(1) The Company, Development Stage, and Basis of Presentation

Description of Business

ARCA biopharma, Inc., or the Company or ARCA, a Delaware corporation, is headquartered in Broomfield, Colorado and is principally focused on developing genetically-targeted therapies for cardiovascular diseases. The Company's lead product candidate, Gencaro^TM (bucindolol hydrochloride), a pharmacologically unique beta-blocker and mild vasodilator, is being developed for the treatment of chronic heart failure, or HF, and the prevention of atrial fibrillation, or AF in patients with HF. The Company has identified common genetic variations in the cardiovascular system that it believes interact with Gencaro's pharmacology and may predict patient response. The Company has collaborated with LabCorp to develop the Gencaro Test, a companion test for the genetic markers that identify these common genetic variations.

The Company has licensed exclusive, worldwide rights to Gencaro and has been granted patents in the U.S. and Europe for methods of treating HF and cardiac arrhythmia patients, which includes AF patients, with bucindolol based on genetic testing, which it believes will provide market exclusivity for Gencaro into at least 2025 in those markets. In addition, the Company believes that if Gencaro is approved, the U.S. Gencaro patent, as well as the patents issued in Europe, will be eligible for patent term extension which, if granted in the U.S., could provide an additional period of market exclusivity in the U.S. of approximately three years, and if granted in Europe could provide an additional five years of market exclusivity.

In September 2008, the U.S. Food and Drug Administration, or FDA, formally accepted for filing the New Drug Application, or NDA, for Gencaro as a potential treatment for HF. In May 2009, the FDA notified the Company through a Complete Response Letter, or CRL, that its NDA for Gencaro was not approvable in its current form, and specified additional actions and information required for approval of the NDA including conducting an additional Phase 3 clinical trial. In May 2010, the Company reached agreement with the FDA on a Special Protocol Assessment, or SPA, for the design of an additional Phase 3 clinical trial to assess the safety and efficacy of Gencaro in approximately 3,200 patients with HF who have the genotype that appears to respond most favorably to Gencaro. The Company believes the SPA agreement would permit this trial, if successful, to serve as the clinical effectiveness basis for the approval of Gencaro in HF. In light of the substantial costs associated with the Phase 3 clinical HF trial, the Company will not initiate the trial until such time as government funding, or a strategic transaction, such as a strategic combination or partnership is secured or the planned AF trial is completed.

The Company is planning to initiate a Phase 3 clinical study of Gencaro in AF patients with HF and left ventricular dysfunction, and believes AF is an attractive indication for Gencaro because data from the BEST trial, the previously conducted Phase 3 HF trial involving Gencaro in 2,708 HF patients, suggest Gencaro may have a potentially significant effect in reducing and/or preventing AF. Based on the BEST trial, the Company believes Gencaro's prevention of AF in HF patients is pharmacogenetically regulated, similar to the effects on HF clinical endpoints, and plans to enroll approximately 300-400 patients with recent onset AF who have the genotype that appears to respond most favorably to Gencaro. The Company anticipates that the trial could begin approximately 6 months after the Company obtains sufficient funding.

To support the continued development of Gencaro, including the additional proposed clinical trials, the Company will need to raise substantial additional funding through public or private debt or equity transactions or a strategic combination or partnership, or government funding.

ARCA also holds exclusive rights to rNAPc2, a potent, long-acting recombinant protein anticoagulant with a unique mechanism of action involving inhibition of tissue factor. Previously, preclinical studies of rNAPc2 demonstrated potential efficacy against two of the most deadly strains of hemorrhagic fever virus, Ebola and Marburg. The Company is currently seeking government or third party funding to further develop rNAPc2 as a potential treatment for viral hemorrhagic fevers and other diseases involving the tissue factor pathway of coagulation. Considering the substantial cost associated with the development of rNAPc2 and ARCA's limited financial resources, further development of rNAPc2 will be dependent upon receipt of government or third party funding, which may not be available.

Development Stage Risks, Liquidity and Going Concern

The Company is in the development stage and devotes substantially all of its efforts towards obtaining regulatory approval, raising capital necessary to fund its operations and Phase 3 AF trial and exploring strategic alternatives for further developing Gencaro. The Company has not generated revenue to date and is subject to a number of risks similar to those of other development stage companies, including dependence on key individuals, the development 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 historically funded its operations through issuances of convertible promissory notes and shares of its common and preferred stock, as well as through the business combination with Nuvelo, Inc., or Nuvelo.

Since ARCA was founded on December 17, 2001, or Inception, the Company has incurred substantial losses and negative cash flows from operations. Since Inception, the Company incurred a loss from operations of $91.4 million and had negative cash flows from operations of $90.4 million.

In light of the substantial additional time and costs associated with the development of Gencaro and the need to raise a significant amount of capital on acceptable terms to finance the additional clinical trial(s) and the Company's ongoing operations, the Company is seeking to raise substantial additional funding through public or private debt or equity transactions or a strategic combination or partnership, or government funding to support the continued development of Gencaro, including any additional clinical trials. In April 2011, the Company raised $2.5 million, net of offering costs, through the sale of our common stock, and may seek additional funding that could allow it to operate while it continues to pursue strategic combination, partnering, additional financing and licensing opportunities. 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 discontinue its operations.

The Company believes its cash and cash equivalents balance as of June 30, 2011, will be sufficient to fund its operations through March 31, 2012. The Company is unable to assert that its current cash and cash equivalents are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about the Company's ability to continue as a going concern beyond March 31, 2012 These consolidated 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:

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

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the market price of the Company's stock and the availability and cost of additional equity capital from existing and potential new investors;

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the Company's ability to retain the listing of its common stock on the Nasdaq Capital Market;

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

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

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the Company's ability to control costs associated with its operations;

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

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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 in the near term, 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 unaudited consolidated financial statements of the Company were prepared in accordance with generally accepted accounting principles for interim financial information and instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, these financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim consolidated financial statements. The results of operations for the three months and six months ended June 30, 2011 are not necessarily indicative of results expected for the full year ending December 31, 2011. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2010 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Amounts presented are rounded to the nearest thousand, where indicated, except per share data and par values.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company has no off-balance-sheet concentrations of credit risk, such as foreign exchange contracts, option contracts, or foreign currency hedging arrangements. The Company maintains cash and cash equivalent balances in the form of bank demand deposits, money market fund accounts and debt securities with financial institutions that management believes are creditworthy. Such balances may at times exceed the insured amount.

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.