UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15(d)


of the Securities Exchange Act of 1934

 

For the Quarter Ended September 30, 2017March 31, 2019

 

Commission File No. 000-21429

 

ArQule, Inc.
(Exact Name of Registrant as Specified in its Charter)

ArQule, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware04-3221586
(State of Incorporation)(I.R.S. Employer Identification Number)

 

One Wall Street, Burlington, Massachusetts 01803
(Address of Principal Executive Offices)
(781) 994-0300

One Wall Street, Burlington, Massachusetts 01803

(Address of Principal Executive Offices)

(781) 994-0300

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueARQLThe NASDAQ Stock Market LLC 
(NASDAQ Global Market)

 

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 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 x No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer¨Accelerated filerx
Non-accelerated filer¨Smaller reporting company¨x
(Do not check if a smaller reporting company)Emerging growth company¨

 

Indicate If an emerging growth company, indicate by check 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.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ Nox

 

Number of shares outstanding of the registrant’s Common Stock as of October 25, 2017:April 17, 2019:

 

Common Stock, par value $.0187,110,202 shares outstanding

Common Stock, par value $.01  109,309,877 shares outstanding

 

 

 

 

 

ARQULE, INC.

 

QUARTER ENDED SEPTEMBER 30, 2017MARCH 31, 2019

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 
  
Item 1. — Unaudited Condensed Financial Statements 
  
Condensed Balance Sheets (Unaudited) September 30, 2017March 31, 2019 and December 31, 201620183
  
Condensed Statements of Operations and Comprehensive Loss (Unaudited) three and nine months ended September 30, 2017March 31, 2019 and 201620184
Condensed Statements of Stockholders’ Equity (Unaudited) three months ended March 31, 2019 and 20185
  
Condensed Statements of Cash Flows (Unaudited) ninethree months ended September 30, 2017March 31, 2019 and 2016201856
  
Notes to Unaudited Condensed Financial Statements67
  
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations1416
  
Item 3. — Quantitative and Qualitative Disclosures about Market Risk2021
  
Item 4. — Controls and Procedures2122
  
PART II - OTHER INFORMATION21
  
Item 1. — Legal Proceedings2123
  
Item 1A. — Risk Factors2123
  
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds2123
  
Item 3. — Defaults Upon Senior Securities2123
  
Item 4. — Mine Safety Disclosures2123
  
Item 5. — Other Information2123
  
Item 6. — Exhibits2123
  
SIGNATURES2223

 

 2 

 

 

ARQULE, INC.

 

CONDENSED BALANCE SHEETS (Unaudited)

 

 September 30,
2017
  December 31,
2016
  March 31,
2019
  December 31,
2018
 
 (IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
  (IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
 
ASSETS          
Current assets:                
Cash and cash equivalents $11,707  $15,267  $17,824  $19,236 
Marketable securities-short term  15,896   15,859   74,399   80,322 
Prepaid expenses and other current assets  304   822 
Contract receivables  3,300   5,984 
Prepaid expenses  1,367   861 
Total current assets  27,907   31,948   96,890   106,403 
        
Property and equipment, net  128   180   339   69 
Operating lease assets  996    
Other assets  205   252   248   204 
Total assets $28,240  $32,380  $98,473  $106,676 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued expenses $7,665  $8,700  $11,541  $12,948 
Notes payable- current portion  417    
Notes payable – current portion  2,917   1,667 
Operating lease liability – current portion  562    
Total current liabilities  8,082   8,700   15,020   14,615 
                
Long-term liabilities:                
Notes payable  14,100    
Notes payable – long term  11,923   13,093 
Operating lease liability – long term  444    
Total liabilities  22,182   8,700   27,387   27,708 
                
Commitment and contingencies        
Commitments and contingencies        
                
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding      
Common stock, $0.01 par value; 100,000,000 shares authorized; 73,171,551 and 71,146,209 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  732   711 
Stockholders’ equity:        
Common stock, $0.01 par value; 200,000,000 shares authorized; 109,095,759 and 109,003,637 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively  1,091   1,090 
Additional paid-in capital  531,605   527,802   628,260   625,993 
Accumulated other comprehensive income (loss)  (1)  2 
Accumulated other comprehensive loss  22   (95)
Accumulated deficit  (526,278)  (504,835)  (558,287)  (548,020)
Total stockholders’ equity  6,058   23,680   71,086   78,968 
Total liabilities and stockholders’ equity $28,240  $32,380  $98,473  $106,676 

 

The accompanying notes are an integral part of these condensed interim unaudited financial statements.

 

 3 

 

 

ARQULE, INC.

 

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

 

 THREE MONTHS ENDED
September 30,
  NINE MONTHS ENDED
September 30,
  THREE MONTHS ENDED
MARCH 31,
 
 2017  2016  2017  2016  2019  2018 
 (IN THOUSANDS, EXCEPT PER SHARE DATA)  (IN THOUSANDS,
EXCEPT PER
SHARE DATA)
 
         
Revenue:        
Research and development revenue $  $1,223  $  $3,522  $1,345  $4,138 
                        
Costs and expenses:                        
Research and development  4,570   5,265   14,747   13,800   7,448   5,812 
General and administrative  1,762   1,824   5,702   5,755   4,300   2,351 
Total costs and expenses  6,332   7,089   20,449   19,555   11,748   8,163 
                        
Loss from operations  (6,332)  (5,866)  (20,449)  (16,033)  (10,403)  (4,025)
                        
Interest income  66   49   125   135   566   159 
Interest expense  (400)     (1,119)     (430)  (396)
                
Other expense     (2,270)
Net loss  (6,666)  (5,817)  (21,443)  (15,898)  (10,267)  (6,532)
                        
Unrealized gain (loss) on marketable securities  6   (10)  (3)  19   117   (25)
Comprehensive loss $(6,660) $(5,827) $(21,446) $(15,879) $(10,150) $(6,557)
                        
Basic and diluted net loss per share:                        
Net loss per share $(0.09) $(0.08) $(0.30) $(0.23) $(0.09) $(0.07)
                        
Weighted average basic and diluted common shares outstanding  71,541   71,083   71,282   69,247   109,020   87,112 

 

The accompanying notes are an integral part of these condensed interim unaudited financial statements.

 

 4 

 

 

ARQULE, INC.

 

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY(Unaudited)

(IN THOUSANDS, EXCEPT SHARE DATA)

  PREFERRED STOCK  COMMON STOCK   ADDITIONAL  ACCUMULATED
OTHER
     TOTAL
STOCK-
 
  SHARES  AMOUNT  SHARES  PAR
VALUE
  PAID-IN
CAPITAL
  COMPREHENSIVE
INCOME/(LOSS)
  ACCUMULATED
DEFICIT
  HOLDERS’
EQUITY
 
Balance at December 31, 2018    $    —   109,003,637  $1,090  $625,993  $(95) $(548,020) $78,968 
Stock option exercises and issuance of common stock        92,122   1   143         144 
Stock based compensation expense              2,124         2,124 
Change in unrealized loss on marketable securities                 117      117 
Net loss                          (10,267)  (10,267)
Balance at March 31, 2019        109,095,759  $1,091  $628,260  $22  $(558,287) $71,086 
                            
  PREFERRED STOCK  COMMON STOCK   ADDITIONAL  ACCUMULATED
OTHER
     TOTAL
STOCK-
 
  SHARES  AMOUNT  SHARES  PAR
VALUE
  PAID-IN
CAPITAL
  COMPREHENSIVE
INCOME/(LOSS)
  ACCUMULATED
DEFICIT
  HOLDERS’
EQUITY
 
Balance at December 31, 2017  8,370  $8,843   87,110,202  $871  $547,364  $(16) $(534,038) $14,181 
Stock option exercises and issuance of common stock        15,125      25         25 
Stock based compensation expense              423         423 
Warrants issued upon debt
extension
              120         120 
Change in unrealized loss on marketable securities                 (25)     (25)
Increase to opening accumulated deficit upon adoption of new accounting standard                    1,500   1,500 
Net loss                          (6,532)  (6,532)
Balance at March 31, 2018  8,370  $8,843   87,125,327  $871  $547,932  $(41) $(539,070) $9,692 

 The accompanying notes are an integral part of these condensed interim unaudited financial statements.

5

ARQULE, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

 

 NINE MONTHS ENDED
SEPTEMBER 30,
  THREE MONTHS ENDED
MARCH 31,
 
 2017  2016  2019  2018 
 (IN THOUSANDS)  (IN THOUSANDS) 
Cash flows from operating activities:                
Net loss $(21,443) $(15,898) $(10,267) $(6,532)
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization  52   77   11   13 
Amortization of premium (discount) on marketable securities  (26)  42   267   56 
Amortization of debt discount  240      80   78 
Change in fair value of warrant liability     2,270 
Non-cash stock compensation  1,142   1,444   2,124   423 
Changes in operating assets and liabilities:                
Prepaid expenses and other assets  565   299 
Contract receivables  2,640    
Prepaid expenses and others, net  (496)  (1,366)
Accounts payable and accrued expenses  (1,045)  1,062   (1,407)  10 
Deferred revenue     (3,438)
Net cash used in operating activities  (20,515)  (16,412)  (7,048)  (5,048)
Cash flows from investing activities:                
Purchases of marketable securities  (18,460)  (28,445)  (18,623)  (13,832)
Proceeds from sale or maturity of marketable securities  18,446   30,550   24,396   9,211 
Additions to property and equipment     (15)
Purchases of property and equipment  (281)   
Net cash provided by (used in) investing activities  (14)  2,090   5,492   (4,621)
Cash flows from financing activities:                
Proceeds from notes payable and warrants, net  14,624    
Proceeds from stock offering, net  2,328   15,174 
Proceeds from employee stock option exercises and employee
stock purchase plan purchases
  17   163 
Net cash provided by financing activities  16,969   15,337 
Net increase (decrease) in cash and cash equivalents  (3,560)  1,015 
Payments for notes payable amendment costs     (48)
Proceeds from stock option exercises and employee stock plan purchases  144   25 
Net cash provided by (used in) financing activities  144   (23)
Net decrease in cash and cash equivalents  (1,412)  (9,692)
Cash and cash equivalents, beginning of period  15,267   13,983   19,236   20,229 
Cash and cash equivalents, end of period $11,707  $14,998  $17,824  $10,537 

 

The accompanying notes are an integral part of these condensed interim unaudited financial statements.

 

  56 

 

 

ARQULE, INC.

 

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION 

 

We are a biopharmaceutical company engaged in the research and development of innovative therapeutics to treat cancers and rare diseases. Our mission is to discover, develop and commercialize novel small molecule drugs in areas of high unmet need that will dramatically extend and improve the lives of our patients. These drugsproduct candidates target biological pathways implicated in a wide range of cancers and certain non-oncology indications. Our discovery and development efforts are guided, when possible, by an understanding of the role of biomarkers, which are indicators of a particular biological condition or process and may predict the clinical benefit of our compounds in defined patient populations. Our clinical-stage pipeline consists of five drugfour product candidates, all of which are in targeted patient populations, making ArQule a leader among companies our size in precision medicine.

 

ArQule has a long history of kinase drug discovery and development, having discovered and introduced ten kinase inhibitors into clinical trials. Our drug discovery efforts have been informed by our historical expertise in chemistry, our work in rational drug design and by our insight into kinase binding and regulation. We have applied this knowledge to produce significant chemical matter for a number of kinase targets and to build an extensive library of proprietary compounds with the potential to target multiple kinases in oncology and other therapeutic areas, such as rare diseases. We expect tomay bring further preclinical programs forward and to interrogate our library against new targets beyond kinases either directly or with collaborators.

 

Our proprietary pipeline of orally bioavailable product candidates is directed toward molecular targets and biological processes with demonstrated roles in the development of both human cancers and rare, non-oncology diseases. All of these programs are being developed in targeted, biomarker-defined patient populations. By seeking out subgroups of patients that are most likely to respond to our drugs,product candidates, we intendseek to identify small, often orphan, indications that allow for focused and efficient development. At the same time, in addition to pursuing these potentially fast-to-market strategies, we also pursue development in other indications that could allow us to expand the utility of the drugsproduct candidates if approved. TheOur clinical pipeline includes the following wholly-owned compounds:product candidates:

ARQ 531 is a potent and reversible dual inhibitor of both wild type and C481S-mutant Bruton’s tyrosine kinase (BTK) that is in Phase 1 clinical development for B-cell malignancies refractory to other therapeutic options;

Miransertib (ARQ 092) is a potent and selective inhibitor of protein kinase B (AKT), a serine/threonine kinase. We expect to commence a registrational clinical trial of miransertib for the treatment of Proteus syndrome and PIK3CA-Related Overgrowth Syndromes (PROS) in the first half of 2019. Miransertib is also in Phase 1b clinical development in oncology in combination with the hormonal therapy, anastrozole;

ARQ 751 is a next-generation, highly potent and selective inhibitor of AKT that is in Phase 1 clinical development for solid tumors harboring AKT, phosphoinositide 3-kinase (PI3K) or phosphatase and tensin homolog (PTEN) loss mutations; and

 

Derazantinib (ARQ 087), is a multi-kinase inhibitor designed to preferentially inhibit the FGFRfibroblast growth factor receptor (FGFR) family of kinases that is in a registrational clinical trial in intrahepatic cholangiocarcinoma (iCCA) in patients with FGFR2 fusions;

Miransertib (ARQ 092), a selective inhibitor of the AKT serine/threonine kinase,fusions. Derazantinib was exclusively licensed to Basilea Pharmaceutica Limited (Basilea) in Phase1/2 in rare Overgrowth Disease and in Phase 1 for multiple oncology indications andApril 2018 in the rare disease, Proteus syndrome, in partnership with the National Institutes of Health (NIH);

ARQ 751, a next-generation inhibitor of AKT, in Phase 1 for solid tumors harboring the AKT1 or PI3K mutations;

ARQ 531, an investigational, orally bioavailable, potent and reversible inhibitor of both wild type and C481S-mutant BTK, in Phase 1 for B-cell malignancies refractory to other therapeutic options; and

ARQ 761, a ß-lapachone analog being evaluated as a promoter of NQO1-mediated programmed cancer cell death, in Phase 1/2 in multiple oncology indications in partnership with The University of Texas Southwest Medical Center.

Tivantinib (ARQ 197), an orally administered, small molecule inhibitor of the c-Met receptor tyrosine kinase (“MET”) and its biological pathway is no longer being developed. We licensed commercial rights to tivantinib for human cancer indications to Daiichi Sankyo Co., Ltd. (“Daiichi Sankyo”) in the U.S., Europe, South AmericaUnited States, European Union, Japan and the rest of the world, excluding Japanthe People’s Republic of China, Hong Kong, Macau, and certain other Asian countries,Taiwan (collectively, Greater China) where we havederazantinib was exclusively licensed commercial rights to Kyowa Hakko Kirin Co.Sinovant Sciences Ltd., a subsidiary of Roivant Sciences Ltd. (“Kyowa Hakko Kirin”).

Our METIV-HCC trial was a pivotal Phase 3 randomized, double-blind, controlled study of tivantinib as single-agent therapy(Sinovant) in previously treated patients with MET diagnostic-high, inoperable HCC conducted by Daiichi Sankyo and us. The primary endpoint was overall survival (OS) in the intent-to-treat (ITT) population, and the secondary endpoint was progression-free survival (PFS) in the same population. On February 17, 2017, we and Daiichi Sankyo announced that the METIV-HCC trial did not meet its primary endpoint of improving OS.

 6
2018.

Our JET-HCC trial was a second pivotal Phase 3 randomized, double-blind, controlled study of tivantinib as single-agent therapy in previously treated patients with MET diagnostic-high, inoperable HCC conducted by Kyowa Hakko Kirin. The primary endpoint was PFS. On March 27, 2017, we reported that Kyowa Hakko Kirin, announced top-line results of the JET-HCC Phase 3 trial of tivantinib in Japan and that the trial did not meet its primary endpoint of improving PFS.

 

Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees, facility and facility-related costs for our offices and laboratories, fees paid in connection with preclinical and clinical studies, laboratory supplies and materials, and professional fees. The sources of our cash flow from operating activities have historically consisted primarily of upfront and other payments received from our collaborators for services performed or upfront payments for future services.in connection with license agreements. In the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, our net use of cash was primarily driven by payments for operating expenses which resulted in net cash outflows of $20.5$7.0 million and $16.4$5.0 million, respectively.

7

 

Our cash requirements may vary materially from those now planned depending uponon the results of our drug discovery and development strategies, our ability to enter into additional corporate collaborations and the terms of such collaborations, results of research and development, unanticipated required capital expenditures, competitive and technological advances, acquisitions and other factors. We cannot guarantee that we will be able to develop any of our drugproduct candidates into a commercial product. On

In January 6, 2017, we entered into a loan and security agreement with Oxford Finance, LLC (the “Loan Agreement”) with a principal balance of $15 million (see Note 8). The terms of the Loan Agreement, which was amended in February 2018, require payments of interest on a monthly basis through September 2018August 2019 and payments of principal and interest and principal from October 2018September 2019 to August 2021. On September 11, 2017, we sold 2.0 million shares of common stock through an at-the-market (ATM) offering and raised proceeds of $2.3 million. In October 2017, we entered into definitive stock purchase agreements with certain institutional investors. In conjunction with this stock offering we issued 13,938,651 shares of our common stock and warrants for 3,123,674 shares of our common stock for aggregate net proceeds of $15.5 million. Each warrant is exercisable for $1.75 per share and expires in four years from the2022. The maturity date of issuance. the loan is August 1, 2022.

In November 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering the Companywe raised grossnet proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants covering 2,260to purchase 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred together with the associated Warrant is priced at $1,135 and will automatically convertconverted into 1,000 shares of common stock and each associated Warrant converted into 1,000 common stock warrants upon the adoptioneffectiveness on May 8, 2018 of an amendment to the Company’sour restated certificate of incorporation to increase the number of authorized shares of common stock thereunder. ArQule estimates the net proceeds from this offering will be approximately $9.3 million. The Warrants have a pre-conversionpost-conversion exercise price of $1,750 per share of Series A Preferred (post-conversion price of $1.75 per share, of common stock), are exercisable immediately and expire approximately four yearsin May 2022.

In February 2018, we entered into a License Agreement with Sinovant pursuant to which ArQule granted Sinovant an exclusive license to develop and commercialize derazantinib in Greater China. The agreement provided for an upfront payment to ArQule of $3 million and a $2.5 million development milestone that was paid in the first quarter of 2019. We are also eligible for up to an additional $82 million in regulatory and sales milestones. Upon commercialization, we are entitled to receive double digit royalties in the low teens from Sinovant on net sales of derazantinib in Greater China. Sinovant will be responsible for all costs and expenses of development, manufacture and commercialization in Greater China. In the three months ended March 31, 2019, we recognized revenue of $1.1 million for providing certain research and development services to Sinovant. During the three months ended March 31, 2018, we recognized revenue of $3.0 million for completing our performance obligation under this licensing agreement.

In April 2018, we entered into a License Agreement with Basilea pursuant to which ArQule granted Basilea an exclusive license to develop and commercialize derazantinib in the United States, European Union, Japan and the rest of the world, excluding Greater China. Under the terms of the agreement, we received an upfront payment of $10 million and are eligible for up to $326 million in regulatory and commercial milestones. Upon commercialization, we are entitled to receive staggered royalties on future net sales of derazantinib ranging from the date of the adoption of the amendmenthigh-single digits to the Company’s restated certificatemid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will be responsible for all costs and expenses of incorporation. development, manufacture and commercialization in its territory. Under certain circumstances, we may have the opportunity to promote derazantinib in the United States directly. In the three months ended March 31, 2019, we recognized revenue of $0.2 million for providing certain research and development services to Basilea, recognized as revenue on a cost-to-cost method.

In July 2018, we sold 12,650,000 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $64.6 million after commissions and other offering expenses.

We anticipate that our cash, cash equivalents and marketable securities on hand at September 30, 2017,March 31, 2019 and the additional funds raised during the October 2017 common stock offering and the November 2017 preferred stock offeringfinancial support from our licensing agreements will be sufficient to finance our operations for at least 12 months from the issuance date of these financial statements. We expect that we will need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and market conditions, and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital when needed, or on terms favorable to us. If necessary funds are not available, we may have to delay, reduce the scope of, or eliminate some of our development programs, potentially delaying the time to market for any of our product candidates.

 

We have prepared the accompanying condensed financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. These condensed financial statements should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31, 2016 included in our annual report on Form 10-K filed with the SEC on March 9, 2017.

In our opinion, the accompanying unaudited condensed financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2017, and its results of operations and cash flows for the three and nine months ended September 30, 2017 and September 30, 2016. The results of operations for such interim periods are not necessarily indicative of the results to be achieved for the full year. The condensed balance sheet at December 31, 2016, was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements

2. COLLABORATIONS AND ALLIANCES

 

Daiichi Sankyo TivantinibBasilea Licensing Agreement

As previously reported, on December 18, 2008,In April 2018, we entered into a License Agreement with Basilea pursuant to which ArQule granted Basilea an exclusive license co-developmentto develop and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical trials and the commercialization of tivantinib in human cancer indicationscommercialize derazantinib in the U.S., Europe, South AmericaUnited States, European Union, Japan and the rest of the world, excluding Japan, China (including Hong Kong), South Korea and Taiwan, where Kyowa Hakko Kirin had exclusive rights for development and commercialization.

Greater China. Under the terms of our tivantinib collaboration agreement with Daiichi Sankyo we shared development costs equally with our share of Phase 3 costs funded solely from milestones and royalties. In each quarter the tivantinib collaboration costs we incurred were compared with those of Daiichi Sankyo. If our costs for the quarter exceeded Daiichi Sankyo’s, we recognized revenue on the amounts due to us under the contingency adjusted performance model. Revenue was calculated on a pro-rata basis using the time elapsed from inception of the agreement, overwe received an upfront payment of $10 million and are eligible for up to $326 million in regulatory and commercial milestones. Upon commercialization, we are entitled to receive staggered royalties on future net sales of derazantinib ranging from the estimated durationhigh-single digits to the mid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances, we may have the development period underopportunity to promote derazantinib in the agreement. If our costs for the quarter were less than those of Daiichi Sankyo, we reported the amount due to Daiichi Sankyo as contra-revenue in that quarter. To the extent that our share of Phase 3 collaboration costs exceeded the amount of milestones and royalties received, that excess was netted against milestones and royalties earned and was not reported as contra-revenue.United States directly.

 

  78 

 

 

Our cumulative share ofRevenue in the Daiichi Sankyo Phase 3 costs through September 30, 2017three months ended March 31, 2019 totaled $110.3 million. Our cumulative share of Phase 3 collaboration costs has exceeded the amount of milestones received through September  30, 2017 by $70.3$0.2 million which are not requiredfor research and development services to be repaid upon expiration our agreement.Basilea, recognized as revenue on a cost-to-cost method.

 

Revenue for this agreement was recognized using the contingency-adjusted performance model with an estimated development period through December 31, 2016. On February 17, 2017, we and Daiichi Sankyo announced that the METIV-HCC trial did not meet its primary end point of improving OS. Our joint development of tivantinib has subsequently been discontinued. As a result, we do not anticipate receiving further royalties or milestones in connection with the agreement.Sinovant Licensing Agreement

 

In February 2018, we entered into a License Agreement with Sinovant pursuant to which ArQule granted Sinovant an exclusive license to develop and commercialize derazantinib in Greater China. The agreement provided for an upfront payment to ArQule of $3 million and a $2.5 million development milestone that was paid in the first quarter of 2019. We are also eligible for up to an additional $82 million in regulatory and sales milestones. Upon commercialization, we are entitled to receive double digit royalties in the low teens from Sinovant on net sales of derazantinib in Greater China. Sinovant will be responsible for all costs and expenses of development, manufacture and commercialization in Greater China. For the three months ended March 31, 2019, we recognized revenue of $1.1 million for certain research and nine months ended September  30, 2017, no revenue was recognized..development services that we provided. For the three months and nine months ended September 30, 2016, $0.8March 31, 2018, we recognized revenue of $3.0 million and $2.1 million, respectively, were recognized as revenue.related to completing our performance obligation under this licensing agreement.

 

Kyowa Hakko KirinOther Licensing AgreementAgreements

As previously reported, on April 27, 2007,In October 2017, we entered into an exclusivea non-exclusive license agreement with Kyowa Hakko Kirinfor certain library compounds. The licensed compounds were delivered and were subject to developquality and commercialize tivantinib in Japan and parts of Asia. Revenue for this agreement was recognized using the contingency-adjusted performance model with an estimated development period through December 31, 2016. On March 27, 2017, we reported that Kyowa Hakko Kirin, announced top-line results of the JET-HCC Phase 3 trial of tivantinib in Japan, and that the trial did not meet its primary endpoint of improving PFS. Our joint development of tivantinib has subsequently been discontinued. As a result, we do not anticipate receiving further royalties or milestones in connection with the agreement.

acceptance testing. For the three months ended March 30, 2019 and nine months ended September 30, 2017, noMarch 31, 2018, we recorded revenue was recognized. For the three monthsof zero and nine months ended September 30, 2016, $0.5 million and $1.4$1.1 million, respectively, were recognized as revenue.based upon the achievement of the quality and acceptance testing for the period under this completed agreement.

 

3. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

 

We generally classify our marketable securities as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. Since we generally intend to convert them into cash as necessary to meet our liquidity requirements our marketable securities are classified as cash equivalents if the original maturity, from the date of purchase, is ninety days or less and as short-term investments if the original maturity, from the date of purchase, is in excess of ninety days but less than one year. Our marketable securities are classified as long-term investments if the maturity date is in excess of one year of the balance sheet date.

 

We report available-for-sale investments at fair value as of each balance sheet date and include any unrealized gains and, to the extent deemed temporary, unrealized losses in stockholders’ equity. Realized gains and losses are determined using the specific identification method and are included in other income (expense) in the statement of operations and comprehensive loss.

 

We conduct quarterly reviews to determine the fair value of our investment portfolio and to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. In the event that the cost basis of a security exceeds its fair value, we evaluate, among other factors, the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of and business outlook for the issuer, including industry and sector performance, and operational and financing cash flow factors, overall market conditions and trends, our intent to sell the investment and if it is more likely than not that we would be required to sell the investment before its anticipated recovery. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded in accumulated other comprehensive income (loss).

 

For available-for-sale debt securities with unrealized losses, we perform an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell aan available-for-sale debt security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected in the statement of operations and comprehensive loss as an impairment loss.

 

Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.

 

We invest our available cash primarily in commercial paper, money market funds, and U.S. Treasury bill funds that have investment grade ratings.

9

The following is a summary of the fair value of available-for-sale marketable securities we held at September 30, 2017March 31, 2019 and December 31, 2016:2018 (in thousands):

 

 8
March 31, 2019 Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 
Security type                
Corporate debt securities-short term $74,377  $25  $(3) $74,399 
Total available-for-sale marketable securities $74,377  $25  $(3) $74,399 

 

December 31, 2018 Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 
Security type                
Corporate debt securities-short term $80,417  $2  $(97) $80,322 
Total available-for-sale marketable securities $80,417  $2  $(97) $80,322 

 

September 30, 2017 Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 
Security type                
Corporate debt securities-short term $15,897  $1  $(2) $15,896 
Total available-for-sale marketable securities $15.897  $1  $(2) $15,896 

December 31, 2016 Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 
Security type                
Corporate debt securities-short term $15,857  $7  $(5) $15,859 
Total available-for-sale marketable securities $15,857  $7  $(5) $15,859 

OurNone of our available-for-sale marketable securities in a loss position at September 30, 2017, and December 31, 2016 were in a continuous unrealized loss position for lessmore than 12 months.months at March 31, 2019 or December 31, 2018.

 

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. We value our level 2 investments using quoted prices for identical assets in the markets where they are traded, although such trades may not occur daily. These quoted prices are based on observable inputs, primarily interest rates. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. There were no transfers in or out of Level 1 or Level 2 measurements for the periods presented:presented (in thousands):

 

 September 30, 
2017
  Quoted
Prices in
Active
Markets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  March 31,
2019
  Quoted
Prices in
Active
Markets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Cash equivalents $8,461  $8,461  $  $  $15,051  $15,051  $  $ 
Corporate debt securities-short term  15,896      15,896      74,399      74,399    
Total $24,357  $8,461  $15,896  $  $89,450  $15,051  $74,399  $ 

 

 December 31,
2016
  Quoted
Prices in
Active
Markets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  December 31,
2018
  

 

Quoted
Prices in
Active
Markets
(Level 1)

  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
Cash equivalents $12,923  $12,923  $  $  $14,444  $14,444  $  $ 
Corporate debt securities-short term  15,859      15,859      80,322      80,322    
Total $28,782  $12,923  $15,859  $  $94,766  $14,444  $80,322  $ 

10

 

4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses include the following at September 30, 2017March 31, 2019 and December 31, 2016:2018 (in thousands):

 

 September 30,
2017
  December 31,
2016
  March 31,
2019
  December 31,
2018
 
Accounts payable $605  $710  $981  $1,329 
Accrued payroll  1,434   1,856   1,221   1,971 
Accrued outsourced pre-clinical and clinical fees  4,762   5,461 
Accrued outsourced preclinical and clinical fees  8,269   8,497 
Accrued professional fees  564   363   773   666 
Other accrued expenses  300   310   297   485 
 $7,665  $8,700  $11,541  $12,948 

 

 9

5. NET LOSS PER SHARE

 

Net loss per share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per share amounts are equivalent for the periods presented as the inclusion of potential common shares in the number of shares used for the diluted computation would be anti-dilutive to loss per share. Potential common shares, for the three and nine months ended September 30, 2017,March 31, 2019, include 10,746,44912,839,695 shares that would be issued upon the exercise of outstanding employee and Board of Director stock options, and 354,33093,168 shares that would be issued upon the exercise of the warrants from our February 2018 amendment to our loan agreement, 3,123,674 shares that would be issued in conjunction withupon the exercise of the warrants from our January 6,October 2017 loan agreement.common stock offering and 2,259,000 common shares that would be issued upon the exercise of the warrants from our November 2017 preferred stock offering. Potential common shares, for the three and nine months ended September 30, 2016,March 31, 2018, include 9,187,69810,921,388 shares that would be issued upon the exercise of outstanding employee and Board of Director stock options.options, 354,330 shares that would be issued upon the exercise of the warrants from our January 2017 loan agreement, 93,168 shares that would be issued upon the exercise of the warrants from our February 2018 amendment to our loan agreement, 3,123,674 shares that would be issued upon the exercise of the warrants from our October 2017 common stock offering, 8,370,000 common shares that would have been issued upon the conversion of the shares from our November 2017 preferred stock offering and 2,259,000 common shares that would be issued upon the exercise of the warrants from our November 2017 preferred stock offering. The preferred shares and warrants from our November 2017 preferred stock offering were converted to common stock and common stock warrants in May 2018.

 

6. STOCK-BASED COMPENSATION AND STOCK PLANS

 

Our stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite service period (generally the vesting period of the equity grant). We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of our stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the expected annual dividend yield. We believe that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted in the ninethree months ended September 30, 2017March 31, 2019 and 2016.2018.

 

The following table presents stock-based compensation expense included in our Condensed Statementscondensed statement of Operationsoperations and Comprehensive Loss:comprehensive loss (in thousands):

 

 Three Months Ended
September 30,
  Nine Months Ended
September 30,
  Three Months Ended
March 31,
 
 2017  2016  2017  2016  2019  2018 
Research and development $80  $107  $284  $407  $302  $106 
General and administrative  233   322   858   1,037   1,822   317 
Total stock-based compensation expense $313  $429  $1,142  $1,444  $2,124  $423 

 

In the three and nine months ended September 30, 2017March 31, 2019, we recorded stock-based compensation expense of $1.0 million related to the modification of awards to our former Chief Financial Officer in connection with his retirement in March 2019. In the three months ended March 31, 2019 and 2016,2018, no stock-based compensation expense was capitalized and there were no recognized tax benefits associated with the stock-based compensation expense.

 

11

Option activity under our stock plans for the ninethree months ended September 30, 2017March 31, 2019 was as follows:

 

Stock Options Number of
Shares
  Weighted
Average
Exercise Price
 
Outstanding as of December 31, 2016  8,715,048  $3.71 
Granted  2,542,500   1.19 
Exercised      
Cancelled  (511,099)  4.93 
Outstanding as of September 30, 2017  10,746,449  $3.05 
         
Exercisable as of September 30, 2017  6,467,316  $4.15 

In April 2017, the Company amended its chief executive officer’s (the “CEO’s”) employment agreement to grant the CEO a maximum of 600,000 performance-based stock options that vest upon the achievement of certain performance and market based targets. In April 2017, the Company amended its chief operating officer’s (the “COO’s”) employment agreement to grant the COO 300,000 performance-based stock units that vest upon the achievement of certain performance and market based targets. In April 2017, the Company amended its chief medical officer’s (the “CMO’s”) employment agreement to grant the CMO 260,000 performance-based stock options that vest upon the achievement of certain performance based targets. In April 2017, certain other employees were granted a total of 270,000 performance-based stock options that vest upon the achievement of certain performance based targets. Through September 30, 2017 no expense has been recorded for any performance-based stock options granted to the CEO, COO, CMO, or to any other employees.

Stock Options Number of
Shares
  Weighted
Average
Exercise Price
 
Outstanding as of December 31, 2018  10,748,157  $2.90 
Granted  2,277,010   3.68 
Exercised  (92,122)  1.56 
Cancelled  (93,350)  1.47 
Outstanding as of March 31, 2019  12,839,695  $3.06 
         
Exercisable as of March 31, 2019  7,567,168  $3.25 

 

The aggregate intrinsic value of options outstanding at September 30, 2017March 31, 2019 was $229$26,673 including $0$15,856 related to exercisable options. The weighted average fair value of options granted in the ninethree months ended September 30, 2017March 31, 2019 and 20162018 was $0.72$2.16 and $1.10$1.07 per share, respectively. NoThe intrinsic value of options were exercised in the ninethree months ended September 30, 2017.March 31, 2019 was $293.

 

 10

Shares vested, expected to vest and exercisable at September 30, 2017 are as follows:

  Shares  Weighted-
Average
Exercise Price
  Weighted-
Average
Remaining
Contractual
Term (in years)
  Aggregate
Intrinsic
Value
 
Vested and unvested expected to vest at September 30, 2017  10,539,275  $3.05   5.9  $221 
Exercisable at September 30, 2017  6,467,316  $4.15   4.1  $0 
  Shares  Weighted-
Average
Exercise Price
  Weighted-
Average
Remaining
Contractual
Term (in years)
  Aggregate
Intrinsic
Value
 
Vested and unvested expected to vest at March 31, 2019  12,687,305  $3.06   6.3  $26,402 
Exercisable at March 31, 2019  7,567,168  $3.25   4.3  $15,856 

 

The total compensation cost not yet recognized as of September 30, 2017March 31, 2019 related to non-vested option awards was $1.8million,$7.3 million, which will be recognized over a weighted-average period of 2.53.0 years. During the three months ended September 30, 2017, 342,149March 31, 2019, 13,350 shares expired and 168,95080,000 shares were forfeited. The weighted average remaining contractual life for options exercisable at September 30, 2017March 31, 2019 was 4.14.3 years.

 

7. COMMON STOCK OFFERINGS

 

On February 26, 2016,In July 2018, we entered into definitive stock purchase agreements with certain institutional and accredited investors. In conjunction with this stock offering we issued 8,027,900sold 12,650,000 shares of our common stock and non-transferable options for 3,567,956 shares of our common stockat $5.50 per share for aggregate net proceeds of $15.2 million. Each option was exercisable for $2.50 per shareapproximately $64.6 million after commissions and they all expired on March 22, 2017.

On September 11, 2017, we sold 2.0 million shares of common stock through an at-the-market (“ATM”)other offering and raised proceeds of approximately $2.3 million.

In October 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering we issued 13,938,651 shares of our common stock and warrants for 3,123,674 shares of our common stock for aggregate net proceeds of $15.5 million. Each warrant is exercisable for $1.75 per share and expires in four years from the date of issuance.

In November 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering the Company raised gross proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants covering 2,260 shares of Series A Preferred (Warrants). Each share of Series A Preferred together with the associated Warrant is priced at $1,135 and will automatically convert into 1,000 shares of common stock upon the adoption of an amendment to the Company’s restated certificate of incorporation to increase the number of authorized shares of common stock thereunder. ArQule estimates the net proceeds from this offering will be approximately $9.3 million. The Warrants have a pre-conversion exercise price of $1,750 per share of Series A Preferred (post-conversion price of $1.75 per share of common stock), are exercisable immediately and expire approximately four years from the date of the adoption of the amendment to the Company’s restated certificate of incorporation.

expenses. 

 

8. LOAN AGREEMENT

 

OnIn January 6, 2017, we entered into a loan and security agreement (the “Loan Agreement”) with Oxford Finance LLC, as collateral agent and a lender (the “Lender”), and any additional lenders that may become parties thereto, entered into a loan and security agreement with us (the “Loan Agreement”).thereto.

 

Pursuant to the terms of the Loan Agreement, the Lender issued us a loan in the principal amount of $15.0 million. The loan will bearbears interest at the rate equal to (a) the greater of (i) the 30 day U.S. LIBOR rate reported in the Wall Street Journal on the date occurring on the last business day of the month that immediately precedes the month in which the interest will accrue or (ii) 0.65% (b) plus 6.85%. The applicable interest rate on the loan at September 30, 2017March 31, 2019 was 8.08%9.34%. We will haveThe Loan Agreement required interest-only payments for 18 months, followed by an amortization period of 36 months. The original maturity date of the loan iswas August 1, 2021.2021 and in February 2018 we signed an amendment with the Lender which extended the maturity date by one year to August 1, 2022 with principal payments commencing on September 1, 2019.

 

The expected remaining repayment of the $15 million loan principal at March 31, 2019 is as follows:follows (in thousands):

 

2018 $1,667 
2019 5,000  $1,667 
2020 5,000   5,000 
2021  3,333   5,000 
2022  3,333 
 $15,000  $15,000 

 

Upon prepayment of the earlier of prepaymentloan or on the maturity date, we will pay to the Lender a final payment of 6% of the full principal amount of the loan. We may elect to prepay all amounts owed prior to the maturity date, provided that a prepayment fee also is paid equal to (i) 3%1% of the outstanding principal balance if prepayment occurs in months 1-12 following the closing, (ii) 2.0% of the outstanding principal balance in months 13-24 following the closing, and (iii) 1% thereafter.balance.

 

  1112 

 

We paid the Lender an upfront facility fee of  $75,000.

 

Pursuant to the terms of the Loan Agreement, we are bound by certain affirmative covenants setting forth actions that are required during the term of the Loan Agreement, including, without limitation, certain information delivery requirements, obligations to maintain certain insurance, and certain notice requirements. Additionally, we are bound by certain negative covenants setting forth actions that are not permitted to be taken during the term of the Loan Agreement without consent, including, without limitation, incurring certain additional indebtedness, entering into certain mergers, acquisitions or other business combination transactions, or incurring any non-permitted lien or other encumbrance on our assets. We arewere in compliance with the loan covenants at September 30, 2017.March 31, 2019.

 

Upon the occurrence of an event of default under the Loan Agreement (subject to cure periods for certain events of default), all amounts owed by us thereunder will begin to bear interest at a rate that is 5% higher than the rate that is otherwise applicable and may be declared immediately due and payable by the Lender. Events of default under the Loan Agreement include, among other things, the following: the occurrence of certain bankruptcy events; the failure to make payments under the Loan Agreement when due; the occurrence of a material adverse change in our business, operations or financial condition ;condition; the rendering of certain types of fines or judgments against us; any breach by us of any covenant (subject to cure for certain covenants only) made in the Loan Agreement; and the failure of any representation or warranty made by us in connection with the Loan Agreement to be correct in all material respects when made.

 

We have granted the Lender, a security interest in substantially all of our personal property, rights and assets, other than intellectual property, to secure the payment of all amounts owed to the Lender under the Loan Agreement. We have also agreed not to encumber any of our intellectual property without required lenders’the Lender’s prior written consent.

 

In February 2018, the Loan Agreement was amended requiring payments of interest on a monthly basis through August 2019 and payments of interest and principal from September 2019 to August 2022. In connection with entering into the Loan Agreement,amendment we issued to the Lender warrants to purchase an aggregate of 354,33093,168 shares of our common stock (the “Lender Warrants”).stock. The warrants are exercisable immediately, have a per-share exercise price of $1.27$1.61 and have a term of ten years. The amendment was determined to be a modification of debt in accordance with ASC 470 Debt. We have recorded the relative fair value of the additional warrants as a discount to the carrying value of the notes payable with a corresponding increase to additional paid in capital.

 

9. PREFERRED STOCK AND WARRANT LIABILITY

Our amended Certificate of Incorporation authorizes the issuance of up to 1 million shares of $0.01 par value preferred stock.

In November 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering we raised net proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants covering 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred converted into 1,000 shares of common stock and each associated Warrant converted into 1,000 common stock warrants upon the effectiveness on May 8, 2018, of an amendment to our restated certificate of incorporation to increase the number of authorized shares of common stock thereunder.

The terms of the Series A Preferred for which the warrants were exercisable required that the fair value allocated to the warrants at the date of issuance be recorded as a liability on our balance sheet. The warrant liability was marked to market value through the statement of operations and comprehensive loss as a non-cash gain or loss at each reporting period until the conversion of the Series A Preferred to common stock on May 8, 2018. Upon conversion, the warrant liability of $3,064 was extinguished with an offsetting amount included as additional paid-in capital in stockholders’ equity. Accordingly, at each of December 31, 2018 and March 31, 2019, the warrant liability was zero. In the three months ended March 31, 2018, we recognized a non-cash expense of $2.3 million recorded in other expense on the statement of operations and comprehensive loss related to a net increase in the fair value of the warrant liability.

10. RECENT ACCOUNTING PRONOUNCEMENTS

 

From time to time, new accounting pronouncements are issued byRecently Adopted Accounting Pronouncements

In February 2016 the Financial Accounting Standards Board (“FASB”) or otherissued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842). This standard setting bodiesestablished a right-of-use model that are adopted by usrequires all lessees to recognize right-of-use assets and liabilities on their balance sheet that arise from leases with terms longer than 12 months as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

In May 2017 the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.well as provide disclosures with respect to certain qualitative and quantitative information related to their leasing arrangements. This new standard provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. This new standard will bebecame effective for us on January 1, 2018, however early adoption is permitted. As of September 30, 2017, 2019 (“the adoption of this standard is not expected to have a material impact on our financial position or results of operations. Effective Date”).

 

13

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted this ASU in 2017 and it will not have a material impact on our financial position, results of operations or statement of cash flows.

 

In February 2016,The FASB has subsequently issued the FASB issuedfollowing amendments to ASU No. 2016-02, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The new standard will bewhich also became effective for us on January 1, 2019. We are currently evaluating2019, and which we collectively refer to as the potential impact that this standard may have on our financial position and results of operations. new leasing standards:

 

In March 2016, the FASB issued 

ASU No. 2016-08, Revenue from Contracts with Customer2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 606s, Principal versus Agent Considerations,842, which clarifiespermits an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired prior to adoption of Topic 842 and that were not previously accounted for as leases under the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers Topic 606, Identifying Performance Obligations and Licensing, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers Topic 606, Narrow-Scope Improvements and Practical Expedients, related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. In December 2016, the FASB issued prior standard, ASC 840, Leases.

ASU No. 2016-20, Technical Corrections and2018-10, Codification Improvements to Topic 606, Revenue from Contracts with Customers,842, Leases, which amends certain narrow aspects of the guidance issued in ASU 2014-09, “Revenue2016-02.

ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for a transition approach to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption as well as an additional practical expedient for lessors to not separate non-lease components from Contracts with Customers” (Topic 606). the associated lease component.

ASU 2014-09 superseded all existing revenue recognition requirements, including most industry-specific guidance. TheNo. 2018-20, Narrow-Scope Improvements for Lessors, which contains certain narrow scope improvements to the guidance issued in ASU 2016-02.

We adopted the new lease accounting standard on January 1, 2019, using a modified retrospective transition approach of applying the new standard requires a company to recognize revenue when it transfers goodsall leases existing as of, or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral ofentered into after, the Effective Date and with remaining terms of 12 months or more.Our assessment included the lease of our headquarters in Burlington, MA which delayed the effective datecommenced in May 2015 and expires in July 2020 and our laboratory space in Woburn, MA which commenced in March 2019 and expires in April 2024.

The adoption of the new standard fromon January 1, 20172019 resulted in the recording of a right-of-use asset and lease liability of $0.7 million related to January 1, 2018.the lease of ourheadquarters in Burlington, MA that existed on the Effective Date. The FASB also agreed to allow entities to choose to adoptlease liability is based on the standard aspresent value of the original effective date.remaining minimum lease payments, discounted using our secured incremental borrowing rate at the Effective Date. As permitted under ASC 842, we elected several practical expedients and therefore did not reassess at the Effective Date (1) whether any existing contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. We evaluated this ASUalso elected the practical expedient to not separate lease and determined that it willnon-lease components. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability. In addition, we implemented internal controls to enable the preparation of financial information on adoption. The adoption did not have a material impact on our condensed financial position or resultsstatements related to the existing lease of operations.our headquarters in Burlington, MA for the three months ended March 31, 2019. As a result, there was no cumulative-effect adjustment.

 

For contracts entered into on or after the Effective Date, at the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset or (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. Our leases are comprised of operating leases related to our headquarters in Burlington, MA and laboratory space in Woburn, MA.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.

The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate. For our operating leases, we use our secured incremental borrowing rate if the implicit lease rate cannot be determined.

Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

Lease expense for operating leases consists of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Certain leases contain rent escalation clauses and variable lease payments that require additional rental payments in later years of the term, including payments based on an index or inflation rate. Payments based on the change in an index or inflation rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, were not included in the initial lease liability and are recorded as a period expense when incurred. Our operating leases may include an option to renew the lease term for various renewal periods and/or to terminate the leases early. As an option to exercise the renewal or early termination of our operating leases were either non-existent or not reasonably certain as of the ASC 842 Effective Date for our headquarters in Burlington, MA and the lease commencement date our laboratory space in Woburn, MA, we have not included such options in our initial lease liability.

  1214 

 

As of March 31, 2019, we recognized right-of-use assets related to our headquarters in Burlington, MA and laboratory space in Woburn, MA of $1.0 million and the related net lease liabilities of $1.0 million, which represents the net present value of the remaining lease payments of approximately $1.2 million, discounted using the Company’s incremental borrowing rate of 9.34%. We have included the right-of-use assets and lease liabilities in the condensed balance sheet as of March 31, 2019.

 

10.The following table summarizes future minimum lease payments for our non-cancelable operating leases as of March 31, 2019 (in thousands):

Year Ending December 31,   
2019 (nine months ending December 31, 2019) $452 
2020  395 
2021  98 
2022  98 
2023  98 
Thereafter  26 
Total minimum lease payments $1,167 

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, ASC 840,Leases, the total commitment for our non-cancelable operating lease was $0.8 million as of December 31, 2018 (in thousands):

Year Ending December 31,   
2019 $523 
2020  296 
Thereafter   
Total minimum lease payments $819 

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”). The new standard removes certain disclosures, modifies certain disclosures and adds additional disclosures related to fair value measurement. The new standard will be effective beginning January 1, 2020 and early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2018-13 will have on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, (“ASU 2018-15”). The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The new standard will be effective beginning January 1, 2020 and early adoption is permitted. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact that the adoption of ASU 2018-15 will have on our consolidated financial statements.

11. INCOME TAXES

 

As of December 31, 2016,2018, we had federal NOL,net operating losses (“NOL”), state NOL, and research and development credit carryforwards of approximately $382,781, $202,137$422,045, $240,916 and $27,779$28,378 respectively, which expire at various dates through 2036. Approximately $15,080 of our federal NOL and $929 of our state NOL were generated from excess tax deductions from share-based awards.2037.

 

The Company adopted ASU No. 2016-09 in the first quarterAs of 2017. The recognition of the excess tax benefits from share-based payments mentioned above increased deferred tax assets and retained earnings accordingly. As the company doesn’t expect taxable income in the foreseeable future, we reserved the full amount at the time of the recognition and there was no impact on the net positions of deferred tax assets and retained earnings. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of our stock, the volume of share-based instruments settled or vested, and the value assigned to employee equity awards under U.S. GAAP and these fluctuations did not affect our net deferred tax position in the first nine months of 2017.

At September 30, 2017March 31, 2019, and December 31, 2016,2018 we had no unrecognized tax benefits. We do not expect that the total amount of unrecognized tax benefits will significantly increase in the next twelve months. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2017March 31, 2019, and December 31, 2016,2018, we had no accrued interest or penalties related to uncertain tax positions. Our U.S. federal tax returns for the tax years 20132015 through 20162018 and our state tax returns for the tax years 20132015 through 20162018 remain open to examination. Prior tax years remain open to the extent of net operating lossNOL and tax credit carryforwards.

 

Utilization of NOL and research and development credit carryforwards may be subject to a substantial annual limitation in the event of an ownership change that has occurred previously or could occur in the future pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. An ownership change may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income, and may, in turn, result in the expiration of a portion of those carryforwards before utilization. In general, an ownership change, as defined by Section 382, results from transactions that increase the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three yearthree-year period. We undertook a detailed study of our NOL and research and development credit carryforwards through January 31, 2017,2019, to determine whether such amounts are likely to be limited by Sections 382 or 383. As a result of this analysis, we currently do not believe any Sections 382 or 383 limitations will significantly impact our ability to offset income with available NOL and research and development credit carryforwards. However, future ownership changes under Section 382 may limit our ability to fully utilize these tax benefits.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our condensed financial statements and accompanying notes contained in this quarterly report on Form 10-Q and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.

We are a biopharmaceutical company engaged in the research and development of innovative therapeutics to treat cancers and rare diseases. Our mission is to discover, develop and commercialize novel small molecule drugs in areas of high unmet need that will dramatically extend and improve the lives of our patients. These drugsproduct candidates target biological pathways implicated in a wide range of cancers and certain non-oncology indications. Our discovery and development efforts are guided, when possible, by an understanding of the role of biomarkers, which are indicators of a particular biological condition or process and may predict the clinical benefit of our compounds in defined patient populations. Our clinical-stage pipeline consists of five drugfour product candidates, all of which are in targeted patient populations, making ArQule a leader among companies our size in precision medicine.

 

ArQule has a long history of kinase drug discovery and development, having discovered and introduced nineten kinase inhibitors into clinical trials. Our drug discovery efforts have been informed by our historical expertise in chemistry, our work in rational drug design and by our insight into kinase binding and regulation. We have applied this knowledge to produce significant chemical matter for a number of kinase targets and to build an extensive library of proprietary compounds with the potential to target multiple kinases in oncology and other therapeutic areas, such as rare diseases. We expect tomay bring further preclinical programs forward and to interrogate our library against new targets beyond kinases either directly or with collaborators.

 

Our proprietary pipeline of orally bioavailable product candidates is directed toward molecular targets and biological processes with demonstrated roles in the development of both human cancers and rare, non-oncology diseases. All of these programs are being developed in targeted, biomarker-defined patient populations. By seeking out subgroups of patients that are most likely to respond to our drugs,product candidates, we intendseek to identify small, often orphan, indications that allow for focused and efficient development. At the same time, in addition to pursuing these potentially fast-to-market strategies, we also pursue development in other indications that could allow us to expand the utility of the drugsproduct candidates if approved. TheOur clinical pipeline includes the following wholly-owned compounds:product candidates:

ARQ 531 is a potent and reversible dual inhibitor of both wild type and C481S-mutant Bruton’s tyrosine kinase (BTK) that is in Phase 1 clinical development for B-cell malignancies refractory to other therapeutic options

Miransertib (ARQ 092) is a potent and selective inhibitor of protein kinase B (AKT), a serine/threonine kinase. We expect to commence a registrational clinical trial of miransertib for the treatment of Proteus syndrome and PIK3CA-Related Overgrowth Syndromes (PROS) in the first half of 2019. Miransertib is also in Phase 1b clinical development in oncology in combination with the hormonal therapy, anastrozole, in endometrial cancer

ARQ 751 is a next-generation, highly potent and selective inhibitor of AKT that is in Phase 1 clinical development for solid tumors harboring AKT, phosphoinositide 3-kinase (PI3K) or phosphatase and tensin homolog (PTEN) loss mutations

 

Derazantinib (ARQ 087), is a multi-kinase inhibitor designed to preferentially inhibit the FGFRfibroblast growth factor receptor (FGFR) family of kinases that is in a registrational clinical trial in intrahepatic cholangiocarcinoma (iCCA) in patients with FGFR2 fusions;

Miransertib (ARQ 092), a selective inhibitor of the AKT serine/threonine kinase,fusions. Derazantinib was exclusively licensed to Basilea Pharmaceutica Limited (Basilea) in Phase1/2 in rare Overgrowth Disease and in Phase 1 for multiple oncology indications andApril 2018 in the rare disease, Proteus syndrome, in partnership with the National Institutes of Health (NIH);

ARQ 751, a next-generation inhibitor of AKT, in Phase 1 for solid tumors harboring the AKT1 or PI3K mutations;

ARQ 531, an investigational, orally bioavailable, potent and reversible inhibitor of both wild type and C481S-mutant BTK, in Phase 1 for B-cell malignancies refractory to other therapeutic options; and

ARQ 761, a ß-lapachone analog being evaluated as a promoter of NQO1-mediated programmed cancer cell death, in Phase 1/2 in multiple oncology indications in partnership with The University of Texas Southwest Medical Center.

Tivantinib (ARQ 197), an orally administered, small molecule inhibitor of the c-Met receptor tyrosine kinase (“MET”) and its biological pathway is no longer being developed. We licensed commercial rights to tivantinib for human cancer indications to Daiichi Sankyo Co., Ltd. (“Daiichi Sankyo”) in the U.S., Europe, South AmericaUnited States, European Union, Japan and the rest of the world, excluding Japanthe People’s Republic of China, Hong Kong, Macau, and certain other Asian countries,Taiwan (collectively, Greater China) where we havederazantinib was exclusively licensed commercial rights to Kyowa Hakko Kirin Co.Sinovant Sciences Ltd., a subsidiary of Roivant Sciences Ltd. (“Kyowa Hakko Kirin”).

Our METIV-HCC trial was a pivotal Phase 3 randomized, double-blind, controlled study of tivantinib as single agent therapy(Sinovant) in previously treated patients with MET diagnostic-high, inoperable HCC conducted by Daiichi Sankyo and us. The primary endpoint was overall survival (OS) in the intent-to-treat (ITT) population, and the secondary endpoint was progression-free survival (PFS) in the same population. On February 17, 2017, we and Daiichi Sankyo announced that the METIV-HCC trial did not meet its primary endpoint of improving.

Our JET-HCC was a pivotal Phase 3, randomized, double-blind, controlled study of tivantinib as single-agent therapy in previously treated patients with MET diagnostic-high, inoperable HCC conducted by Kyowa Hakko Kirin in Japan. On March 27, 2017, we reported that our partner, Kyowa Hakko Kirin, announced top-line results of the JET-HCC Phase 3 trial of tivantinib in Japan, and that the trial did not meet its primary endpoint of improving PFS.

2018

 

We have incurred a cumulative deficit of approximately $526$558 million from inception through September 30, 2017.March 31, 2019. We recorded a net loss for 2015 and 20162018 and expect a net loss for 2017.

 14

As previously reported, on December 18, 2008, we entered into a license, co-development and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical trials and the commercialization of tivantinib in human cancer indications in the U.S., Europe, South America and the rest of the world, excluding Japan, China (including Hong Kong), South Korea and Taiwan, where Kyowa Hakko Kirin has exclusive rights for development and commercialization. On February 17, 2017, we and Daiichi Sankyo announced that the MET-IV-HCC trial did not meet its primary end point of improving OS. Our joint development of tivantinib has subsequently been discontinued. As a result, we do not anticipate receiving further royalties or milestones in connection with the agreement.

Under the terms of our tivantinib collaboration agreement with Daiichi Sankyo we shared development costs equally with our share of Phase 3 costs funded solely from milestones and royalties. In each quarter the tivantinib collaboration costs we incurred were compared with those of Daiichi Sankyo. If our costs for the quarter exceeded Daiichi Sankyo’s, we recognized revenue on the amounts due to us under the contingency adjusted performance model. Revenue was calculated on a pro-rata basis using the time elapsed from inception of the agreement over the estimated duration of the development period under the agreement. If our costs for the quarter were less than those of Daiichi Sankyo, we reported the amount due to Daiichi Sankyo as contra-revenue in that quarter. To the extent that our share of Phase 3 collaboration costs exceeded the amount of milestones and royalties received, that excess was netted against milestones and royalties earned and was not reported as contra-revenue.

Our cumulative share of the Daiichi Sankyo Phase 3 costs through September 30, 2017 totaled $110.3 million. Our cumulative share of Phase 3 collaboration costs has exceeded the amount of milestones received through September 30, 2017 by $70.3 million which are not required to be repaid upon expiration of the agreement.

Revenue for this agreement was recognized using the contingency-adjusted performance model with an estimated development period through December 31, 2016. On February 17, 2017, we and Daiichi Sankyo announced that the METIV-HCC trial did not meet its primary end point of improving OS. As a result, we do not anticipate receiving further royalties or milestones in connection with the agreement.

As previously reported, on April 27, 2007, we entered into an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize tivantinib in Japan and parts of Asia. Revenue for this agreement was recognized using the contingency-adjusted performance model with an estimated development period through December 31, 2016. On March 27, 2017, we reported that our partner, Kyowa Hakko Kirin, announced top-line results of the JET-HCC Phase 3 trial of tivantinib in Japan, and that the trial did not meet its primary endpoint of improving PFS. Our joint development of tivantinib has subsequently been discontinued. As a result, we do not anticipate receiving further royalties or milestones in connection with the agreement.2019.

 

LIQUIDITY AND CAPITAL RESOURCES

 

 March 31,  December 31,  Increase (decrease) 
 September 30,  December 31,  Increase (decrease)  2019  2018  $  % 
 2017  2016  $  %  (in millions)   
 (in millions)          
Cash, cash equivalents and marketable securities-short term $27.6  $31.1   (3.5)  (11)% $92.2  $99.6  $(7.4)  (7)%
Working capital  19.8   23.2   (3.4)  (15)%  81.9   91.8   (9.9)  (11)%

 

  Nine Months Ended    
  September 30,
2017
  September 30,
2016
  Increase
(decrease)
 
  (in millions) 
Cash flow from:            
Operating activities $(20.5) $(16.4) $(4.1)
Investing activities  -   2.1   (2.1)
Financing activities  17.0   15.3   1.7 
16

  Three Months Ended    
  March 31,  March 31,  Increase 
  2019  2018  (decrease) 
  (in millions) 
    
Cash flow from:            
Operating activities $(7.0) $(5.0) $(2.0)
Investing activities  5.5   (4.6)  10.1 
Financing activities  0.1   -   0.1 

 

Cash flow from operating activities. Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees, facility and facility-related costs for our offices and laboratories, fees paid in connection with preclinical and clinical studies, laboratory supplies and materials and professional fees. The sources of our cash flow from operating activities have consisted primarily of upfront and other payments received from our collaborators for services performed or upfront payments for future services. Forin connection with license agreements. In the ninethree months ended September 30, 2017 and 2016,March 31, 2019, our net use of cash was primarily driven by the difference between cash received from our collaborations and payments for operating expenses which resulted in net cash outflows of $20.5 million$7.0 million. In the three months ended March 31, 2018, our net use of cash was primarily driven by the difference between cash received from our collaborator and $16.4 million, respectively.payments for operating expenses which resulted in net cash outflows of $5.0 million.

Cash flow from investing activities. Our net cash provided by investing activities of zero$5.5 million for the ninethree months ended September 30, 2017.March 31, 2019 was comprised of net maturities of marketable securities. Our net cash providedused by investing activities of $2.1$4.6 million for the ninethree months ended September 30, 2016,March 31, 2018 was comprised primarily of net maturitiesmaturity of marketable securities. The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of our constant evaluation of conditions in financial markets, the maturity of specific investments, and our near term liquidity needs.

 15

Cash flow from financing activities. Our net cash provided by financing activities of $17.0 million for the nine months ended September 30, 2017, was comprised of the net proceeds of $14.6 million from the loan and security agreement that we entered into on January 6, 2017 and $2.3 million from the issuance of 2 million shares of common stock in September 2017 through our “at-the-market” offering. Our net cash provided by financing activities of $15.3 million for the nine months ended September 30, 2016, was comprised of net proceeds from our February 26, 2016 stock offering of $15.2 million and $0.1 million from stock option exercises and employee stock plan purchases.

 

Our cash equivalents and marketable securities typically include commercial paper, money market funds, and U.S. Treasury bill funds, money market funds, commercial paper, and U.S. federal and state agency backed certificates thatwhich have investment grade ratings. Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

Cash flow from financing activities. Our net cash provided by financing activities of $0.1 million for the three months ended March 31, 2019 was comprised of proceeds from stock option exercises.Our net cash provided by financing activities was zero for the three months ended March 31, 2018.

 

Our cash requirements may vary materially from those now planned depending upon the results of our drug discovery and development strategies, our ability to enter into additional corporate collaborations and the terms of such collaborations, results of research and development, unanticipated required capital expenditures, competitive and technological advances, acquisitions and other factors. We cannot guarantee that we will be able to develop any of our drug candidates into a commercial product. ItIn January 2017, we entered into Loan Agreement with a principal balance of $15 million (see Note 8). The terms of the Loan Agreement require payments of interest on a monthly basis through August 2019 and payments of interest and principal from September 2019 to August 2022.

In November 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering, we raised net proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants to purchase 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred converted into 1,000 shares of common stock and each associated Warrant converted into 1,000 common stock warrants upon the effectiveness on May 8, 2018 of an amendment to our restated certificate of incorporation to increase the number of authorized shares of common stock thereunder. The Warrants have a post-conversion exercise price of $1.75 per share, are exercisable immediately and expire in May 2022.

In February 2018, we entered into a License Agreement with Sinovant pursuant to which ArQule granted Sinovant an exclusive license to develop and commercialize derazantinib in Greater China. The agreement provided for an upfront payment to ArQule of $3 million and a $2.5 million development milestone that was paid in the first quarter of 2019. We are also eligible for up to an additional $82 million in regulatory and sales milestones. Upon commercialization, we are entitled to receive double digit royalties in the low teens from Sinovant on net sales of derazantinib in Greater China. Sinovant will be responsible for all costs and expenses of development, manufacture and commercialization in Greater China. For the three months ended March 31, 2019, we recognized revenue of $1.1 million for providing certain research and development services to Sinovant. For the three months ended March 31, 2018, we recognized revenue of $3.0 million for completing our performance obligation under this licensing agreement.

17

In April 2018, we entered into a License Agreement with Basilea pursuant to which ArQule granted Basilea an exclusive license to develop and commercialize derazantinib in the United States, European Union, Japan and the rest of the world, excluding Greater China. Under the terms of the agreement, we received an upfront payment of $10 million and are eligible for up to $326 million in regulatory and commercial milestones. Upon commercialization, we are entitled to receive staggered royalties on future net sales of derazantinib ranging from the high-single digits to the mid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances, we may have the opportunity to promote derazantinib in the United States directly. For the three months ended March 31, 2019, we recognized revenue of $0.2 million for providing certain research and development services to Basilea, recognized as revenue on a cost-to-cost method.

In July 2018, we sold 12,650,000 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $64.6 million after commissions and other offering expenses.

We anticipate that our cash, cash equivalents and marketable securities on hand at March 31, 2019 and the financial support from our licensing agreements will be sufficient to finance our operations into 2021 which is likelyin excess of at least 12 months from the issuance date of these financial statements.

We expect that we will need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and market conditions, and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital when needed, or on terms favorable to us. If necessary funds are not available, we may have to delay, reduce the scope of, or eliminate some of our development programs, potentially delaying the time to market for any of our product candidates.

 

On February 26, 2016 we entered into definitive stock purchase agreements with certain institutional and accredited investors. In conjunction with this stock offering we issued 8,027,900 shares of our common stock and non-transferable options for 3,567,956 shares of our common stock for aggregate net proceeds of $15.2 million. Each option was exercisable for $2.50 per share and they all expired on March 22, 2017.

On January 6, 2017, we entered into a loan and security agreement in the principal amount of $15.0 million. The loan bears interest at a minimum of 7.6% per annum and the interest rate floats based upon the 30 day U.S. LIBOR rate. We have interest-only payments for 18 months, followed by an amortization period of 36 months. The maturity date of the loan is July 1, 2021.

On September 11, 2017, we sold 2.0 million shares of common stock through an at-the-market (ATM) offering and raised proceeds of approximately $2.3 million.

In October 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering we issued 13,938,651 shares of our common stock and warrants for 3,123,674 shares of our common stock for aggregate net proceeds of $15.5 million. Each warrant is exercisable for $1.75 per share and expires in four years from the date of issuance.

In November 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering the Company raised gross proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants covering 2,260 shares of Series A Preferred (Warrants). Each share of Series A Preferred together with the associated Warrant is priced at $1,135 and will automatically convert into 1,000 shares of common stock upon the adoption of an amendment to the Company’s restated certificate of incorporation to increase the number of authorized shares of common stock thereunder. ArQule estimates the net proceeds from this offering will be approximately $9.3 million. The Warrants have a pre-conversion exercise price of $1,750 per share of Series A Preferred (post-conversion price of $1.75 per share of common stock), are exercisable immediately and expire approximately four years from the date of the adoption of the amendment to the Company’s restated certificate of incorporation.

We anticipate that our cash, cash equivalents and marketable securities on hand at September 30, 2017 and the additional funds raised during the October 2017 common stock offering and the November 2017 preferred stock offering will be sufficient to finance our operations into the second half of 2019 which is greater than 12 months from the issuance date of these financial statements.

Our contractual obligations were comprised of the following as of September 30, 2017March 31, 2019 (in thousands):

 

 Payment due by period  Payment due by period 
Contractual Obligations Total  Less than
1 year
  1 - 3 years  3 - 5 years  More than
5 years
  Total  Less than
1 year
  1 - 3 years  3 - 5 years  More than
5 years
 
Notes payable $15,900  $417  $10,000  $5,483  $  $15,900  $2,917  $10,000  $2,983  $ 
Interest on notes payable  3,176   1,106   1,129   941    
Operating lease obligations  1,472   557   915         1,167   603   464   100    
Purchase obligations  4,762   4,762            8,269   8,269          
Total $22,134   5,736   10,915   5,483  $  $28,512  $12,895  $11,593  $4,024  $ 

In January 2015, we entered into a lease agreement for our headquarters facility in Burlington, MA. The lease commenced on May 1, 2015 for a term of five years and three months with an average annual rental rate of $455 thousand. In January 2019, we entered into a lease agreement for our laboratory space in Woburn, MA. The lease commenced on March 6, 2019 for a term of five years and one month. The lease agreement for the laboratory space includes a rent escalation clause, and accordingly, rent expense is being recognized on a straight-line basis over the lease term. The obligations for our operating leases are included in the table above.

 

Purchase obligations are comprised primarily of outsourced preclinical and clinical trial expenses and payments to license certain intellectual property to support our research efforts.

 

 16

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

A “critical accounting policy” is one which is both important to the portrayal of our financial condition and results 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. For additional information, please see the discussion of our significant accounting policies in Note 2 to the Financial Statements included in our Annual Report for the fiscal year ended December 31, 20162018 on Form 10-K filed with the SECSecurities and Exchange Commission (“SEC”) on March 9, 2017.7, 2019.

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RESULTS OF OPERATIONS

 

The following are the results of operations for the three and nine months ended September 30, 2017March 31, 2019 and 2016:2018:

 

Revenue

 

      Increase (decrease)       Increase (decrease) 
 2017  2016  $  %  2019  2018  $  % 
 (in millions)       (in millions)   
For the three months ended September 30:                
For the three months ended March 31:                
Research and development revenue $  $1.2  $(1.2)  (100)% $1.3  $4.1  $(2.8)  (68)%
                
For the nine months ended September 30:                
Research and development revenue $  $3.5  $(3.5)  (100)%

 

Research and development revenue in the three and nine months ended September 30, 2017 was zero due to the endMarch 31, 2019 consisted of the estimated development period on December 31, 2016 for both the Daiichi Sankyo tivantinib development$1.1 million from our February 2018 Sinovant licensing agreement and the Kyowa Hakko Kirin exclusive license$0.2 million from our April 2018 Basilea licensing agreement.

Research and development revenue in the three months ended September 30, 2016 revenue is comprisedMarch 31, 2018 consisted of revenue of $0.8$3.0 million from our Daiichi Sankyo METIV-HCC trialFebruary 2018 Sinovant licensing agreement and $0.4$1.1 million from a non-exclusive license agreement for certain of our Kyowa Hakko Kirin JET-HCC trial.library compounds.

 

Research and development revenue in the nine months ended September 30, 2016 revenue is comprised of revenue of $2.1 million from our Daiichi Sankyo METIV-HCC trial and $1.4 million from our Kyowa Hakko Kirin JET-HCC trial.

 

Research and development

      Increase (decrease)       Increase (decrease) 
 2017  2016  $  %  2019  2018  $  % 
 (in millions)       (in millions)   
For the three months ended September 30:                
For the three months ended March 31:         
Research and development $4.6  $5.3  $(0.7)  (13)% $7.4  $5.8  $1.6   28%
                
For the nine months ended September 30:                
Research and development $14.7  $13.8  $0.9   7%

 

Research and development expense in the quarter ended September 30, 2017 decreased by $0.7 million primarily due to $0.4 million lower outsourced clinical and product development costs for our pipeline programs, and lower labor and related costs of $0.2 million.

Research and development expense in the ninethree months ended September 30, 2017March 31, 2019 increased by $0.9$1.6 million primarily due to higher outsourced preclinical, clinical and product development costs for our pipeline programs of $1.3 million, partially offset by lowerand higher labor and related costs of $0.3 million.

costs. At September 30, 2017 and 2016March 31, 2019 we had 19 and 2122 employees dedicated to our research and development program respectively.compared to 18 employees at March 31, 2018.

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Overview

 

Our research and development expense consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees paid to professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with pre-clinicalpreclinical animal studies, costs of materials used in research and development, consulting, license, and sponsored research fees paid to third parties and depreciation of associated laboratory equipment. We expect that our research and development expense willto remain significant, yet consistent, as we continue to develop our portfolio of oncology and rare disease programs.

 

We have not accumulated and tracked our internal historical research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and infrastructure resources are allocated across several projects, and many of our costs are directed to broadly applicable research endeavors. As a result, we cannot state the costs incurred for each of our oncology programs on a program-by-program basis.

The expenses incurred by us to third parties for pre-clinical and clinical trials in the current quarter and since inception of our tivantinib program were as follows (in millions):

Oncology program Current status Nine Months
Ended
September 30, 2017
  Program-to-
date
 
Met program—Tivantinib Phase 3 $0.2  $85.0 

Under the terms of our tivantinib collaboration agreement with Daiichi Sankyo we shared development costs equally with our share of Phase 3 costs funded solely from milestones and royalties. Our cumulative share of Phase 3 collaboration costs has exceeded the amount of milestones received through September 30, 2017 by $70.3 million and is not reflected in the above table.

 

Our future research and development expenses in support of our current and future oncology programs will be subject to numerous uncertainties in timing and cost to completion. We test potential products in numerous pre-clinicalpreclinical studies for safety, toxicology, and efficacy. We may conduct multiple clinical trials for each product. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products. Completion of clinical trials may take several years or more, and the length of time and cost of development generally varies substantially according to the type, complexity, novelty, and intended use of a product. It is not unusual for the pre-clinical and clinical development of each of these types of products to take nine years or more, and for total development costs to exceed $500 million for each product.

We estimate that clinical trials of the type generally needed to secure new drug approval are typically completed over the following timelines:

 

Clinical Phase Estimated Completion
Period
Phase 1 1 – 1–2 years
Phase 2 2 – 2–3 years
Phase 3 2 – 2–4 years

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The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the following:

 

the number of clinical sites included in the trials;
the number of clinical sites included in the trials;

 

the length of time required to enroll suitable patients;
the length of time required to enroll suitable patients;

 

the number of patients that ultimately participate in the trials;
the number of patients that ultimately participate in the trials;

 

the duration of patient follow-up to ensure the absence of long-term product-related adverse events; and
the duration of patient follow-up to ensure the absence of long-term product-related adverse events; and

 

the efficacy and safety profile of the product.
the efficacy and safety profile of the product.

 

An element of our business strategy is to pursue the research and development of a broad pipeline of products. This is intended to allow us to diversify the risks associated with our research and development expenditures. As a result, we believe our future capital requirements and future financial success do not substantially depend on any one product. To the extent we are unable to build and maintain a broad pipeline of products, our dependence on the success of one or a few products increases.

 

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Our strategy includes entering into alliance arrangements with third parties to participate in the development and commercialization of our products, such as our collaboration agreements with Daiichi SankyoSinovant and Kyowa Hakko Kirin.Basilea. In the event that third parties have control over the clinical trial process for a product, the estimated completion date would be under control of that third party rather than under our control. We cannot forecast with any degree of certainty whether our products will be subject to future collaborative arrangements or how such arrangements would affect our development plans or capital requirements.

 

As a result of the uncertainties discussed above, we make significant estimates in determining the duration and completion costs of our oncology programs or when and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our oncology programs in a timely manner or our failure to enter into appropriate collaborative agreements could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time-to-time in order to continue with our product development strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

 

General and administrative

 

      Increase (decrease)       Increase (decrease) 
 2017  2016  $  %  2019  2018  $  % 
 (in millions)       (in millions)   
         
For the three months ended September 30:                
For the three months ended March 31:                
General and administrative $1.8  $1.8  $-   -% $4.3  $2.4  $1.9   83%
                
For the nine months ended September 30:                
General and administrative $5.7  $5.8  $(0.1)  (1)%

 

General and administrative expense remained constantincreased by $1.9 in the three and nine months ended September 30, 2017 compared with the comparable periods in 2016.

GeneralMarch 31, 2019 principally due to labor and related costs, including $1.3 million of non-recurring executive retirement costs and $0.5 million of stock-based compensation expense. At March 31, 2019 we had 14 general and administrative headcount was 14employees compared to 13 employees at September 30, 2017 and September 30, 2016.March 31, 2018.

 

Interest income, interest expense and interestother expense

 

      Increase (decrease)       Increase (decrease) 
 2017  2016  $  %  2019  2018  $  % 
 (in thousands)       (in thousands)   
For the three months ended September 30:         
For the three months ended March 31:                
Interest income $66  $49  $17   35% $566  $159  $407   256%
Interest expense  (400)     400   100%  (430)  (396)  (34)  9%
                
For the nine months ended September 30:                
Interest income $125  $135  $(10)  (7)%
Interest expense  (1,119)     1,119   100%
Other expense     (2,270)  (2,270)  (100)%

 

Interest income is derived from our portfolio of cash, cash equivalents and investments and decreasedincreased in the three and nine month periodsmonths ended September 30, 2017March 31, 2019 primarily due to a decreasean increase in our portfolio balance. balance resulting from (i) net proceeds from our July 2018 stock offering, (ii) up-front and other payments from our 2018 licensing agreements and (iii) increased interest rates.

Interest expense is from therelated to our loan agreement we enteredwith Oxford.

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Other expense was zero in the three months ended March 31, 2019 due to the elimination of our preferred stock warrant liability upon the conversion of the preferred shares into on January 6, 2017common shares in May 2018. Other expense in the three months ended March 31, 2018 reflected a non-cash expense resulting from a net increase in the fair value of our preferred stock warrant liability of $2.3 million.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

For a discussion of new accounting pronouncements please read Note 9,10,Recent Accounting Pronouncements to our financial statements included in this report.

 

FORWARD LOOKING STATEMENTS

 

In addition to historical information, this report contains forward-looking statements. You can identify these forward-looking statements by their use of words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “target,” “will”, “potential” , “goal”, and other words and terms of similar meaning. You also can identify them by the fact that they do not relate strictly to historical or current facts. All statements which address operating performance, events or developments that the Company expectswe expect or anticipatesanticipate will occur in the future, such as projections about itsour future results of operations, itsour financial condition, research, development and commercialization of itsour products and anticipated trends in itsour business are forward-looking statements.

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In this report we make forward-looking statements regarding our drug development pipeline and our existing and planned clinical trials as well as future milestones and royalty payments, projected financial results and our ability to fund operations with current cash, cash equivalents and marketable securities.

 

Drug development involves a high degree of risk. Only a small number of research and development programs result in the commercialization of a product. For example, pre-clinicalpreclinical efforts associated with our product pipeline may fail or prove disappointing because our technology platform did not produce candidates with the desired characteristics. Animal xenograft pre-clinicalpreclinical studies may be unpredictive of human response. Positive information about early stage clinical trial results will not ensure that later stage or larger scale clinical trials will be successful.

successful or will satisfy applicable regulatory standards. Furthermore, our drugs may not demonstrate promising therapeutic effects; in addition, they may not demonstrate appropriate safety profiles in ongoing or later stage or larger scale clinical trials as a result of known or as yet unidentified side effects. The results achieved in later stage trials may not be sufficient to meet applicable regulatory standards. Problems or delays may arise during clinical trials or in the course of developing, testing or manufacturing our drugs that could lead us or our partnercollaborators to discontinue development.

 

Even if later stage clinical trials are successful, the risk exists that unexpected concerns may arise from analysis of data or from additional data or that obstacles may arise or issues be identified in connection with review of clinical data with regulatory authorities or that regulatory authorities may disagree with our view of the data or require additional data or information or additional studies. Also, theThe planned timing of initiation of clinical trials and the duration and conclusion of such trials for our drugs are subject to the ability of the company to enroll patients, enter into agreements with clinical trial sites and investigators, and other technical hurdles and issues that may not be resolved.

 

We also make forward-looking statements regarding the adequacy of our financial resources. Our capital resources may not be adequate because our cash requirements may vary materially from those now planned depending upon the results of our drug discovery and development strategies, the outcomes of our clinical trials, our ability to enter into additional corporate collaborations in the future and the terms of such collaborations, results of research and development, the need for currently unanticipated capital expenditures, competitive and technological advances, acquisitions, financial market conditions and other factors. Additionally, our corporate collaborators may terminate their agreements with us, thereby eliminating that source of funding, because we may fail to satisfy the prescribed terms of the collaborations or for other reasons.funding.

 

We cannot guarantee that we will be able to develop any of our drug candidates into a commercial product generating revenues. If we experience increased losses, we may have to seek additional financing from public and private sales of our securities, including equity securities. There can be no assurance that additional funding will be available when needed or on acceptable terms.

 

The factors, risks and uncertainties referred to above and others are more fully described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162018 filed with the SEC on February 28, 2017,March 7, 2019, as updated from time to time in our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The forward-looking statements contained herein represent our judgment as of the date of this report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We own financial instruments that are sensitive to market risk as part of our investment portfolio. We have implemented policies regarding the amount and credit ratings of investments. Our investment portfolio is used to preserve our capital until it is used to fund operations, including our research and development activities. Our investments are evaluated quarterly to determine the fair value of the portfolio.

 

Our cash equivalents and marketable securities typically include commercial paper, money market funds, and U.S. Treasury bill funds that have investment grade ratings.

21

 

Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. Based on the type of securities we hold, we do not believe a change in interest rates would have a material impact on our financial statements. If interest rates were to increase or decrease by 1%, this would not result in a material change in the fair value of our investment portfolio.

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ITEM 4. CONTROLS AND PROCEDURES

 

Our management, with the participation of our Chief Executive Officer (Principal Executive Officer) and President and Chief Operating Officer (Principal Financial Officer), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017,March 31, 2019, our Chief Executive Officer (Principal Executive Officer) and President and Chief Operating Officer (Principal Financial Officer) concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

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There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. — LEGAL PROCEEDINGS.None.

 

ITEM 1A. — RISK FACTORS. For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussion provided under “Risk Factors” in Item 1A of ArQule’s Annual Report on Form 10-K for the year ended December 31, 20162018 filed with the SEC on March 9, 2017,7, 2019, as updated from time to time in our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. See also, “Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.

 

ITEM 2. — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None.

 

ITEM 3. — DEFAULTS UPON SENIOR SECURITIES. None.

 

ITEM 4. — MINE SAFETY DISCLOSURES. Not applicable.

 

ITEM 5. — OTHERS INFORMATION. None.

 

ITEM 6. — EXHIBITS.

 

EXHIBIT NO. DESCRIPTION
3.110.1* CertificateSeparation of DesignationsEmployment Agreement, dated November 7, 2017 forMarch 13, 2019, between the Convertible Series A Preferred Stock as filed with the Secretary of State of the State of Delaware Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 8, 2017 (File No. 000-21429)Company and incorporated herein by reference.Robert Weiskopf.
4.110.2* Form of Warrant. Filed as Exhibit 4.1Fifth Amendment to the Company’s Current Report on Form 8-K filed on October 16, 2017 (File No. 000-21429) and incorporated herein by reference.
4.2Form of Warrant. Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 8, 2017 (File No. 000-21429) and incorporated herein by reference.
10.1Form of Securities Purchase Agreement. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 16, 2017 (File No. 000-21429) and incorporated herein by reference.
10.2 +Master ServicesEmployment Agreement, dated July 20, 2017,as of March 29, by and between the Company and ARUP Laboratories, Inc., filed herewith.Paolo Pucci.
10.3 +10.3* Scope of Work #1Sixth Amendment to Master ServicesEmployment Agreement, dated July 20, 2017,as of March 29, by and between the Company and ARUP Laboratories, Inc., filed herewith.Peter S. Lawrence
10.4 +10.4* Scope of Work #2Sixth Amendment to Master ServicesEmployment Agreement, dated July 20, 2017,as of March 29, by and between the Company and ARUP Laboratories, Inc., filed herewith.Brian Schwartz.
10.510.5* Form of Securities Purchase Agreement. Filed as Exhibit 10.1 toLetter Agreement, dated April 11, 2019, by and between the Company’s Current Report on Form 8-K filed on November 8, 2017 (File No. 000-21429)Company and incorporated herein by reference.Marc Schegerin.
31.1 Rule 13a-14(a) Certificate of Chief Executive Officer, filed herewith.
31.2 Rule 13a-14(a) Certificate of Principal Financial Officer, filed herewith.
32 Rule 13a-14(b) Certificate of Chief Executive Officer and Chief Financial Officer, filed herewith.
101 Interactive Data File

 

+       Certain confidential material contained in the document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended or Rule 24b-2 of the Securities and Exchange Act of 1934, as amended.

 21*Indicates a management contract or compensatory plan.

ARQULE, INC.

 

ARQULE, INC.

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 ArQule, Inc.
  
Date: November 9, 2017May 1, 2019/s/ PETER S. LAWRENCE
 Peter S. Lawrence
 President and Chief Operating Officer
 (Duly Authorized Officer and Principal Financial Officer)
/s/ ROBERT J. WEISKOPF
Robert J. Weiskopf
Chief Financial Officer and Treasurer
(Principal Accounting Officer)

 

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