase 2B clinical superiority trial, known as GENETIC-AF, in which the Company evaluated Gencaro for
the treatment of AF in patients with heart failure with reduced left ventricular ejection fraction (HFrEF) against an active comparator,
the beta-blocker TOPROL-XL (metoprolol succinate), a drug approved for treating HFrEF that is also prescribed, but not approved,
for treating AF in patients with HFrEF. Enrollment in GENETIC-AF, which was completed in August 2017, was limited to patients
that possess the specific genotype that the Company believes enhances Gencaro’s potential therapeutic effects. The current
development of Gencaro is, in part, based on a prospectively designed DNA substudy of adrenergic receptor polymorphisms in the
BEST trial, a previous Phase 3 study of HF patients.
GENETIC-AF was a Phase 2B, multi-center, randomized, double-blind, clinical superiority trial comparing the safety and efficacy of
Gencaro against TOPROL-XL, that enrolled 267 patients. Eligible patients had HFrEF, a history of paroxysmal AF (episodes lasting 7
days or less) or persistent AF (episodes lasting more than 7 days and less than 1 year) in the past 6 months, and the beta-1 389 arginine
homozygous genotype that the Company believes responds most favorably to Gencaro. The primary endpoint of the study was time to
recurrent AF/atrial flutter (AFL), or all-cause mortality. The Company reported top-line Phase 2B data in February 2018. Overall,
Gencaro demonstrated a similar treatment benefit compared to the active comparator, metoprolol succinate.
The Company plans to intiate Investigational New Drug enabling development activities with AB171, a thiol-substituted isosorbide
mononitrate, as a potential genetically-targeted treatment for peripheral arterial disease and for HF.
The Company will need to raise additional capital to fund future operations and any additional development of Gencaro or AB171. If
the Company is unable to obtain additional funding or is unable to complete a strategic transaction, it may have to discontinue
development activities on Gencaro or discontinue its operations.
On January 27, 2009, the Company completed a business combination (the Merger) with Nuvelo, Inc. (Nuvelo). Immediately
following the Merger, the Company changed its name from Nuvelo, Inc. to ARCA biopharma, Inc.
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, cash equivalents and marketable securities as of December 31, 2017, together with the
$3.4 million of net proceeds raised in January 2018 from sales of its common stock, as discussed in Note 11, will be sufficient to fund
its operations, at its projected cost structure, through the end of 2018. In light of the significant uncertainties regarding clinical
development timelines and costs for developing drugs such as Gencaro, the Company will need to raise additional capital to finance
the Company’s future operations and any additional development of Gencaro or any other product candidates. If the Company is
delayed in completing or is unable to complete additional funding and/or a strategic transaction, the Company may discontinue its
development activities or operations.
Due to the current status of the Gencaro development program, the current amount of cash, cash equivalents and marketable securities
held, the anticipated costs to be incurred for existing operations as well as other corporate strategic alternatives through the end of
2018, and the uncertainty of the Company’s ability to raise a significant amount of capital, management has determined there is
substantial doubt about the Company’s ability to continue as a going concern from one year after the Company’s financial statements
52
have been issued. The Company could delay or cancel certain significant planned expenditures related to Gencaro and/or implement
cost reduction measures to conserve its cash balances; however, there is no assurance that those measures would be adequate to allow
the Company to continue as a going concern for a period beyond one year from the issuance of these financial statements. These
financial statements have been prepared with the assumption that the Company will continue as a going concern and will be able to
realize its assets and discharge its 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 the
inability of the Company to continue as a going concern. The Company may not be able to raise sufficient capital on acceptable terms,
or at all, to continue development of 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 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;
the Company’s ability to control costs associated with its operations;
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, and the subsequent events are disclosed in Note 11.
Recent Accounting Pronouncements
In January 2016, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 requires equity
investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of
equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates
the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is
required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to
use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present
separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option
for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form
of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should
evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the
entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. Given the short-term nature of the Company’s marketable
securities, the impact that ASU 2016-01 will have on its financial statements and related disclosures is not expected to be significant.
53
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to recognize assets
and liabilities for the rights and obligations created by most leases on their balance sheet. The guidance is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. ASU 2016-02
requires modified retrospective adoption for all leases existing at, or entered into after, the date of initial application, with an option to
use certain transition relief. While the Company is currently evaluating the impact that ASU 2016-02 will have on its financial
statements and related disclosures, it is expected that the operating lease commitment discussed in Note 6 will be recognized as
operating lease liability and right-of-use asset.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based
Payment Accounting (ASU 2016-09), which changes how companies account for certain aspects of share-based payments to
employees. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards
vest or are settled, allows an employer to repurchase more of an employee’s shares than previously allowed for tax withholding
purposes without triggering liability accounting, allows a company to make a policy election to account for forfeitures as they occur,
and eliminates the requirement that excess tax benefits be realized before companies can recognize them. The new guidance also
requires excess tax benefits and tax shortfalls to be presented on the cash flow statement as an operating activity rather than as a
financing activity, and clarifies that cash paid to a tax authority when shares are withheld to satisfy its statutory income tax
withholding obligation are to be presented as a financing activity. For the year ended December 31, 2016, the Company recognized no
such excess tax benefits and did not withhold shares to satisfy statutory income tax withholding obligations. The Company adopted
this guidance January 1, 2017. The provisions of ASU 2016-09 did not have a material impact on the financial statements or related
disclosures.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities. The new guidance is effective for fiscal years beginning after
December 15, 2018 and interim periods within those years. Early adoption is permitted for interim or annual reporting periods
beginning after December 15, 2017. The guidance is to be applied on a modified retrospective basis through a cumulative-effect
adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance shortens the amortization period
for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Given the short-
term nature of the Company’s marketable securities, the impact that ASU 2017-08 will have on its financial statements and related
disclosures is not expected to be significant.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting in Topic 718. The guidance is effective for annual periods beginning after December 15, 2017, with early
adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company is
currently evaluating the impact that ASU 2017-09 will have on its financial statements and related disclosures.
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 clinical trial accruals, and in estimating other accrued
liabilities, stock-based compensation, 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.
54
Marketable Securities
The Company has designated its marketable securities as available-for-sale securities and accounted for them at their respective fair
values. Marketable securities are classified as short-term or long-term based on the nature of the securities and their availability to
meet current operating requirements. Marketable securities that are readily available for use in current operations are classified as
short-term available-for-sale securities and are reported as current marketable securities in the accompanying balance sheets.
Marketable securities that are not considered available for use in current operations are classified as long-term available-for-sale
securities and are reported as a component of long-term assets in the accompanying balance sheets.
Securities that are classified as available-for-sale are measured at fair value, including accrued interest, with temporary unrealized
gains and losses reported as a component of stockholders' equity until their disposition. The Company reviews all available-for-sale
securities at each period end to determine if they remain available-for-sale based on the Company’s then current intent and ability to
sell the security if it is required to do so.
All of the Company’s marketable securities are subject to a periodic impairment review. The Company recognizes an impairment
charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and
cash equivalents and marketable securities. 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.
Accrued Expenses
As part of the process of preparing its financial statements, the Company is required to estimate accrued 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 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 professional service fees, such as attorneys, consultants, and 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, or 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, we are obligated to make certain upfront payments upon execution
of the agreement. We record these upfront payments as prepaid research and development expenses, which are included in Other
55
current assets or Other assets in the accompanying Balance Sheets. Such payments are recorded to research and development expense
as services are performed. We evaluate 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. The Company recognizes compensation costs for its performance based stock-based awards over the
performance period, once the performance condition is probable, and as adjusted for expected forfeitures.
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. The
Company has recorded a valuation allowance against all of its deferred tax assets, as management has concluded that it is more likely
than not that the net deferred tax asset will not be realized through future taxable income, based primarily on the Company’s history of
operating losses. 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.
(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, restricted stock units and warrants
for common stock.
Because the Company reported a net loss for the years ended December 31, 2017 and 2016, 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:
Potentially dilutive securities, excluded:
Outstanding stock options............................................
Unvested restricted stock units ....................................
Warrants to purchase common stock ...........................
Years Ended December 31,
2017
2016
611,975
15,168
3,633,008
4,260,151
629,629
30,739
3,686,894
4,347,262
56
(3) Marketable Securities and Fair Value Disclosures
Marketable securities consisted of the following as of December 31, 2017 and 2016 (in thousands):
December 31, 2017
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Amortized
Cost
Fair
Value
Short-term available-for-sale
securities:
Corporate bonds ............... $
Total ...................... $
3,052
3,052
$
$
— $
— $
(2) $
(2) $
3,050
3,050
December 31, 2016
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Amortized
Cost
Fair
Value
Short-term available-for-sale
securities:
Corporate bonds ............... $
Total ...................... $
13,778
13,778
Long-term available-for-sale
securities:
Corporate bonds ............... $
Tota ....................... $
2,355
2,355
$
$
$
$
— $
— $
(16) $
(16) $
13,762
13,762
3
3
$
$
(6) $
(6) $
2,352
2,352
The investments have been in an unrealized loss position for less than twelve months. Based upon the Company’s evaluation of all
relevant factors, the Company believes that the decline in fair value of securities held at December 31, 2017 below cost is temporary,
and the Company intends to retain its investment in these securities for a sufficient period of time to allow for recovery of the fair
value.
As of December 31, 2017, the amortized cost and estimated fair value of available-for-sale securities by contractual maturity were as
follows (in thousands):
Due in one year or less ........................................... $
Total ................................................. $
3,052
3,052
$
$
3,050
3,050
Amortized
Cost
Fair
Value
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.
57
The following table identifies the Company’s assets that were measured at fair value on a recurring basis (in thousands):
Balance
Level 1
Level 2
Level 3
December 31, 2017
Money market..................
Corporate bonds ..............
Total......................
December 31, 2016
Money market..................
Corporate bonds ..............
Total......................
$
$
$
$
8,189
3,725
11,914
7,672
16,114
23,786
$
$
$
$
8,189
—
8,189
7,672
—
7,672
$
$
$
$
— $
3,725
3,725 $
— $
16,114
16,114 $
—
—
—
—
—
—
As of December 31, 2017 and 2016, the Company had $8.9 million and $7.7 million, respectively, of cash equivalents consisting of
money market funds and corporate bonds 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 and equity securities with Level 1
inputs through quoted market prices. There were no transfers between any fair value hierarchy levels in 2017 or 2016.
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, 2017 and 2016, the Company did not have any debt outstanding.
(4) Property and Equipment
Property and equipment consist of the following (in thousands):
Computer equipment ..........................................
Lab equipment....................................................
Furniture and fixtures .........................................
Computer software .............................................
Leasehold improvements....................................
Accumulated depreciation and amortization......
Property and equipment, net...............................
Estimated Life
3 years
5 years
5 years
3 years
Lesser of useful life
or life of the lease
December 31,
2017
December 31,
2016
$
$
74
142
83
85
59
443
(401)
42
$
$
84
142
83
85
59
453
(387)
66
For the years ended December 31, 2017 and 2016, depreciation and amortization expense was $27,000 and $24,000, 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, 2017 and 2016 was $418,000 and $427,000, respectively.
58
(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.
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 has served as the Company’s primary business office since October 1, 2013. Effective March 2, 2016,
the lease was renewed for an additional 38 month term beginning October 1, 2016 and expiring on November 30, 2019.
Below is a summary of the future minimum lease payments committed for the Company’s facility in Westminster, Colorado as of
December 31, 2017 (in thousands):
2018 ............................................................................ $
2019 ............................................................................
Total future minimum lease payments ....................... $
88
83
171
Rent expense under these leases for the years ended December 31, 2017 and 2016 was $82,000 and $81,000, respectively.
Duke University
In November 2013, the Company entered into a clinical research agreement with Duke University (Duke) to serve as the clinical
research organization for the Company’s GENETIC-AF clinical study. Under the agreement the Company is responsible to pay Duke
for their work managing certain aspects of the clinical study. Upon completion of the clinical study, the agreement will terminate.
The agreement can be terminated earlier by the Company for any reason with 90 days written notice to Duke. In the event of an early
termination, the Company and Duke would coordinate efforts for an orderly wind-down of the study, and the Company would be
responsible to pay Duke for time and effort incurred through the date of termination and through the wind-down period.
Cardiovascular Pharmacology and Engineering Consultants, LLC
ARCA has licensed worldwide rights to all preclinical and clinical data from development of bucindolol through the BEST trial from
Cardiovascular Pharmacology and Engineering Consultants, LLC (CPEC), who has licensed rights to this data from Bristol Myers
Squib (BMS). CPEC is a licensing subsidiary of Indevus Pharmaceuticals Inc. (a wholly owned subsidiary of Endo Pharmaceuticals),
holding ownership rights to certain clinical trial data of Gencaro. Under the terms of its license agreement with CPEC, the Company
will incur milestone and royalty obligations upon the occurrence of certain events. If the FDA grants marketing approval for Gencaro,
the license agreement states that the Company will owe CPEC a milestone payment of $8.0 million within six months after FDA
approval. The license agreement states that a milestone payment of up to $5.0 million in the aggregate shall be paid upon regulatory
marketing approval in Europe and Japan. The license agreement also states that the Company’s royalty obligation ranges from 12.5%
to 25% of revenue from the related product based on achievement of specified product sales levels, including a 5% royalty that CPEC
is obligated to pay under its original license agreement for Gencaro. The agreement states that the Company has the right to buy down
the royalties to a range of 12.5% to 17% by making a payment to CPEC within six months of regulatory approval.
In October 2017, the Company entered into an agreement with CPEC’s minority owner, Aeolus Pharmaceuticals, Inc. (Aeolus)
pursuant to which the Company acquired Aeolus’ minority membership interest in CPEC. The transaction effectively buys-out
Aeolus’ royalty interest thereby reducing or eliminating the stated milestone and royalty obligations that could be payable by the
Company, if Gencaro receives regulatory approval and is commercialized. As a result of this transaction, the Company, together with
Endo Pharmaceuticals, Inc., indirectly have the rights to the Gencaro program, as discussed above. The acquisition cost of this
interest is included in General and administrative expense in the Statement of Operations and Comprehensive Loss and did not have a
material impact on the Company’s annual financial statements.
59
(7) Equity Financings and Warrants
2017 Equity Financing
On January 11, 2017, the Company entered into a Capital on Demand TM Sales Agreement (the Sales Agreement) with JonesTrading
Institutional Services LLC, as agent (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, the Company amended its Capital on Demand Sales Agreement. The amendment,
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 $10.2 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 will pay JonesTrading a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares and
have 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.
As of December 31, 2017, the Company has sold an aggregate of 2,677,525 shares of Common Stock pursuant to the terms of such
Sales Agreement, as amended, for aggregate gross proceeds of approximately $6.6 million. Net proceeds received during the year
ended December 31, 2017 were approximately $6.1 million, including initial expenses for executing the “at the market offering” and
commissions to the placement agent.
Sales under this facility subsequent to December 31, 2017 are discussed in Note 11 Subsequent Events.
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, 2017, these warrants, by year of expiration, are summarized below:
Year of Expiration
2018
2019
2020
2022
Number
of Warrants
Weighted Average
Exercise Price
963,153
224,323
44,299
2,401,233
3,633,008
$
$
11.77
15.73
15.96
6.10
8.32
(8) Share-based Compensation
Stock Plans
The Company’s equity incentive plan, the 2013 Equity Incentive Plan (the Equity Plan), was approved by stockholders on
September 17, 2013, and amended in June 2016 to increase the reserve for issuance under this Equity Plan by 1,000,000 shares. The
maximum number of shares issuable under this plan is 1,321,428 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
60
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, 2017, options and awards for 618,292 shares were outstanding under the Equity
Plan, and 610,194 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 its previous plan, the Amended and
Restated ARCA biopharma, Inc. 2004 Equity Incentive Plan (the 2004 Plan), effective September 17, 2013. 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, 2017, options to purchase 5,643 shares with a weighted average exercise price of $102.64 per share were outstanding
under this plan. Other stock plans that were assumed by ARCA in the Merger still have options outstanding that will continue to vest
according to the original terms of each grant, but no new options can be granted under these plans, as the plans have expired. As of
December 31, 2017, options to purchase 3,208 shares with a weighted average exercise price of $164.95 were outstanding under these
plans.
The Company granted options for 469,600 and 487,700 shares of common stock in the years ended December 31, 2017 and 2016,
respectively. The fair values of employee stock options granted in the years ended December 31, 2017 and 2016 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:
Expected term.............................................................
Expected volatility......................................................
Risk-free interest rate .................................................
Expected dividend yield .............................................
Weighted-average grant date fair value per share ......
$
Years Ended December 31,
2017
5.8 years
2016
5.7 years
73%
1.99%
0%
1.60
$
72%
1.29%
0%
2.01
A summary of ARCA’s stock option activities for the years ended December 31, 2017 and 2016, and related information as of
December 31, 2017, 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, 2015.................................................
Granted.....................................................
Exercised ..................................................
Forfeited and cancelled ............................
Options outstanding – December
31, 2016.................................................
Granted.....................................................
Exercised ..................................................
Forfeited and cancelled ............................
Options outstanding – December
31, 2017.................................................
Options exercisable – December
31, 2017.................................................
Options vested and expected to vest -
December 31, 2017 ...............................
18.30
3.22
—
28.70
6.30
2.54
—
3.05
6.00
8.27
6.00
$
$
$
$
$
161,278
487,700
—
(19,349)
629,629
469,600
—
(487,254)
611,975
348,961
611,101
61
8.86
$
8.14
7.59
8.14
$
$
$
25
—
—
—
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. The total intrinsic value of options exercised for the years ended December 31, 2017 and 2016 was $0 and
$0, respectively. As of December 31, 2017, the unrecognized compensation expense related to unvested options, excluding estimated
forfeitures, was $447,000 which is expected to be recognized over a weighted average period of 1.9 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.
Restricted Stock Units
The Company began granting restricted stock units (RSUs) to employees during 2013 in conjunction with the adoption of the Equity
Plan. The fair value of RSU awards is the closing price of the Company’s common stock on the date of grant and is recognized as
compensation expense on a straight-line basis over the respective vesting period. The stock awards granted have a requisite service
period between three and four years with annual vesting on the grant anniversary date.
A summary of RSU activity for the years ended December 31, 2017 and 2016 is presented below:
RSUs outstanding - December 31, 2015 ...........................
Granted ..............................................................................
Vested and released...........................................................
Forfeited and cancelled .....................................................
RSUs outstanding - December 31, 2016 ...........................
Granted ..............................................................................
Vested and released...........................................................
Forfeited and cancelled .....................................................
RSUs outstanding - December 31, 2017 ...........................
Restricted Stock Units Outstanding
Weighted
Average
Grant Date
Fair Value
Number
of Shares
62,359
—
(31,149)
(471)
30,739
—
(15,171)
(400)
15,168
$
$
$
8.36
—
8.85
4.69
7.91
—
7.94
6.03
7.94
As of December 31, 2017, the total unrecognized compensation cost related to unvested stock awards was approximately $24,000.
This cost will be recognized on a straight-line basis over the next 0.2 years and will be adjusted for estimated forfeitures.
Non-cash Stock-based Compensation
For the years ended December 31, 2017 and 2016, the Company recognized the following non-cash, share-based compensation
expense (in thousands):
Years Ended
December 31,
2017
2016
Research and development.............. $
General and administrative..............
Total ................................................ $
169 $
289
458 $
167
409
576
Stock-based compensation expense related to non-employees was negligible in 2017 and 2016. 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.
(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 $135,000
and $119,000 for the years ended December 31, 2017 and 2016, respectively.
62
(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, 2017, the
Company has net operating loss carryforwards of approximately $156.4 million, and approximately $1.7 million of research and
development credits that may be used to offset future taxable income. The Company’s net operating loss carryforwards will expire
beginning 2025 through 2037. 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, and its offering of common stock completed in June 2015. 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 asset of approximately $41.6 million at December 31, 2017, reflecting a decrease of approximately
$13.2 million from December 31, 2016. Deferred tax assets decreased $20.1 million related to the remeasurement of the deferred tax
assets from 34% to the new 2018 U.S. Federal corporate income tax rate of 21%. The deferred tax assets are primarily comprised of
net operating loss carryforwards and research and experimentation credit carryforwards. As of December 31, 2017, 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 year ended December 31, 2017 was related to a federal research and experimentation income tax credits
related to the Protecting Americans from Tax Hikes Act of 2015, or PATH Act, which allows qualified small businesses to monetize
up to $250,000 of research and experimentation tax credits through payroll tax refunds. We had no income tax benefit during the year
ended December 31, 2016, as the PATH Act refunds were not effective until 2017. 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 34% for
2017 and 2016, as a result of the following (in thousands):
Years ended December 31,
2016
2017
U.S. federal income tax benefit at statutory rates .......................... $
State income tax benefit, net of federal benefit..............................
Research and experimentation credits............................................
Change in tax rate...........................................................................
Deferred tax asset adjustment ........................................................
Other...............................................................................................
Change in valuation allowance ......................................................
Income tax benefit.......................................................................... $
(6,286)
(565)
(303)
20,085
37
122
(13,151)
(61)
$
$
(5,591)
(502)
(268)
—
65
137
6,159
—
63
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
consisted of the following (in thousands):
As of December 31,
2017
2016
Net operating loss carryforwards ......................................... $
Charitable contribution carryforwards .................................
Research and experimentation credits..................................
Capitalized intangibles .........................................................
Stock based compensation....................................................
Depreciation and amortization .............................................
Accrued compensation .........................................................
Other.....................................................................................
Total deferred tax assets ....................................................
Valuation allowance .............................................................
Net deferred tax assets ............................................................... $
$
38,566
455
1,682
608
148
1
168
—
41,628
(41,628)
— $
51,758
552
1,440
781
193
6
35
14
54,779
(54,779)
—
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, 2017 and 2016, 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, 2017 and 2016.
.
(11) Subsequent Event
Subsequent to December 31, 2017, the Company sold an aggregate of 2,133,828 shares of its Common Stock pursuant to the terms of
the Sales Agreement for aggregate gross proceeds of approximately $3.5 million and net proceeds of $3.4 million, including expenses
for executing the “at the market offering” and commissions to the placement agent. As of January 19, 2018, the Company has sold all
shares available under its prospectus to the Company’s registration statement on Form S-3 (No. 333-217459) and does not currently
anticipate making any additional sales under this Sales Agreement.
64
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Principal Executive Officer and our Principal Financial
Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls
and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our
disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Exchange Act). Our internal control system is designed to provide reasonable assurance to
management and our board of directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial
Officer, we have assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making our
assessment of internal control over financial reporting, we used the criteria issued in the report Internal Control-Integrated Framework
(2013) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have concluded that our internal
control over financial reporting was effective as of December 31, 2017 based on these criteria.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting
firm pursuant to the exemption from Section 404(b) of the Sarbanes-Oxley Act for non-accelerated filers provided by the Dodd-Frank
Wall Street Reform and Consumer Protection Act.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2017, there were no changes in our internal control over financial reporting that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been detected.
Item 9B. Other Information
None
65
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Our directors, executive officers and key employees as of February 28, 2018 are as follows:
Name
Age
Position
Dr. Michael R. Bristow .................................................
Thomas A. Keuer ..........................................................
Christopher D. Ozeroff ................................................
Brian L. Selby ...............................................................
Dr. Linda Grais (1) (2)* ................................................
Dr. Raymond L. Woosley (2) (3)* ................................
Mr. Robert E. Conway (1)* (2).....................................
Mr. Dan J. Mitchell (1) (3)............................................
Dr. Anders Hove (3)......................................................
* Committee Chairperson
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
73
59
59
56
61
75
64
60
52
President and Chief Executive Officer and Director
Chief Operating Officer
Secretary, Senior Vice President and General Counsel
Vice President, Finance and Chief Accounting Officer
Director
Director
Director
Director
Director
(3) Member of the Nominating and Corporate Governance Committee
Dr. Hove was appointed to our Board of Directors in February 2017. At such time, Dr. Hove joined our Nominating and
Corporate Governance Committee. At the same time, Dr. Woosley left our Audit Committee, and Dr. Grais left our Nominating and
Corporate Governance Committee and joined our Audit Committee.
Michael R. Bristow, M.D., Ph.D. Dr. Bristow was one of the founders of ARCA in September 2004, and has served as a
Director since that time. Dr. Bristow has also served as the Company’s President and Chief Executive Officer since July 2009.
Previously, Dr. Bristow served as the President and Chief Executive Officer of the Company from September 2004 to November 2006,
and as the Company’s Chief Science and Medical Officer from November 2006 to July 2009. Dr. Bristow is a Professor of Medicine
and the former Head of Cardiology at the University of Colorado Health Sciences Center, where he has been since October 1991. Dr.
Bristow was one of the founders of Myogen, Inc. and served as Myogen’s Chief Science and Medical Officer from October 1996 to
February 2006 and as a Scientific Advisor to Myogen from February 2006 until the acquisition of Myogen by Gilead Sciences, Inc. in
November 2006. We believe Dr. Bristow is an appropriate member of the Company’s Board of Directors given his extensive
experience and expertise as a cardiologist, medical researcher and drug developer in the field of cardiovascular medicine, and heart
failure specifically, and his experience as a founder and manager of cardiovascular-focused, public pharmaceutical company. Dr.
Bristow also has extensive experience with, and knowledge of, ARCA’s business, as the founder and former Chief Science and
Medical Officer of the Company, and the current President and Chief Executive Officer of ARCA, and as a member of the Board of
Directors of ARCA since the founding of the Company. Dr. Bristow holds a M.D. and Ph.D. from the University of Illinois.
Thomas A. Keuer. Mr. Keuer has served as the Company’s Chief Operating Officer since December 2014. Mr. Keuer served
as the Company’s Executive Vice President, Pharmaceutical Operations from 2006 to 2014. Prior to joining the Company, Mr. Keuer
served as the SVP of Operations for Insmed, Inc. from 2004 to 2006. Prior to Insmed, Mr. Keuer served as the VP of Engineering for
Baxter Healthcare from 1998 to 2004. Prior to Baxter, Mr. Keuer served as the VP of Operations for Somatogen, Inc. Mr. Keuer
received his M.S. in Biochemical Engineering from Rice University and received his B.S. in Chemical Engineering from the
University of Texas, Austin.
Christopher D. Ozeroff. Mr. Ozeroff is a co-founder of ARCA. Mr. Ozeroff has served as the Company’s Senior Vice
President, General Counsel and Secretary since 2009, has served as the Company’s General Counsel and Secretary since the
Company’s founding, and has also served as Executive Vice President, Business Development from 2004 to 2009. Prior to joining the
Company, Mr. Ozeroff was a partner with the law firm of Hogan & Hartson L.L.P., where he practiced in such areas as finance,
acquisitions, public offerings, and licensing. Mr. Ozeroff completed his undergraduate degree at Stanford University and his law
degree at the University of Chicago Law School.
Brian L. Selby. Mr. Selby has served as the Company’s Vice President, Finance and Chief Accounting Officer since
December 2014. Previously, Mr. Selby served as the Company’s Controller from 2007 to 2014. Prior to joining the Company, Mr.
Selby served as the Controller for Myogen, Inc., a publicly traded pharmaceutical company subsequently acquired by Gilead, from
2004 to 2007. Prior to Myogen, Mr. Selby served as the Controller for several private and publicly traded companies and earlier in his
career was an audit professional with Deloitte. Mr. Selby received his M.S. in Accounting from the University of Colorado and
received his B.S., in Business Administration and Finance from Colorado State University, and is a certified public accountant.
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Linda Grais, M.D. Dr. Grais has served as a member of the Board of Directors since May 2007. Dr. Grais has been a director
of Ocera Therapeutics, Inc., a public biopharmaceutical company, since January 2008 and became President and Chief Executive
Officer of Ocera in June 2012, and served in that role until Ocera’s acquisition by Mallinckrodt Pharmaceuticals in December 2017.
Dr. Grais served as a Managing Member at InterWest Partners, a venture capital firm from May 2005 until February 2011. From July
1998 to July 2003, Dr. Grais was a founder and executive vice president of SGX Pharmaceuticals Inc., a drug discovery company.
Prior to that, she was a corporate attorney at Wilson Sonsini Goodrich & Rosati, where she practiced in such areas as venture
financings, public offerings and strategic partnerships. Before practicing law, Dr. Grais worked as an assistant clinical professor of
Internal Medicine and Critical Care at the University of California, San Francisco. Dr. Grais received a B.A. from Yale University,
magna cum laude, and Phi Beta Kappa, an M.D. from Yale Medical School and a J.D. from Stanford Law School. Since September
2015, Dr. Grais has served on the board of PRA Health Sciences, a public contract research organization. We believe Dr. Grais is an
appropriate member of the Board of Directors because of her diverse training and experience as both a medical doctor and a lawyer,
her experience as a founder and senior executive of a pharmaceutical company, and her experience as an investor in new life sciences
companies. She also has extensive experience with and knowledge of the Company's business from her service on the Board of
Directors of the Company since 2007.
Raymond L. Woosley, M.D., Ph.D. Dr. Woosley was appointed to the Board of Directors in July 2013. Since 2012, Dr.
Woosley is the Director of the Arizona Center for Education and Research on Therapeutics (AzCERT), an independent, nonprofit
research and education organization. Dr. Woosley is currently the President Emeritus of the Critical Path Institute (C-Path), a non-
profit, public-private partnership with the Federal Food and Drug Administration, of which he was a founder in November 2004, and
where he served as President, Chief Executive Officer and Chairman of the board of directors from 2005 to 2011. Since 2012, Dr.
Woosley has also been the Director of CredibleMeds Worldwide, an independent, nonprofit research and education
organization. Since 2001, Dr. Woosley has also been a Professor of Medicine and Pharmacology at The University of Arizona Health
Sciences Center (UAHSC), and, since 2012, Professor Emeritus, where he was also Vice President for Health Sciences from 2001 to
2005, and Dean of the College of Medicine from 2001 to 2002. Since 2015, he has been Professor of Medicine in the University of
Arizona, College of Medicine-Phoenix. From 1988 to 2001, Dr. Woosley was a professor of medicine at the Georgetown University
School of Medicine, where he was also Director of the Institute of Cardiovascular Sciences from 1994 to 2000, and Division Chief,
Clinical Pharmacology, in the Department of Medicine from 1988 to 1994. Dr. Woosley earned his Ph.D. in Pharmacology from the
University of Louisville and his M.D. from the University of Miami. Dr. Woosley’s research has been published in over 312 peer-
reviewed publications and 50 book chapters. We believe Dr. Woosley is an appropriate member of the Board of Directors, given his
expertise and experience in cardiovascular clinical pharmacology, anti-arrhythmic therapeutics, pharmacogenetic drug development
and therapeutic regulatory approval.
Robert E. Conway Mr. Conway was appointed to the Board of Directors in September 2013, and has served as the Chairman
of our Board of Directors since 2014. Mr. Conway served as the Chief Executive Officer and member of the board of directors of
Array Biopharma, a publicly traded pharmaceutical company, from 1999 to 2012. Prior to joining Array, Mr. Conway was the Chief
Operating Officer and Executive Vice President of Hill Top Research, Inc., from 1996 to 1999. From 1979 until 1996, Mr. Conway
held various executive positions for Corning Inc. including Corporate Vice President and General Manager of Corning Hazleton, Inc.,
a contract research organization. From 2004 to 2013, he served on the board of directors of PRA International, Inc., which was a
public company for a portion of his tenure there, from 2012 to the present, he has served on the board of directors of eResearch
Technology, Inc., a private company, and from 2015 to July 2017, he has served on the board of directors of Nivalis Therapeutics, Inc.
a public, clinical stage pharmaceutical company. In July 2017, Nivalis Therapeutics, Inc. combined with Alpine Immune
Sciences, Inc., a public, clinical stage pharmaceutical company, and Mr. Conway continues to serve on the board of directors
following such combination. Mr. Conway also serves as the Chairman of Wall Family Enterprise, a leading library and educational
supplies company. In addition, Mr. Conway is a member of the Strategic Advisory Committee of Genstar Capital, LLC and is a
member of the board of directors of Bracket, Inc. Mr. Conway received a B.S. in accounting from Marquette University in 1976. We
believe Mr. Conway is an appropriate member of the Board of Directors given his experience and expertise in the pharmaceutical
industry, in pharmaceutical development and clinical trials, and in corporate finance, governance, accounting and public company
compliance.
Dan J. Mitchell Mr. Mitchell was appointed to the Board of Directors in February 2014. He founded, and is a manager of
Sequel Venture Partners, L.L.C., a venture capital firm formed in January 1997. Prior to founding Sequel Venture Partners, Mr.
Mitchell was a founder of Capital Health Venture Partners, a health care focused venture capital firm, where he was a General Partner
from October 1986 until 2006, and he was in the Venture Capital Division of the Trust Department of the First National Bank of
Chicago from 1983 to 1985. He currently serves on the board of directors of several private companies. Mr. Mitchell holds a B.S.
from the University of Illinois and an M.B.A. from the University of California at Berkeley. We believe Mr. Mitchell is an appropriate
member of the Board of Directors given his expertise and experience in the pharmaceutical industry, pharmaceutical development, and
in corporate finance and governance.
Anders Hove, M.D. Dr. Hove has served as a member of the Board of Directors since February 2017. Dr. Hove owns Acorn
Capital Advisors and is a managing partner at Majalin/Amzak Health, a partnership focusing on long-term investments in biotech,
67
specialty pharma and medical device companies. Dr. Hove was most recently a general partner of Venrock Associates, a venture
capital firm, which he joined in January 2004 and remained at through December 2016. In 2008, Dr. Hove was a founder of Venrock
Healthcare Capital Partners, Venrock’s public funds focused on small capitalization biotech companies and late-stage private
companies. From 1996 to 2004, Dr. Hove was a fund manager at BB Biotech Fund, an investment firm, and from 2002 to 2003 he also
served as Chief Executive Officer of Bellevue Asset Management, LLC, an investment company. Dr. Hove previously held senior
level positions in the medical, clinical and business operations of the pharmaceuticals division of Ciba-Geigy. Mr. Hove was a
member of the boards of directors of Anacor Pharmaceuticals, a publicly traded pharmaceutical company, from 2005 until its
acquisition by Pfizer in June 2016, and Edge Therapeutics, a publicly traded biotechnology company, from 2015 to 2016. In addition,
Dr. Hove is a member of the board of directors of MC2 Therapeutics. He received a M.Sc. in Biotechnology Engineering from the
Technical University of Denmark, an M.D. from the University of Copenhagen and an M.B.A. from the Institut Européen
d'Administration des Affaires. We believe Dr. Hove is an appropriate member of the Company’s Board of Directors, given his
extensive training and experience as a medical doctor and masters of business administration, an executive in the pharmaceutical
industry, and as an investor in biotechnology companies.
ADDITIONAL INFORMATION REGARDING THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
Election of Board of Directors
Directors are elected by a plurality of the votes of the holders of shares present in person or represented by proxy and entitled to
vote on the election of directors at our annual stockholders’ meetings. The Company’s Amended and Restated Certificate of
Incorporation, as amended, provides that the Board of Directors is divided into three classes to provide for staggered terms and that
each director will serve for a term of three years or less, depending on the class to which the Board of Directors has assigned a director
not previously elected by the stockholders. There are currently two Class II directors whose terms expire at the annual stockholders’
meeting in 2018, two Class III directors whose terms expire at the annual stockholders’ meeting in 2019 and two Class I directors
whose terms expire at the annual meeting in 2020. The Board of Directors has nominated two Class II directors, Dr. Raymond L.
Woosley and Dan J. Mitchell, for election to the Board of Directors, for a three-year term ending on the date of the annual meeting in
2021 or until their successors are duly elected and qualified or appointed.
Our executive officers are appointed by and serve at the discretion of our Board. There are no family relationships between our
directors and executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than 10%
of its common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock of the
Company. Such persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms that they file.
To the Company’s knowledge, based solely upon its review of the copies of such reports furnished to it and written
representations that no other reports were required, during the fiscal year ended December 31, 2017, all Section 16(a) filing
requirements applicable to its officers, directors and ten percent beneficial owners were complied with.
Code of Ethics
The Company has adopted the ARCA biopharma, Inc. Code of Business Conduct and Ethics that applies to all officers, directors
and employees. The Code of Business Conduct and Ethics is available on the Company’s website at www.arcabiopharma.com. If the
Company makes any substantive amendments to the Code of Business Conduct and Ethics or grants any waiver from a provision of
the Code of Business Conduct and Ethics to any executive officer or director, the Company will promptly disclose the nature of the
amendment or waiver on its website and file any current report on Form 8-K required by applicable law or NASDAQ listing
standards.
Audit Committee
The Audit Committee was established by the Board of Directors in accordance with Section 3(a)(58)(A) of the Exchange
Act, to oversee the Company’s corporate accounting and financial reporting processes and audits of its financial statements. For this
purpose, the Audit Committee performs several functions. The Audit Committee evaluates the performance of and assesses the
qualifications of the independent registered public accounting firm; determines and approves the engagement of the independent
registered public accounting firm; determines whether to retain or terminate the existing independent registered public accounting firm
or to appoint and engage a new independent registered public accounting firm; reviews and approves the retention of the independent
registered public accounting firm to perform any proposed permissible non-audit services; monitors the rotation of partners of the
independent registered public accounting firm on the Company’s audit engagement team as required by law; reviews and approves or
rejects transactions between the company and any related persons; confers with management and the independent registered public
68
accounting firm regarding the effectiveness of internal controls over financial reporting; establishes procedures, as required under
applicable law, for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal
accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding
questionable accounting or auditing matters; and meets to review the Company’s annual audited financial statements and quarterly
financial statements with management and the independent registered public accounting firm, including a review of the Company’s
disclosures under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discussion in its
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. As of December 31, 2017, the Audit Committee was composed
of three directors: Mr. Conway (chair), Mr. Mitchell and Dr. Grais. The Audit Committee is currently composed of three directors:
Mr. Conway (chair), Mr. Mitchell and Dr. Grais. The Audit Committee met five times during the fiscal year. The Board of Directors
has adopted a written charter of the Audit Committee that is available to stockholders on the Company’s website at www.arcabio.com.
The Board of Directors reviews the Nasdaq listing standards definition of independence for audit committee members on an
annual basis and has determined that all members of the Audit Committee are independent (as independence is currently defined in
Rule 5605(c)(2)(A)(i) and (ii) of the Nasdaq listing standards). The Board of Directors has also determined that Mr. Conway qualifies
as an “audit committee financial expert,” as defined in applicable SEC rules. The Board of Directors made a qualitative assessment of
Mr. Conway’s level of knowledge and experience based on several factors, including his prior experience, business acumen and
independence.
Report of the Audit Committee of the Board of Directors1
The Audit Committee has reviewed and discussed the audited financial statements for the fiscal year ended
December 31, 2017, with management of the Company. The Audit Committee has discussed with the independent registered public
accounting firm the matters required to be discussed by Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard
No. 1301, Communications with Audit Committees. The Audit Committee has also received the written disclosures and the letter
from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding the independent
registered public accounting firm’s communications with the Audit Committee concerning independence, and has discussed with the
independent registered public accounting firm the accounting firm’s independence. Based on the foregoing, the Audit Committee has
recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2017.
Mr. Robert Conway
Mr. Dan Mitchell
Dr. Linda Grais
Compensation Committee
The Compensation Committee is currently composed of three directors: Mr. Conway, Dr. Grais (chair) and Dr. Woosley.
All members of the Compensation Committee are independent, as independence is currently defined in Rule 5605(a)(2) of the Nasdaq
listing standards. The Compensation Committee met one time during the fiscal year. The Compensation Committee has adopted a
written charter that is available to stockholders on the Company’s website at www.arcabio.com.
The Compensation Committee of the Board of Directors acts on behalf of the Board of Directors to review, adopt and
oversee the Company’s compensation strategy, policies, plans and programs, including:
● overseeing succession planning for senior management of the Company, including a review of the performance and
advancement potential of current and future senior management and succession plans for each and recommending,
as appropriate, the retention of potential succession candidates;
● assessing the overall compensation structure of the Company and evaluating and recommending changes to the
Company’s compensation philosophies and strategies;
● reviewing and approving performance-based compensation plans or programs, including establishing goals and
targets, applicable to the Chief Executive Officer and other members of the management team;
1 The material in this report is not “soliciting material,” is not deemed “filed” with the Commission and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or
after the date hereof and irrespective of any general incorporation language in any such filing.
69
●
administering, reviewing, and approving all executive compensation programs or plans, and all of the Company’s
incentive compensation and stock plans and awards thereunder of the Company, including amendments to the
programs, plans or awards made thereunder; and
● preparing and approving the Report of the Compensation Committee to be included as part of the Company’s
annual meeting proxy statement, to the extent required.
Compensation Committee Processes and Procedures
Typically, the Compensation Committee meets on a regular basis as it deems appropriate. The agenda for each meeting is
usually developed by the Chair of the Compensation Committee. The Compensation Committee meets regularly in executive session.
However, from time to time, various members of management and other employees as well as outside advisors or consultants may be
invited by the Compensation Committee to make presentations, to provide financial or other background information or advice or to
otherwise participate in Compensation Committee meetings. The Chief Executive Officer may not participate in, or be present during,
any deliberations or determinations of the Compensation Committee regarding his compensation or individual performance objectives.
The Compensation Committee has the sole authority to retain compensation consultants to assist in its evaluation of executive and
director compensation, including the authority to approve the consultant’s reasonable fees and other retention terms.
In June 2013, the Company’s Compensation Committee reviewed the Company’s executive compensation considering
general market conditions in the life science industry. As part of this review process, the Compensation Committee identified a peer
group of biotechnology companies that it viewed as having a similar profile to ARCA at that time.
In setting 2017 base salary and cash bonus award amounts for the Company’s named executive officers, the Compensation
Committee considered peer group data and factors specific to the Company, and targeted cash compensation to be consistent with
these metrics. The Compensation Committee recommended, and the Board of Directors approved, a base salary of $295,359 for Dr.
Bristow, the Company’s President and Chief Executive Officer, a base salary of $294,170 for Mr. Keuer, the Company’s Chief
Operating Officer, and a base salary of $288,683 for Mr. Ozeroff, the Company’s Senior Vice President and General Counsel, for the
fiscal year ended December 31, 2016. In early 2017, the Compensation Committee recommended and the Board of Directors approved
cash bonuses based on previous performance for the Named Executive Officers (as defined below), and also approved increases to
Named Executive Officer salaries for the fiscal year 2017 as described in below under “Executive Compensation.” There were no
changes to the Company’s named executive officers’ salaries for 2018.
Historically, the Compensation Committee has made most of the significant adjustments to annual compensation,
determined bonus and equity awards and established new performance objectives at one or more meetings held during the first quarter
of the year. However, the Compensation Committee also considers matters related to individual compensation, such as compensation
for new executive hires, as well as high-level strategic issues, such as the efficacy of the Company’s compensation strategy, potential
modifications to that strategy and new trends, plans or approaches to compensation, at various meetings throughout the year.
Generally, the Compensation Committee’s process comprises two related elements: the determination of compensation levels and the
establishment of performance objectives for the current year.
The Compensation Committee reviews and approves the compensation of the Chief Executive Officer and the other
executive officers of the Company, including annual base salaries, annual and long-term incentive or bonus awards, employment
agreements, and severance and change in control agreements/provisions, in each case as, when and if appropriate, and any special or
supplemental benefits. For executives other than the Chief Executive Officer, the Compensation Committee solicits and considers
evaluations and recommendations submitted to the Compensation Committee by the Chief Executive Officer. The Compensation
Committee evaluates the performance of the Chief Executive Officer in light of Company and individual goals and objectives, and
makes appropriate recommendations for improving performance. In performing the evaluation, the Chair of the Compensation
Committee may solicit comments from the other non-employee members of the Board of Directors and lead the Board of Directors in
an overall review of the Chief Executive Officer’s performance in an executive session of non-employee members of the Board of
Directors. If the compensation for the Chief Executive Officer or any other executive officer is governed by an employment
agreement, the Compensation Committee approves such employment agreement and any amendments thereto.
For all executives as part of its deliberations, the Compensation Committee may review and consider, as
appropriate, materials such as financial reports and projections, operational data, tax and accounting information, tally sheets that set
forth the total compensation that may become payable to executives in various hypothetical scenarios, executive and director stock
ownership information, company stock performance data, analyses of historical executive compensation levels and current Company-
wide compensation levels.
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The Compensation Committee also considers the results of any “say-on-pay” vote of the Company’s stockholders with
regard to the compensation of the Company’s executive officers when making compensation decisions. At the 2016 annual meeting of
stockholders, the Company’s stockholders approved, on an advisory basis, the compensation of the Company’s named executive
officers as described in the proxy statement for such annual meeting. The Compensation Committee believes that this advisory vote
supports that the Company’s current compensation practices are aligned with the best interests of stockholders and anticipates taking
into account any subsequent advisory vote when making compensation decisions in the future.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is responsible for identifying, reviewing and evaluating candidates
to serve as directors of the Company (consistent with criteria approved by the Board of Directors), reviewing and evaluating
incumbent directors, recommending to the Board of Directors candidates for election to the Board of Directors, making
recommendations to the Board of Directors regarding compensation for service on the Board of Directors and the committees thereof,
making recommendations to the Board of Directors regarding the membership of the committees of the Board of Directors, assessing
the performance of the Board of Directors and developing a set of corporate governance principles for the Company. As of
December 31, 2017, the Nominating and Corporate Governance Committee was composed of three directors: Dr. Hove, Mr. Mitchell
and Dr. Woosley (chair). Prior February 2017, Dr. Grais served on the Nominating and Corporate Governance Committee in the seat
currently occupied by Dr. Hove. All members of the Nominating and Corporate Governance Committee in 2017 were independent (as
independence is currently defined in Rule 5605(a)(2) of the Nasdaq listing standards). The Nominating and Corporate Governance
Committee met four times during the 2017 fiscal year. The Nominating and Corporate Governance Committee has adopted a written
charter that is available to stockholders on the Company’s website at www.arcabio.com.
The Nominating and Corporate Governance Committee periodically reviews the compensation of non-employee Directors
for service on the Board of Directors and committees thereof. In 2015, the Nominating and Corporate Governance Committee began a
review of its Director compensation levels considering general market conditions in the life science industry, and in comparison to
other clinical stage biopharmaceutical companies, and in early 2016, the Committee recommended, and the Board of Directors
approved, revised compensation for non-employee Directors, discussed in “Director Compensation” below.
The Board of Directors has adopted a process for identifying and evaluating director nominees, including stockholder
nominees. Before recommending an individual to the Board of Directors for membership on the Board of Directors, the Nominating
and Corporate Governance Committee canvasses its members and the Company’s management team for potential candidates for the
Board of Directors. The Nominating and Corporate Governance Committee also uses its network of contacts to identify potential
candidates and, if it deems appropriate, may also engage a professional search firm. The Nominating and Corporate Governance
Committee will consider stockholders’ recommendations for nominees to serve as director if notice is timely received by the Secretary
of the Company. Candidates nominated by stockholders will be evaluated in the same manner as other candidates. The Nominating
and Corporate Governance Committee keeps the Board of Directors apprised of its discussions with potential nominees, and the
names of potential nominees received from its current directors, management, and stockholders, if the stockholder notice of
nomination is timely made.
Although the Board of Directors has not adopted a fixed set of minimum qualifications for candidates for membership on
the Board of Directors, the Nominating and Corporate Governance Committee generally considers several factors in its evaluation of a
potential member, such as the candidate’s education, professional background and field of expertise including industry or academic
experience in the pharmaceutical and biotechnology fields, experience in corporate governance and management, the reasonable
availability of the potential member to devote time to the affairs of the Company, as well as any other criteria deemed relevant by the
Board of Directors or the Nominating and Corporate Governance Committee. However, the Nominating and Corporate Governance
Committee retains the right to modify these qualifications from time to time. Candidates for director nominees are reviewed in the
context of the current composition of the Board of Directors, the operating requirements of the Company and the long-term interests
of stockholders. In conducting this assessment, the Nominating and Corporate Governance Committee typically considers diversity,
age, skills and such other factors as it deems appropriate given the current needs of the Board of Directors and the Company, to
maintain a balance of knowledge, experience and capability. The Nominating and Corporate Governance Committee believes it is
essential that Board of Directors members come from a variety of backgrounds and experiences.
In the case of incumbent directors whose terms of office are set to expire, the Nominating and Corporate Governance
Committee reviews these directors’ overall contributions to the Company and the Board of Directors during their terms, including
level of attendance, level of participation, quality of performance and contribution to the Board of Directors’ responsibilities and
actions, and any relationships and transactions that might impair the directors’ independence. In the case of new director candidates,
the Nominating and Corporate Governance Committee also determines whether the nominee is independent for Nasdaq and SEC
purposes, which determination is based upon applicable Nasdaq listing standards, applicable SEC rules and regulations and the advice
of counsel, if necessary. The Nominating and Corporate Governance Committee conducts any appropriate and necessary inquiries into
the backgrounds and qualifications of possible candidates after considering the function and needs of the Board of Directors. The
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Nominating and Corporate Governance Committee meets to discuss and consider the candidates’ qualifications and then determines
whether to recommend a nominee to the Board of Directors by majority vote.
Stockholders who wish to recommend individuals for consideration by the Nominating and Corporate Governance Committee
to become nominees for election to the Board of Directors may do so by delivering a written recommendation to the Nominating and
Corporate Governance Committee addressed to the Corporate Secretary, between 60 and 90 days before the one year anniversary date
of ARCA’s last annual meeting of stockholders. Recommendations must include the full name of the proposed nominee, a description
of the proposed nominee’s business experience for at least the previous five years, complete biographical information, a description of
the proposed nominee’s qualifications as a director, and a representation that the recommending stockholder is a beneficial or record
owner of ARCA’s stock. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a
nominee and to serve as a director if elected. To date, the Nominating and Corporate Governance Committee has not rejected a timely
director nominee from a stockholder.
In 2017, the Nominating and Corporate Governance Committee did not pay any fees to assist in the process of identifying
or evaluating director candidates.
Stockholder Communications with the Board of Directors
Stockholders who wish to communicate with the Board of Directors may do so by e-mail by using the following email
address: directors@arcabio.com; or by mail by following the directions as set forth on ARCA’s website at www.arcabio.com, under
the section titled “Corporate Governance” and the subsection titled “Governance Documents”.
Item 11. Executive Compensation
Executive Compensation
The following table shows for the fiscal years ended December 31, 2017 and/or December 31, 2016, compensation awarded
to, paid to, or earned by the Company’s principal executive officer and its two most highly compensated executive officers as of
December 31, 2017, collectively, the Named Executive Officers:
SUMMARY COMPENSATION TABLE FOR FISCAL 2017 AND 2016
Name and Principal Position
Michael R. Bristow
President and Chief Executive
Officer ...............................................
Thomas A. Keuer
Chief Operating Officer ........................
Christopher D. Ozeroff
Secretary, Senior Vice President and
General Counsel ...................................
Salary
($)(1)
302,856
Option
Awards
($)(2)
137,281
294,036
169,693
301,642
80,428
Year
2017
2016
2017
2016
292,852
97,174
2017
296,011
76,654
2016
287,389
92,447
Stock
Awards
($)(2)
—
—
—
—
—
—
Non-Equity
Incentive Plan
Awards ($)(3)
91,300
All Other
Compensation ($)
16,256
Total ($)
547,693
92,300
54,500
16,227
20,597
572,256
457,167
55,200
17,782
463,008
53,500
12,110
438,275
54,100
5,381
439,317
(1)
(2)
The amounts reported under “Salary” in the above table represent the actual amounts paid during the calendar year. Because the Company’s actual
pay dates do not always coincide with the first and last days of the year, these amounts may differ from the base salary amounts authorized by the
Company’s Board of Directors and described in the narrative that follows.
The amounts reported under “Option Awards” and “Stock Awards” in the above table reflect the grant date fair value of these awards as
determined in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation – Stock
Compensation, excluding the effects of estimated forfeitures. The value of stock option awards was estimated using the Black-Scholes option-
pricing model. The valuation assumptions used in the valuation of option grants may be found in Note 8 to the Company’s financial statements
included in this annual report on Form 10-K for the year ended December 31, 2017.
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(3)
Represents cash bonuses earned under the 2017 and 2016 Bonus Plans. Cash bonuses earned and reported above in 2016 were paid in 2017, and
cash bonuses earned and reported above in 2017 were paid in 2018. See “Executive Compensation” for descriptions of the 2017 and 2016 Bonus
Plans.
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Narrative Disclosure to Summary Compensation Table
Employment Agreements or Arrangements
Michael R. Bristow, M.D., Ph.D. Dr. Bristow serves as the Company’s President and Chief Executive Officer under an
Employment and Retention Agreement that was amended and restated as of June 4, 2008, and further amended pursuant to a Waiver
and Amendment Agreement executed as of June 13, 2013. Pursuant to such employment agreement, Dr. Bristow is permitted to
continue his academic work for the University of Colorado Health Sciences Center and for the Cardiovascular Institute, so long as it
does not interfere with his duties as President and Chief Executive Officer of ARCA.
On February 16, 2017, the Board of Directors approved a cash bonus of $92,300 for Dr. Bristow. The cash bonus was earned
under the 2016 Bonus Plan for services rendered in 2016. See “Non-Equity Incentive Plan Compensation” below for descriptions of
the 2016 Bonus Plan. The Board of Directors also approved a 2017 base salary of $304,219 for Dr. Bristow.
On March 1, 2018, the Board of Directors approved a cash bonus of $91,300 for Dr. Bristow. The cash bonus was earned
under the 2017 Bonus Plan for services rendered in 2017. See “Non-Equity Incentive Plan Compensation” below for descriptions of
the 2017 Bonus Plan. There were no changes to the Company’s named executive officers’ salaries for 2018.
If the Company terminates Dr. Bristow’s employment without “cause,” or if Dr. Bristow terminates his employment with
“good reason” (as these terms are defined in his employment agreement), the Company has agreed to pay Dr. Bristow a severance
payment equivalent to (i) (a) 12 months of his base salary, if such termination occurs on the same day as or within 13 months after a
change of control of the Company, or (b) six months of his base salary if such termination does not occur on the same day as or
within 13 months after a change of control of the Company, (ii) a pro rata portion of any bonus compensation under any employee
bonus plan that has been approved by the Board of Directors payable to him for the fiscal year in which his employment terminated to
be paid at the same time that such incentive bonus would have been paid had the termination not occurred, and (iii) reimbursement to
cover out-of-pocket costs to continue group health insurance benefits under COBRA for 6 months, whether he elects or is eligible to
receive COBRA (provided, that even if he does not elect or is not eligible to receive COBRA, he will receive the equivalent of such
out-of-pocket expenses paid by him not to exceed the costs that the benefits would equal under COBRA if he were so eligible). In
addition, ARCA may elect in its sole discretion, to pay additional severance equal to up to 6 months of base salary, which additional
payment would extend the covenants and obligations under Dr. Bristow’s Employee Intellectual Property, Confidentiality and Non-
Compete Agreement for such additional period. The severance payment is conditioned on the execution by Dr. Bristow of a legal
release in a form acceptable to the Company. A termination for “cause” includes Dr. Bristow’s willful misconduct, gross negligence,
theft, fraud, or other illegal or dishonest conduct, any of which are considered to be materially harmful to the Company; refusal,
unwillingness, failure, or inability to perform his material job duties or habitual absenteeism; or violation of fiduciary duty, violation
of any duty of loyalty, or material breach of any material term of his employment agreement or his Employee Intellectual Property,
Confidentiality and Non-Compete Agreement, or any other agreement, with the Company. “Good reason” includes a relocation by us
of Dr. Bristow’s normal work location greater than 30 miles; a decrease in current base salary by more than 15%, with certain
exceptions; and the Company’s unilateral decision to significantly and detrimentally reduce Dr. Bristow’s job responsibilities.
Thomas A. Keuer. Mr. Keuer serves as the Company’s Chief Operating Officer under an Amended and Restated
Employment Agreement that was effective as of January 1, 2015.
Under his employment agreement, Mr. Keuer is entitled to receive an annual base salary of $280,000, subject to annual
increases if approved by the Company’s Board of Directors or Compensation Committee and is eligible to receive an annual bonus as
determined by the Board of Directors or Compensation Committee in its sole discretion.
On February 16, 2017, the Board of Directors approved a cash bonus of $55,200 for Mr. Keuer. The cash bonus was earned
under the 2016 Bonus Plan for services rendered in 2016. See “Non-Equity Incentive Plan Compensation” below for descriptions of
the 2016 Bonus Plan. The Board of Directors also approved a 2017 base salary of $303,000 for Mr. Keuer.
On March 1, 2018, the Board of Directors approved a cash bonus of $54,500 for Mr. Keuer. The cash bonus was earned
under the 2017 Bonus Plan for services rendered in 2017. See “Non-Equity Incentive Plan Compensation” below for descriptions of
the 2017 Bonus Plan. There were no changes to the Company’s named executive officers’ salaries for 2018.
If the Company terminates Mr. Keuer’s employment without “cause,” or if Mr. Keuer terminates his employment with
“good reason” (as these terms are defined in his employment agreement), the Company has agreed to pay Mr. Keuer a severance
payment equivalent to (i) (a) 12 months of his base salary, if such termination occurs on the same day as or within 13 months after a
change of control of the Company, or (b) six months of his base salary if such termination does not occur on the same day as or
74
within 13 months after a change of control of the Company, (ii) a pro rata portion of any bonus compensation under any employee
bonus plan that has been approved by the Board of Directors payable to him for the fiscal year in which his employment terminated to
be paid at the same time that such incentive bonus would have been paid had the termination not occurred, and (iii) reimbursement to
cover out-of-pocket costs to continue group health insurance benefits under COBRA for (x) 12 months, if such termination occurs on
the same day as or within 13 months after a change of control of the Company, or (y) six months if such termination does not occur
on the same day as or within 13 months after a change of control of the Company, whether he elects or is eligible to receive COBRA
(provided, in either event, that even if he does not elect or is not eligible to receive COBRA, he will receive the equivalent of such out-
of-pocket expenses paid by him not to exceed the costs that the benefits would equal under COBRA if he were so eligible). In
addition, ARCA may elect in its sole discretion, to pay additional severance equal to up to 12 months of base salary, which additional
payment would extend the covenants and obligations under Mr. Keuer’s Employee Intellectual Property, Confidentiality and Non-
Compete Agreement for such additional period. The severance payment is conditioned on the execution by Mr. Keuer of a legal
release in a form acceptable to the Company. A termination for “cause” includes Mr. Keuer’s willful misconduct, gross negligence,
theft, fraud, or other illegal or dishonest conduct, any of which are considered to be materially harmful to the Company; refusal,
unwillingness, failure, or inability to perform his material job duties or habitual absenteeism; or violation of fiduciary duty, violation
of any duty of loyalty, or material breach of any material term of his employment agreement or his Employee Intellectual Property,
Confidentiality and Non-Compete Agreement, or any other agreement, with the Company. “Good reason” includes a relocation by us
of Mr. Keuer’s normal work location greater than 30 miles; a decrease in current base salary by more than 15%, with certain
exceptions; and the Company’s unilateral decision to significantly and detrimentally reduce Mr. Keuer’s job responsibilities.
Christopher D. Ozeroff. Mr. Ozeroff serves as the Company’s Senior Vice President and General Counsel under an
Employment and Retention Agreement that was amended and restated as of June 12, 2008, and further amended pursuant to a Waiver
and Amendment Agreement executed as of June 13, 2013.
Under his employment agreement, Mr. Ozeroff is entitled to receive an annual base salary of $259,000, subject to annual
increases if approved by the Company’s Board of Directors or Compensation Committee and is eligible to receive an annual bonus as
determined by the Board of Directors or Compensation Committee in its sole discretion.
On February 16, 2017, the Board of Directors approved a cash bonus of $54,100 for Mr. Ozeroff. The cash bonus was
earned under the 2016 Bonus Plan for services rendered in 2016. See “Non-Equity Incentive Plan Compensation” below for
descriptions of the 2016 Bonus Plan. The Board of Directors also approved a 2017 base salary of $297,343 for Mr. Ozeroff.
On March 1, 2018, the Board of Directors approved a cash bonus of $53,500 for Mr. Ozeroff. The cash bonus was earned
under the 2017 Bonus Plan for services rendered in 2017. See “Non-Equity Incentive Plan Compensation” below for descriptions of
the 2017 Bonus Plan. There were no changes to the Company’s named executive officers’ salaries for 2018.
If the Company terminates Mr. Ozeroff’s employment without “cause,” or if Mr. Ozeroff terminates his employment with
“good reason” (as these terms are defined in his employment agreement), the Company has agreed to pay Mr. Ozeroff a severance
payment equivalent to (i) (a) 12 months of his base salary, if such termination occurs on the same day as or within 13 months after a
change of control of the Company, or (b) six months of his base salary if such termination does not occur on the same day as or
within 13 months after a change of control of the Company, (ii) a pro rata portion of any bonus compensation under any employee
bonus plan that has been approved by the Board of Directors payable to him for the fiscal year in which his employment terminated to
be paid at the same time that such incentive bonus would have been paid had the termination not occurred, and (iii) reimbursement to
cover out-of-pocket costs to continue group health insurance benefits under COBRA for 6 months, whether he elects or is eligible to
receive COBRA (provided, that even if he does not elect or is not eligible to receive COBRA, he will receive the equivalent of such
out-of-pocket expenses paid by him not to exceed the costs that the benefits would equal under COBRA if he were so eligible). In
addition, ARCA may elect in its sole discretion, to pay additional severance equal to up to 6 months of base salary, which additional
payment would extend the covenants and obligations under Mr. Ozeroff’s Employee Intellectual Property, Confidentiality and Non-
Compete Agreement for such additional period. The severance payment is conditioned on the execution by Mr. Ozeroff of a legal
release in a form acceptable to the Company. A termination for “cause” includes Mr. Ozeroff’s willful misconduct, gross negligence,
theft, fraud, or other illegal or dishonest conduct, any of which are considered to be materially harmful to the Company; refusal,
unwillingness, failure, or inability to perform his material job duties or habitual absenteeism; or violation of fiduciary duty, violation
of any duty of loyalty, or material breach of any material term of his employment agreement or his Employee Intellectual Property,
Confidentiality and Non-Compete Agreement, or any other agreement, with the Company. “Good reason” includes a relocation by us
of Mr. Ozeroff’s normal work location greater than 30 miles; a decrease in current base salary by more than 15%, with certain
exceptions; and the Company’s unilateral decision to significantly and detrimentally reduce Mr. Ozeroff’s job responsibilities.
75
Non-Equity Incentive Plan Compensation
In February 2007, the Compensation Committee and the Board of Directors of ARCA established a bonus structure for its entire
executive team. The philosophy employed was to create incentives for the executive officers to achieve key corporate goals. The
Compensation Committee retained discretion to change the bonus structure and the bonus payment amounts as it considered
appropriate.
2016 Cash Bonus Plan
On February 16, 2017, the Board of Directors approved cash bonuses for certain employees. The cash bonuses were paid in
2017 for performance in 2016, including for attainment of the Company’s 2016 Goals under its 2016 Cash Bonus Plan, or the 2016
Goals, as determined by the Compensation Committee. The 2016 bonuses were based on the Board of Directors’ determination with
respect to the Company’s achievement of the 2016 Goals.
The 2016 Goals were based on (1) enrollment of GENETIC-AF (2) development pipeline objectives, and (3) corporate
transaction objectives.
2017 Cash Bonus Plan
The Board of Directors has set corporate goals for 2017, or the 2017 Goals, which may be updated at the Board of Directors’
discretion during 2017. Attainment of the 2017 Goals is a prerequisite to the payment of any awards to employees under the
Company’s 2017 Cash Bonus Plan, including executive officers.
The amount payable to each employee is set as a target percentage of each employee’s annual salary, or the target bonus
percentage, or TBP, but employees, including executive officers, may receive more or less than 100% of their TBP, based upon
corporate goal achievement, individual performance and the discretion of the Board of Directors.
To receive a cash bonus (if any), each individual employee must be actively employed by the Company, and in good standing,
on December 31, 2017. Employees hired after January 1, 2017, will have their cash bonus (if any) prorated based on the percentage of
time the employee worked at ARCA in 2017. The 2017 Goals are based on (1) the GENETIC-AF Data and Safety Monitoring Board
analysis and enrollment of GENETIC-AF; (2) financing goals; and (3) corporate transaction objectives.
2018 Cash Bonus Plan
The Compensation Committee and Board of Directors have not approved a bonus structure or goals for 2018.
Other Elements of Executive Compensation Program
The remaining elements of the Company’s executive compensation program, like its broader employee compensation
programs, are intended to make the Company’s overall compensation program competitive with those of its peer companies, keeping
in mind the constraints imposed by the Company’s reliance on capital markets as a primary source of cash. The remaining elements
of the Company’s executive compensation program, (401(k) Plan, Medical, Dental, and Vision Plans, Life and Disability Insurance)
are available to all Company employees.
76
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table shows for the fiscal year ended December 31, 2017, certain information regarding outstanding equity
awards at fiscal year end for the Named Executive Officers.
A description of the equity incentive plans we maintain is set forth in Note 8 to the Company’s financial statements included
in this annual report on Form 10-K.
Name
Michael R. Bristow, President and Chief Executive Officer......
Thomas A. Keuer, Chief Operating Officer ...............................
Christopher Ozeroff, Secretary, Senior Vice President and
General Counsel ..................................................................
Number of
Securities
Underlying
Unexercised
Options
(#) Exercisable
596
380
714
28,142
12,260
7,050
3,494
13,600
11,667
270
262
584
190
476
4,775
1,428
1,437
1,841
7,800
7,000
152
476
6,091
1,437
1,747
7,400
6,667
Option Awards
Number of
Securities
Underlying
Unexercised
Options
(#)Unexercisable
—
—
—
—
—
307 (1)(5)
206 (2)(5)
13,600(3)(5)
30,333(4)(5)
—
—
—
—
—
—
—
63 (1)(5)
109 (2)(5)
7,800 (3)(5)
18,200 (4)(5)
—
—
—
63 (1)(5)
103 (2)(5)
7,400 (3)(5)
17,333 (4)(5)
Option
Exercise
Price
($)
233.94
124.74
94.08
9.66
9.66
13.65
4.69
3.30
2.50
78.12
216.30
121.80
124.74
94.08
9.66
10.85
13.65
4.69
3.30
2.50
124.74
94.08
9.66
13.65
4.69
3.30
2.50
Option
Expiration
Date
1/23/2019
2/18/2020
5/20/2021
9/16/2023
9/16/2023
2/26/2024
2/11/2025
6/8/2026
2/15/2027
2/12/2018
11/14/2018
6/25/2019
2/18/2020
5/20/2021
9/16/2023
10/14/2023
2/26/2024
2/11/2025
6/8/2026
2/15/2027
2/18/2020
5/20/2021
9/16/2023
2/26/2024
2/11/2025
6/8/2026
2/15/2027
(1) Options vest in monthly installments through February 27, 2018.
(2) Options vest in 36 monthly installments measured from February 12, 2015.
(3) Options vest in 36 monthly installments measured from June 9, 2016.
(4) Options vest in 36 monthly installments measured from February 16, 2017.
(5) In the event of a change in control of the Company, 50% of the unvested shares subject to this award shall become fully and immediately vested upon the
closing date of such change in control, provided, however, that on the earlier of (i) the one-year anniversary of the closing date or (ii) involuntary termination,
any options that remain unvested on such earlier date shall become fully and immediately vested.
77
Name
Michael R. Bristow, President and Chief Executive Officer
Thomas A. Keuer, Chief Operating Officer
Christopher Ozeroff, Secretary, Senior Vice President and
General Counsel ..........................................................................
Stock Awards
Number of
Shares or Units of Stock
That Have Not Vested
(#) Unvested
Market Value of
Shares or Units of
Stock That Have Not
Vested
($)
2,025 (1)(3)
2,291 (2)(3)
1,222 (1)(3)
1,207 (2)(3)
1,222 (1)(3)
1,145 (2)(3)
2,734
3,093
1,650
1,629
1,650
1,546
(1) Restricted Stock Units vest on February 27, 2018.
(2) Restricted Stock Units vest on April 2, 2018.
(3) In the event of a change in control of the Company, 50% of the unvested shares subject to this award shall become fully and immediately vested upon the
closing date of such change in control, provided, however, that on the earlier of (i) the one-year anniversary of the closing date or (ii) involuntary termination,
any options that remain unvested on such earlier date shall become fully and immediately vested.
Option Exercises And Stock Vested
The following table sets forth certain information regarding option exercises and restricted stock units that vested during the
year ended December 31, 2017, with respect to the Named Executive Officers:
Name
Michael R. Bristow......................................
Thomas A. Keuer........................................
Christopher Ozeroff.....................................
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise
(#)
—
—
—
Value
Realized
on Exercise
($)(1)
—
—
—
Number of
Shares
Acquired on
Vesting
(#)
4,315
2,428
2,366
Value
Realized
on Vesting
($)(2)
10,761
6,071
5,923
(1) The value realized on exercise of the options equals the difference between the market price of the underlying stock at exercise
and the exercise or base price of the options, multiplied by the number of shares acquired on exercise.
(2) The value realized on vesting of restricted stock units equals the market value of the Company's Common Stock on the vesting
date, multiplied by the number of shares that vested.
78
DIRECTOR COMPENSATION
The following table shows for the fiscal year ended December 31, 2017, certain information with respect to the compensation
of all non-employee directors of the Company:
DIRECTOR COMPENSATION FOR FISCAL 2017 (1)
Linda Grais, M.D. (3)..........................
Raymond L. Woosley, M.D. (4) .........
Robert E. Conway (5) .........................
Dan J. Mitchell (6) ..............................
Anders Hove (7)..................................
Option
Fees Earned
or Paid in
Awards
Cash ($)
($)(2)
52,500 12,220
50,000 12,220
80,000 12,220
47,500 12,220
40,000 15,114
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
—
—
—
—
—
—
—
—
—
—
Total ($)
64,720
62,220
92,220
59,720
55,114
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Dr. Bristow, our President and Chief Executive Officer, was also a director during the year ended December 31, 2017, but did not receive any additional
compensation for his service as a director. Dr. Bristow’s compensation as an executive officer is set forth above under “Executive Compensation—Summary
Compensation Table.”
The amounts reported under “Option Awards” in the above table reflect the aggregate grant date fair value of these awards as determined in accordance with
Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation – Stock Compensation, excluding the effects of estimated
forfeitures. The value of stock option awards was estimated using the Black-Scholes option-pricing model. The valuation assumptions used in the valuation of
option awards may be found in Note 8 to the Company’s financial statements included in this annual report on Form 10-K for the year ended
December 31, 2017.
The aggregate number of shares issuable upon exercise of option awards outstanding at December 31, 2017, for Dr. Grais was 22,138, of which all shares were
fully vested.
The aggregate number of shares issuable upon exercise of option awards outstanding at December 31, 2017, for Dr. Woosley was 21,063, of which all shares
were fully vested.
The aggregate number of shares issuable upon exercise of option awards outstanding at December 31, 2017, for Mr. Conway was 20,941, of which all shares
were fully vested.
The aggregate number of shares issuable upon exercise of option awards outstanding at December 31, 2017, for Mr. Mitchell was 20,438, of which all shares
were fully vested.
The aggregate number of shares issuable upon exercise of option awards outstanding at December 31, 2017, for Dr. Hove was 10,000, of which 8,334 shares
were fully vested.
In 2016, the Company revised its compensation plan for non-employee directors to provide that non-employee directors will
be compensated for their service on the Board of Directors, as follows:
•
Each non-employee director will receive an annual retainer fee of $35,000;
• As additional compensation for their services, each non-employee director will receive (i), upon joining the Board of
Directors, an initial option grant to purchase 10,000 shares of the Company’s Common Stock under the Amended and
Restated ARCA 2013 Equity Incentive Plan, as amended, or the Amended 2013 Plan and (ii), on an annual basis, an
annual option grant to purchase 8,000 shares of the Company’s Common Stock under the Amended 2013 Plan;
•
•
•
•
•
The Chairman of the Board of Directors will receive an additional annual retainer fee of $25,000;
The Audit Committee chair will receive an additional annual retainer fee of $15,000;
The chairs of the Compensation Committee and the Nominating and Corporate Governance Committee will each receive
an additional annual retainer fee of $10,000;
Each non-chair member of the Audit Committee will receive an additional annual retainer fee of $7,500; and
Each non-chair member of the Compensation Committee and the Nominating and Corporate Governance Committees
will receive an additional annual retainer fee of $5,000.
At the February 16, 2017, meeting of the Board of Directors, the Board of Directors awarded annual stock option grants to
the Company’s non-employee directors. Mr. Mitchell, Dr. Grais, Dr. Woosley and Mr. Conway each were granted options to
purchase 8,000 shares of Common Stock under the Amended 2013 Plan vesting over one year. In addition, the Board granted an
option to purchase 10,000 shares of Common Stock to Dr. Hove in connection with his joining the Board. These options were issued
under the Amended 2013 Plan and vest over one year. The purchase price for the options issued on February 16, 2017, was $2.50 per
share, which was equal to the closing price of the Company’s Common Stock on Nasdaq on the date of the grant. If the non-employee
79
director’s service terminates in connection with or at any time following a change in control, then any unexpired options that remain
unvested shall become fully vested.
At the March 1, 2018, meeting of the Board of Directors, the Board of Directors awarded annual stock option grants to the
Company’s non-employee directors. Mr. Mitchell, Dr. Grais, Dr. Woosley, Mr. Conway and Dr. Hove each were granted options to
purchase 8,000 shares of Common Stock under the Amended 2013 Plan vesting over one year. The purchase price for the options
issued on March 1, 2018, was $0.72 per share, which was equal to the closing price of the Company’s Common Stock on Nasdaq on
the date of the grant. If the non-employee director’s service terminates in connection with or at any time following a change in
control, then any unexpired options that remain unvested shall become fully vested.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information as of December 31, 2017, for all of our equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
No. of Securities
to be Issued Upon
Exercise of
Outstanding Options
or
Upon
Vesting of Restricted
Stock
Units
(a)
Equity compensation plans approved by
security holders ....................................
Equity compensation plans not approved
by security holders ...............................
627,143
—
Total...........................................
627,143
Weighted Average
Exercise
Price of Outstanding
Options
($)
(b)
6.00
—
6.00
No. of Securities
Remaining
Available for
Future Issuance Under
Equity Compensation
Plans Excluding Securities
Reflected in
Column(a)
(c)
610,194
—
610,194
On September 17, 2013, our stockholders approved the ARCA biopharma, Inc. 2013 Equity Incentive Plan, or the 2013 Plan,
at the Company’s 2013 annual meeting of stockholders. The 2013 Plan is the successor to the Amended and Restated ARCA
biopharma, Inc. 2004 Equity Incentive Plan, or the 2004 Plan. On June 9, 2016, our stockholders approved the Amended 2013 Plan.
A description of the 2013 Plan and the Amended 2013 Plan is set forth in Note 8 to the Company’s financial statements included in
this annual report on Form 10-K.
Compensation Risks
We believe our approach to goal setting, setting of targets with payouts at multiple levels of performance, and evaluation of
performance results assist in mitigating excessive risk-taking that could harm the value or reward poor judgment by our executives.
We believe several features of our programs reflect sound risk management practices. We believe we have allocated compensation
among base salary and short and long-term compensation target opportunities in such a way as to not encourage excessive risk-taking.
The multi-year vesting of equity awards properly accounts for the time horizon of risk. Furthermore, the Compensation Committee
assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking on
an annual basis.
80
Principal Stockholders
The following table sets forth certain information regarding the ownership of the Company’s Common Stock as of
February 28, 2018, by: (i) each director and nominee for director, (ii) each of our named executive officers, (iii) all executive officers
and directors of the Company as a group, and (iv) all those known by the Company to be beneficial owners of more than five percent
of its Common Stock. Unless otherwise noted below, the address of each beneficial owner listed on the table is c/o ARCA biopharma,
Inc., 11080 CirclePoint Road, Suite 140, Westminster, Colorado, 80020.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes
below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting
and investment power with respect to all shares of Common Stock that they beneficially own, subject to applicable community
property laws. The table is based upon information supplied by officers, directors and principal stockholders and Schedules 13G or
13D, Form 4s or other ownership reports filed with the SEC. For purposes of this table, certain of our outstanding warrants that may
be exercisable for fractional shares have been rounded down to the nearest whole number.
In computing the number of shares of Common Stock beneficially owned by a person and the percentage ownership of that
person, we deemed outstanding shares of Common Stock subject to options, restricted stock units, or warrants held by that person that
are currently exercisable or exercisable within 60 days of February 28, 2018. We did not deem these shares outstanding, however, for
the purpose of computing the percentage ownership of any other person.
The percentages below are based on 13,914,320 shares of our Common Stock outstanding as of February 28, 2018.
Beneficial Owner
Directors and Named Executive Officers
Michael R. Bristow, M.D., Ph.D. (1) .......................................
Thomas A. Keuer (2)................................................................
Christopher D. Ozeroff (3) .......................................................
Linda Grais, M.D. (4)...............................................................
Robert E. Conway (5)...............................................................
Raymond L. Woosley (6) .........................................................
Dan J. Mitchell (7) ...................................................................
Anders Hove, M.D. (8).............................................................
All current directors and executive officers as a
group (9 persons) (9) ...........................................................
5% Stockholders
Tekla Life Sciences Investors (10)..........................................
Shares
Beneficially
Owned
Percentage of
Shares
Beneficially
Owned
196,106
44,134
45,965
22,138
55,941
21,063
31,438
10,000
1.40%
*
*
*
*
*
*
*
453,958
3.20%
811,227
5.83%
*
(1)
(2)
(3)
Represents beneficial ownership of less than 1% of our Common Stock.
Includes the following owned by (i) Investocor Trust: 19,986 shares, Dr. Bristow is the sole trustee of Investocor Trust; (ii) NFS
as Custodian for Michael Bristow’s IRA: (a) 25,459 shares and (b) 17,821 shares issuable upon the exercise of warrants, which
warrants are immediately exercisable; (iii) 5,578 shares issuable upon the exercise of warrants, which warrants are immediately
exercisable and held directly; (iv) options to purchase 86,106 shares that are exercisable within 60 days of February 28, 2018;
and (v) 2,291 restricted stock units that are vesting within 60 days of February 28, 2018.
Includes options to purchase 30,499 shares that are exercisable within 60 days of February 28, 2018, and 1,207 restricted stock
units that are vesting within 60 days of February 28, 2018.
Includes (i) options to purchase 28,448 shares that are exercisable within 60 days of February 28, 2018 and (ii) 1,145 restricted
stock units that are vesting within 60 days of February 28, 2018.
Includes options to purchase 22,138 shares that are exercisable within 60 days of February 28, 2018.
Includes options to purchase 20,941 shares that are exercisable within 60 days of February 28, 2018.
Includes options to purchase 21,063 shares that are exercisable within 60 days of February 28, 2018.
Includes options to purchase 20,438 shares that are exercisable within 60 days of February 28, 2018.
Includes an option to purchase 10,000 shares that is exercisable within 60 days of February 28, 2018.
(4)
(5)
(6)
(7)
(8)
(9) See Notes (1) through (8) above. Also, includes additional options to purchase 26,059 shares that are exercisable within 60 days
of February 28, 2018 and 1,114 restricted stock units that vest within 60 days of February 28, 2018 beneficially owned by our
executive officers not listed by name in the table above.
(10) Based solely on a Schedule 13G filed with the SEC on February 12, 2018. Tekla Capital Management LLC (“TCM”), as an
investment adviser to Tekla Life Sciences Investors (“HQL”), shares beneficial ownership over the shares held by HQL. Each of
TCM and Daniel R. Omstead, through his control of TCM, has sole power to dispose of the shares beneficially owned by HQL.
81
Neither TCM nor Daniel R. Omstead has the sole power to vote or direct the vote of the shares beneficially owned by HQL,
which power resides in the fund’s Board of Trustees. TCM carries the voting of shares under written guidelines established by
the funders Board of Trustees. The address for Tekla Life Sciences Investors is 100 Federal Street, 19th Floor, Boston, MA
02110.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Independence of the Board of Directors
As required under the Nasdaq listing standards, a majority of the members of a listed company’s board of directors must
qualify as “independent,” as affirmatively determined by the board of directors. Our Board of Directors consults with the Company’s
counsel to ensure that the Board of Directors’ determinations are consistent with relevant securities and other laws and regulations
regarding the definition of “independent,” including those set forth in pertinent listing standards of the Nasdaq, as in effect from time
to time.
Consistent with these considerations, after review of all relevant identified transactions or relationships between each
director, or any of his or her family members, and the Company, its senior management and its independent registered public
accounting firm, the Board of Directors has affirmatively determined that the following five directors are independent directors within
the meaning of the applicable Nasdaq listing standards: Mr. Conway, Dr. Grais, Mr. Mitchell, Dr. Hove and Dr. Woosley. In making
this determination, the Board of Directors found that none of the directors or nominees for director had a material or other
disqualifying relationship with the Company. Dr. Bristow, the Company’s President and Chief Executive Officer is not an
independent director by virtue of his employment relationship with the Company.
Certain Transactions With or Involving Related Persons
The following is a summary of transactions since January 1, 2016, to which we have been a party in which the amount
involved exceeded the lesser of $120,000 or one percent of the average of our total assets at fiscal years ended 2017, and in which any
of our executive officers, directors or holders of more than 5% of our capital stock, or any member of the immediate family of any of
the foregoing persons, had or will have a direct or indirect material interest, other than compensation arrangements disclosed in “Item
11. Executive Compensation” of this Form 10-K.
Transactions With the Company’s President and Chief Executive Officer
The Company has entered into unrestricted research grants with the academic research laboratory of Dr. Bristow, the
Company’s President and Chief Executive Officer, 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, 2017 and 2016 was approximately $418,000 and $427,000, respectively.
Policies and Procedures for Related Party Transactions
Our Audit Committee reviews and approves all related party transactions. This review covers any material transaction,
arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a
participant, and a related party had or will have a direct or indirect material interest, including, purchases of goods or services by or
from the related party or entities in which the related party has a material interest, indebtedness, guarantees of indebtedness and
employment by us of a related party.
82
Item 14. Principal Accountant Fees and Services
The following table represents aggregate fees billed, or expected to be billed, to us for the fiscal years ended
December 31, 2017 and December 31, 2016, by KPMG LLP, our independent registered public accounting firm.
Audit Fees (1) ..............................
Audit-related Fees .......................
Tax Fees.......................................
All Other Fees..............................
Total Fees ...................................
Fiscal Year
Ended 2017
Fiscal Year
Ended 2016
$193,500
—
—
—
$193,500
$156,255
—
—
—
$156,255
(1) Audit Fees include fees for the (i) audit of the financial statements included in our Form 10-K for
our fiscal years ended December 31, 2017, and December 31, 2016, (ii) review of interim financial statements
included on Forms 10-Q and (iii) attest, consent and review services normally provided by the accountant in
connection with SEC filings.
All fees described above were approved by the Audit Committee.
PRE-APPROVAL POLICIES AND PROCEDURES
The above services performed by the independent registered public accounting firm were pre-approved in accordance with
the pre-approval policy and procedures adopted by the Audit Committee. This policy describes the permitted audit, audit-related, tax,
and other services that our independent registered public accounting firm may perform. The policy also requires that our independent
registered public accounting firm provide in writing:
•
•
•
an annual description of all relationships between the independent registered public accounting firm and the client that
may reasonably be thought to bear on independence;
confirm that, in the independent registered public accounting firm’s professional judgment, the independent registered
public accounting firm is independent of the client under SEC requirements;
discuss with the Audit Committee the independent registered public accounting firm’s independence and the potential
effects on its independence of performing any non-audit related services.
The services expected to be performed by our independent registered public accounting firm during the subsequent fiscal year
are presented to the Audit Committee for pre-approval. Any pre-approval must describe, in writing, the particular service or category
of services.
Requests for audit, audit-related, tax, and other services not contemplated by those pre-approved services must be submitted
to the Audit Committee for specific pre-approval. Generally, pre-approval is considered at the Audit Committee’s regularly scheduled
meetings. However, the authority to grant specific pre-approval between meetings, as necessary, has been delegated to the chairman
of the Audit Committee. If the chairman is not available, the other two Audit Committee members together have the authority to grant
specific pre-approval between meetings. The chairman or the other members must update the Audit Committee at the next regularly
scheduled meeting of any services that were granted specific pre-approval.
The Audit Committee pre-approved all audit related services rendered in 2017 and did not rely on the waiver of pre-approval
requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X promulgated under the Exchange Act.
83
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this Report:
PART IV
1. Financial statements filed as part of this Report are listed under Part II, Item 8, page 45 of this Annual Report on Form
10-K.
2. No schedules are required because either the required information is not present or is not present in amounts sufficient to
require submission of the schedule, or because the information required is included in the consolidated financial statements
or the notes thereto.
(b)
Exhibits
A list of exhibits filed with this report or incorporated herein by reference is found in the Exhibit Index.
84
Exhibit
No.
3.1
3.1(a)
3.1(b)
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
10.1§
10.2
EXHIBIT INDEX
Description
Amended and Restated Certificate of Incorporation of the
Registrant, as amended.
Form
10-K
Incorporated by Reference
Filing
Date
Number
Filed
Herewith
3/27/2009
Certificate of Amendment to Restated Certificate of
Incorporation.
8-K
3/5/2013
Certificate of Amendment to Restated Certificate of
Incorporation.
8-K
9/3/2015
Second Amended and Restated Bylaws of the Registrant, as
amended.
10-Q
11/16/2009
Form of Common Stock Certificate.
Warrant to Purchase Stock Agreement, dated August 19,
2008, by and between ARCA biopharma, Inc. and Silicon
Valley Bank.
Amendment No. 1 to Warrant to Purchase Stock Agreement,
dated February 19, 2009, by and between ARCA biopharma,
Inc. and SVB Financial Group.
Form of Common Stock Purchase Warrant.
Form of Warrants to Purchase Shares of Common Stock.
Form of Common Stock Purchase Warrant.
Form of Warrant Agency Agreement by and between ARCA
biopharma, Inc. and Computershare Trust Company, N.A.
dated May 31, 2013.
Form of Common Stock Purchase Warrant.
Form of Common Stock Purchase Warrant.
Warrant Agency Agreement by and among ARCA
biopharma, Inc., Computershare Inc. and Computershare
Trust Company, N.A. dated February 3, 2014.
Form of Warrant to Purchase shares of Common Stock.
Form of Warrant to Purchase shares of Common Stock.
Reference is made to Exhibits 3.1, 3.1(a), 3.1(b) and 3.2
8-K
10-K
1/28/2009
3/27/2009
10-K
3/27/2009
8-K
8-K
8-K
8/3/2012
1/23/2013
2/1/2013
S-1/A
5/15/2013
S-1/A
5/15/2013
8-K
8-K
8-K
8-K
2/4/2014
2/4/2014
6/11/2015
6/11/2015
License and Sublicense Agreement, dated October 28, 2003,
by and between ARCA Discovery, Inc. and CPEC, L.L.C.
10-Q
5/15/2009
Amendment to License and Sublicense Agreement, dated
February 22, 2006, by and between ARCA Discovery, Inc.
and CPEC L.L.C.
10-Q
5/15/2009
85
3.1
5.1
3.1
3.2
4.1
4.5
4.6
4.1
4.1
4.1
4.1
4.3
4.1
4.2
4.1
4.2
10.1
10.2
Exhibit
No.
10.3§
Description
Manufacturing Agreement, dated September 11, 2006, by
and between ARCA Discovery, Inc. and Patheon, Inc.
10.4†
ARCA Discovery, Inc. 2004 Stock Incentive Plan.
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20
Amendment No. 1 to the ARCA Discovery, Inc. 2004 Stock
Incentive Plan.
Amendment No. 2 to the ARCA Discovery, Inc. 2004 Stock
Incentive Plan.
Amendment No. 3 to the ARCA Discovery, Inc. 2004 Stock
Incentive Plan.
Amendment No. 4 to the ARCA Discovery, Inc. 2004 Stock
Incentive Plan.
Amendment No. 5 to the ARCA Discovery, Inc. 2004 Stock
Incentive Plan.
Amendment No. 6 to the ARCA Discovery, Inc. 2004 Stock
Incentive Plan.
ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of
Executive Incentive Stock Option Agreement.
ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of
Non-Executive Incentive Stock Option Agreement.
ARCA biopharma, Inc. 2004 Stock Incentive Plan, Form of
Nonqualified Stock Option Agreement.
ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a
Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Partial
Acceleration Stock Option Agreement.
ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a
Nuvelo, Inc. 2004 Equity Incentive Plan), Form of No
Acceleration Stock Option Agreement.
ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a
Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Director
Stock Option Agreement.
ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a
Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Notice of
Grant of Stock Option.
ARCA biopharma, Inc. 2004 Equity Incentive Plan (f/k/a
Nuvelo, Inc. 2004 Equity Incentive Plan), Form of Notice of
Director Grant of Stock Option.
and Restated Employment
Amended
and Retention
Agreement, dated June 4, 2008, by and between ARCA
biopharma, Inc. and Michael R. Bristow.
Assignment and Assumption Agreement, dated January 26,
2009, by and between ARCA biopharma, Inc. and ARCA
biopharma Colorado, Inc.
86
Incorporated by Reference
Filing
Date
Number
Filed
Herewith
5/15/2009
10.10
1/28/2009
1/28/2009
1/28/2009
1/28/2009
1/28/2009
1/28/2009
1/28/2009
1/28/2009
1/28/2009
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
1/28/2009
10.10
Form
10-Q
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-K
3/27/2009
10.34
10-K
3/27/2009
10.35
10-K
3/27/2009
10.36
10-K
3/27/2009
10.37
10-K
3/27/2009
10.38
10-K
3/27/2009
10.43
10-K
3/27/2009
10.46
Exhibit
No.
10.21†
10.22
10.23†
10.24†
10.25†
Description
Amended and Restated Employment Agreement, dated
June 12, 2008, by and between ARCA biopharma, Inc. and
Christopher D. Ozeroff.
Assignment and Assumption Agreement, dated January 26,
2009, by and between ARCA biopharma, Inc. and ARCA
biopharma Colorado, Inc.
Incorporated by Reference
Filing
Date
Number
Filed
Herewith
3/27/2009
10.45
Form
10-K
10-K
3/27/2009
10.48
Amended and Restated ARCA biopharma, Inc. 2004 Equity
Incentive Plan.
10-Q/A
8/21/2009
Form of Option Amendment pursuant to ARCA biopharma,
Inc. 2004 Equity Incentive Plan and ARCA biopharma, Inc.
2004 Stock Option Plan (change of control).
Form of Option Agreement and Grant Notice pursuant to
ARCA biopharma,
Inc. 2004 Equity Incentive Plan
(NDA/change of control acceleration).
10-Q
8/10/2009
10.1
10.5
10-Q
8/10/2009
10.6
10.26
Form of
biopharma, Inc. and its directors and officers.
Indemnification Agreement between ARCA
10-K
3/27/2009
10.52
10.27
Form of Subscription Agreement.
10.28
10.29
10.30§
Capital on DemandTM Sales Agreement, dated January 11,
2017, by and between ARCA biopharma,
Inc. and
JonesTrading Institutional Services LLC.
Amendment No. 1 to Capital on DemandTM Sales
Agreement, dated August 21, 2017, by and between ARCA
biopharma, Inc. and JonesTrading Institutional Services
LLC.
Amended and Restated Exclusive License Agreement, dated
August 12, 2011, by and between the Regents of
the
University of Colorado and ARCA biopharma, Inc.
8-K
8-K
4/18/2011
1/11/2017
10.1
10.1
8-K
8/21/2017
10.1
10-Q
8/15/2011
10.5
10.31
Form of Subscription Agreement.
10.32
Form of Registration Rights Agreement.
10.33
Form of Subscription Agreement.
10.34
Form of Subscription Agreement by and among the
Company and the purchasers identified therein, dated
October 22, 2012.
10.35
Form of Registration Rights Agreement.
10.36
Form of Subscription Agreement by and among the
Company and the purchasers identified therein, dated
December 18, 2012.
10.37
Form of Registration Rights Agreement.
10.38
Form of Amendment to the Registration Rights Agreement,
dated December 18, 2012.
87
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
12/22/2011
12/22/2011
8/3/2012
10/23/2012
10/23/2012
12/19/2012
12/19/2012
12/19/2012
10.1
10.2
10.1
10.1
10.2
10.1
10.2
10.3
Exhibit
No.
10.39
Description
Form of Subscription Agreement by and among the
Company and the purchasers identified therein, dated
January 22, 2013.
10.40
Form of Registration Rights Agreement.
10.41
Subscription Agreement.
Placement Agency Agreement by and between ARCA
biopharma, Inc. and Dawson James Securities, Inc., dated
January 21, 2014.
Amendment No. 1 Placement Agency Agreement by and
between ARCA biopharma,
Inc. and Dawson James
Securities, Inc., dated January 31, 2014.
Securities Purchase Agreement by and among the Company
and the purchasers identified therein, dated June 10, 2015.
Office Lease Agreement by and between ARCA biopharma,
Inc. and Circle Point Properties, LLC, effective August 1,
2013.
Amendment to Office Lease Agreement by and between
ARCA biopharma, Inc. and Circle Point Properties, LLC,
effective March 2, 2016.
10.42
10.42(a)
10.43
10.44
10.45
10.46†
10.47†
Incorporated by Reference
Filing
Date
Number
Filed
Herewith
1/23/2013
10.1
1/23/2013
2/1/2013
2/4/2014
10.2
10.1
1.1
Form
8-K
8-K
8-K
8-K
8-K
2/4/2014
1.2
8-K
8-K
6/11/2015
8/6/2013
10.1
10.1
8-K
3/7/2016
10.1
Amendment Agreement by and between ARCA biopharma,
Inc. and Michael R. Bristow, effective as of June 13, 2013.
10-Q
8/13/2013
Amendment Agreement by and between ARCA biopharma,
Inc. and Christopher Ozeroff, effective as of June 13, 2013.
10-Q
8/13/2013
10.48†
ARCA biopharma, Inc. 2013 Equity Incentive Plan.
10.49†
10.50†
10.51†
10.52†
10.53†
10.54
Form of Stock Option Agreement and Option Grant Notice
under 2013 Equity Incentive Plan (Standard).
Form of Stock Option Agreement and Option Grant Notice
under 2013 Equity Incentive Plan (Officer).
Form of Stock Option Agreement and Option Grant Notice
under 2013 Equity Incentive Plan (Director).
Form of Restricted Stock Unit Award Agreement and Notice
of Grant Award under 2013 Equity Incentive Plan
(Standard).
Form of Restricted Stock Unit Award Agreement and Notice
of Grant Award under 2013 Equity Incentive Plan (Officer).
Clinical Trial Collaboration Agreement between ARCA
biopharma, Inc. and Medtronic, Inc. dated as of April 18,
2013.
8-K
8-K
8-K
8-K
8-K
8-K
8-K
9/23/2013
9/23/2013
9/23/2013
9/23/2013
9/23/2013
9/23/2013
4/22/2013
10.6
10.8
10.1
10.2
10.3
10.4
10.5
10.6
10.1
10.55
Letter Agreement between ARCA biopharma, Inc. and
Medtronic, Inc. dated as of July 26, 2013.
10-Q
8/13/2013
10.2
88
Exhibit
No.
10.56§
10.57§
10.58§
10.59§
10.60§
10.61†
10.62†
23.1
24.1
31.1
31.2
32.1
Description
First Amendment to Clinical Trial Collaboration Agreement
between ARCA biopharma, Inc. and Medtronic, Inc. dated
July 28, 2014.
Second Amendment to Clinical Trial Collaboration
Agreement between ARCA biopharma, Inc. and Medtronic,
Inc. dated September 9, 2014.
Canadian Addendum to Clinical Trial Collaboration
Agreement between ARCA biopharma, Inc. and Medtronic,
Inc. dated February 4, 2015.
European Addendum to Clinical Trial Collaboration
Agreement between ARCA biopharma, Inc. and Medtronic,
Inc. dated September 19, 2016.
Amendment to European Addendum to the Clinical Trial
Agreement Between Medtronic and ARCA dated
July 10, 2017.
Incorporated by Reference
Filing
Date
Number
Filed
Herewith
8/13/2014
10.1
Form
10-Q
10-Q
11/12/2014
10.2
10-K
3/19/2015
10.64
10-K
3/21/2017
10.58
10-Q
11/9/2017
10.1
Employment Agreement, dated December 29, 2014, by and
between ARCA biopharma, Inc. and Brian Selby.
8-K/A
12/30/2014
8-K/A
12/30/2014
Amended and Restated Employment Agreement, dated
December 29, 2014, by and between ARCA biopharma, Inc.
and Thomas A. Keuer.
Consent of KPMG LLP, Independent Registered Public
Accounting Firm.
Power of Attorney (included in the signature page hereto).
Certification of Principal Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. sec. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
101.INS
XBRL Instance Document (filed electronically herewith)
101.SCH
101.CAL
101.LAB
101.PRE
XBRL Taxonomy Extension Schema Document (filed
electronically herewith)
XBRL Taxonomy Extension Calculation Linkbase
Document (filed electronically herewith)
XBRL Taxonomy Extension Label Linkbase Document
(filed electronically herewith)
XBRL Taxonomy Extension Presentation Linkbase
Document (filed electronically herewith)
89
10.1
10.2
X
X
X
X
X
X
X
X
X
X
Exhibit
No.
101.DEF
Description
Form
Incorporated by Reference
Filing
Date
Number
Filed
Herewith
XBRL Taxonomy Extension Definition Linkbase Document
(filed electronically herewith)
X
†
§
Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b)
of Form 10-K.
Confidential treatment has been requested for portions of this document, which are omitted and filed separately with the SEC.
Omitted portions have been filed with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
90
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ARCA biopharma, Inc.
By:
/S/ BRIAN L. SELBY
Brian L. Selby
Vice President, Finance
(Principal Financial Officer and Principal Accounting Officer)
Date: March 22, 2018
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Michael R. Bristow and Brian L. Selby, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution for him, and in his name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of
ARCA biopharma, Inc., in the capacities and on the dates indicated.
Signature
/S/ Michael R. Bristow
Michael R. Bristow
/S/ Brian L. Selby
Brian L. Selby
/S/ Linda Grais
Linda Grais
/s/ Raymond Woosley
Raymond Woosley
/s/ Robert Conway
Robert Conway
/s/ Daniel Mitchell
Daniel Mitchell
/s/ Anders Hove
Anders Hove
Date
March 22, 2018
March 22, 2018
March 22, 2018
March 22, 2018
March 22, 2018
March 22, 2018
March 22, 2018
Title
President and Chief Executive
Officer and Director
(Principal Executive Officer)
Vice President, Finance
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
91