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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 June 30, 2000 Commission File No. 000-21429
ARQULE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3221586
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
19 PRESIDENTIAL WAY, WOBURN, MASSACHUSETTS 01801
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(781) 994-0300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO __
Number of shares outstanding of the registrant's Common Stock as of July 26,
2000:
Common Stock, par value $.01 13,557,033 shares outstanding
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ARQULE, INC.
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
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PART I -- FINANCIAL INFORMATION
Item 1 -- Unaudited Consolidated Financial Statements
Consolidated Balance Sheet
June 30, 2000 (Unaudited) and December 31, 1999........ 3
Consolidated Statement of Operations (Unaudited)
Three months ended June 30, 2000 and 1999
and six months ended June 30, 2000 and 1999.......... 4
Consolidated Statement of Cash Flows (Unaudited)
Six months ended June 30, 2000 and 1999................ 5
Notes to Unaudited Consolidated Financial Statements... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
PART II -- OTHER INFORMATION................................ 10
Item 4 -- Submission of Matters to a Vote of Security
Holders................................................... 10
Signatures.................................................. 12
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ARQULE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
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ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 9,068 $ 4,208
Marketable securities.................................. 24,930 32,213
Accounts receivable.................................... 1,451 2,529
Accounts receivable related party...................... 1,550 1,424
Inventory.............................................. 344 486
Prepaid expenses and other current assets.............. 743 579
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Total current assets.............................. 38,086 41,439
Property and equipment, net............................ 31,869 34,093
Non-current marketable securities...................... 5,257 --
Other assets........................................... 1,786 1,814
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$76,998 $77,346
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 3,067 $ 5,719
Current portion of capital lease obligations........... 72 316
Current portion of long-term debt...................... 3,500 2,525
Deferred revenue....................................... 15,551 14,375
Deferred revenue related party......................... 101 1,133
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Total current liabilities......................... 22,291 24,068
Long-term debt.............................................. 8,950 10,700
Deferred revenue............................................ 2,313 3,825
Stockholders' Equity:
Common stock, $0.01 par value; 30,000,000 shares
authorized; 13,557,033 and 12,864,225 shares issued
and outstanding at June 30, 2000 and December 31,
1999, respectively.................................... 136 129
Additional paid-in capital............................. 79,048 73,167
Deferred compensation.................................. (371) (5)
Unrealized loss on marketable securities............... (98) --
Accumulated deficit.................................... (35,271) (34,538)
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Total stockholders' equity............................. 43,444 38,753
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$76,998 $77,346
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The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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ARQULE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2000 1999 2000 1999
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Revenue:
Compound development revenue................... $ 9,543 $ 2,369 $17,233 $ 4,173
Compound development revenue -- related
parties...................................... 2,541 2,222 5,239 4,430
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Total revenue............................. 12,084 4,591 22,472 8,603
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Costs and expenses:
Cost of revenue................................ 4,199 2,031 8,201 3,683
Cost of revenue -- related parties............. 1,118 1,888 2,522 3,910
Research and development....................... 4,405 3,156 8,593 6,503
Marketing, general and administrative.......... 2,091 1,494 4,452 2,737
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Total costs and expenses.................. 11,813 8,569 23,768 16,833
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Income (loss) from operations............. 271 (3,978) (1,296) (8,230)
Interest income..................................... 592 404 1,094 828
Interest expense.................................... (254) (20) (531) (158)
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Net income (loss).............................. $ 609 $(3,594) $ (733) $(7,560)
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Basic net income (loss) per share................... $ 0.05 $ (0.29) $ (0.05) $ (0.61)
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Weighted average common shares
outstanding -- Basic.............................. 13,520 12,560 13,362 12,438
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Diluted net income (loss) per share................. $ 0.04 $ (0.29) $ (0.05) $ (0.61)
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Weighted average common shares
outstanding -- Diluted............................ 14,398 12,560 13,362 12,438
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Comprehensive income (loss)
Net income (loss).............................. $ 609 $(3,594) $ (733) $(7,560)
Unrealized loss on investment securities....... (98) -- -- --
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Comprehensive income (loss)......................... $ 511 $(3,594) $ (733) $(7,560)
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The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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ARQULE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
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2000 1999
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net loss............................................... $ (733) $ (7,560)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 3,663 2,801
Amortization of deferred compensation................ 402 192
Decrease in accounts receivable...................... 952 3,148
Decrease (increase) in inventory..................... 142 (30)
(Increase) decrease in prepaid expenses and other
current assets...................................... (164) 341
Decrease in other assets............................. 28 20
(Decrease) increase in accounts payable and accrued
expenses............................................ (2,652) 832
Decrease in deferred revenue......................... (1,368) (1,743)
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Net cash provided by (used in) operating
activities...................................... 270 (1,999)
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Cash flows from investing activities:
Purchases of available-for-sale securities........... (38,527) (30,957)
Proceeds from sale or maturity of marketable
securities.......................................... 40,455 32,226
Proceeds from tenant improvement allowance........... 2,212 --
Additions to property and equipment.................. (3,651) (7,736)
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Net cash provided by (used in) investing
activities...................................... 489 (6,467)
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Cash flows from financing activities:
Principal payments of capital lease obligation....... (244) (581)
Principal payments of long-term debt................. (775) --
Borrowings of long-term debt......................... -- 6,200
Proceeds from issuance of common stock............... 5,120 783
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Net cash provided by financing activities......... 4,101 6,402
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Net increase (decrease) in cash and cash
equivalents......................................... 4,860 (2,064)
Cash and cash equivalents, beginning of period....... 4,208 5,780
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Cash and cash equivalents, end of period............. $ 9,068 $ 3,716
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The accompanying notes are an integral part of these unaudited consolidated
financial statements.
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ARQULE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. 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 consolidated financial statements should be read in
conjunction with our audited financial statements and footnotes related thereto
for the year ended December 31, 1999 included in our annual report on Form 10-K
filed with the Securities and Exchange Commission on March 23, 2000. The
unaudited consolidated financial statements include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly our financial position as of June 30, 2000, and the
results of our operations for the three and six month periods ended June 30,
2000 and 1999. The results of operations for such interim periods are not
necessarily indicative of the results to be achieved for the full year.
2. NEW ACCOUNTING PRONOUNCEMENTS
During April 2000, the Financial Accounting Standards Board issued
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of Accounting Principles Board ("APB")
No. 25". Among other issues, FIN 44 clarifies (a) the definition of an employee,
(b) the criteria for determining whether a stock award plan qualifies as
non-compensatory, and (c) the accounting consequence of various award
modifications. This interpretation became effective July 1, 2000. We evaluated
the effects of FIN 44 on our financial position and results of operations and
have determined any such effects to be immaterial.
During June 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101B, an amendment to SAB 101, "Revenue
Recognition in Financial Statements." SAB 101B defers the required
implementation of SAB 101 until the fiscal quarter ended December 31, 2000. We
are currently evaluating the effects, if any, of SAB 101 on our financial
position and results of operations.
During June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard ("FAS") No. 138, "Accounting for Certain Derivative
Instruments -- An amendment of FAS 133 "Accounting for Derivative Instruments
and Hedging Activities". FAS 138 shall be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. We do not expect this to have a
material impact on our financial position and results of operations.
3. MONSANTO COLLABORATION
On June 30, 2000, at the request of Monsanto Company (now Pharmacia
Corporation), we replaced our existing collaboration agreement with Monsanto
with a new collaboration agreement with G.D. Searle & Co., a subsidiary of
Pharmacia Corporation. This transaction was completed in connection with the
merger between Monsanto and Pharmacia. The scope of the new agreement is
substantially unchanged from that of the prior agreement. However, ArQule will
now receive all payments due in 2000 and 2001 immediately. Nonetheless, as
compound deliveries and most other obligations are unchanged, we will continue
to recognize these payments as revenue over the same time period. We also
expanded the scope of the agreement to enable Pharmacia Corporation and its
affiliates to screen our compounds, which may result in milestone and royalty
payments in the future.
4. AMERSHAM PHARMACIA BIOTECH COLLABORATION
On July 10, 2000, we terminated our existing Research Collaboration and
License Agreement dated August 13, 1998 with Amersham Pharmacia and entered into
a new Technology Transfer and License
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Agreement with Amersham Pharmacia. Under the new agreement, we will transfer to
Amersham Pharmacia certain ArQule technologies to enable them to exploit those
technologies in the chromatographic bioseparations field. As a result, we are no
longer obligated to perform chemistry services in support of this collaboration.
We may in the future receive royalties on products, but at a lower rate than in
the prior agreement. We do not anticipate any decrease in revenue or increase in
expense for 2000 or 2001 in connection with this collaboration. The change
reflects our strategic decision to focus on drug discovery.
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ARQULE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are engaged in the production and development of novel chemical
compounds with commercial potential in the pharmaceutical, biotechnology,
bioseparations and agrochemical industries. We primarily manufacture arrays of
synthesized compounds for delivery to our customers for use in lead compound
generation and lead compound optimization activities. We also offer other
research and development services to meet the needs of our customers. In
addition, we have established a number of joint drug discovery programs with
biotechnology companies and academic institutions, and are pursuing a limited
number of our own internal drug discovery programs.
We primarily generate revenue through our collaborative agreements for
production and delivery of compound arrays and other research and development
services. Under most of these collaborative agreements, we are also entitled to
receive milestone and royalty payments if the customer develops products
resulting from the collaboration. To date, we have received two milestone
payments and no royalty payments. In addition, we have not yet realized any
significant revenue from our joint discovery programs with biotechnology
companies and academic institutions, or from our internal drug discovery
programs. Quarterly variations in financial performance may be expected because
levels of revenue are dependent on expanding or continuing existing
collaborations, entering into additional corporate collaborations, receiving
future milestones and royalty payments, and realizing value from ongoing drug
discovery programs, all of which are difficult to anticipate.
We will continue to invest in technologies that enhance and expand our
capabilities in drug discovery. These continued investments in technology are
intended to enhance the novelty, diversity, and medical relevance of our
compound arrays and to augment the power and scope of our chemistry
capabilities. In addition to investments in technology, we may invest in
internal lead optimization programs with the goal of delivering clinical
candidates. In November 1999, we moved our main operations to a new facility in
Woburn, Massachusetts, which includes 128,000 square feet of laboratory and
office space. Investments of this nature may result in near term earnings
fluctuations or impact the magnitude of profitability or loss.
We have incurred a cumulative net loss of $35.3 million through June 30,
2000. Losses have resulted principally from costs incurred in research and
development activities related to our efforts to develop our technologies and
from the associated administrative costs required to support those efforts. Our
ability to achieve profitability is dependent on a number of factors, including
our ability to perform under our collaborations at the expected cost, expand or
continue existing collaborations, and realize value from the development and
commercialization of products in which we have an economic interest, all of
which are difficult to anticipate.
The Management's Discussion and Analysis of Financial Condition and Results
of Operation contains forward-looking statements reflecting management's current
expectations regarding our future performance. Such expectations are based on
certain assumptions regarding the progress of product development efforts under
collaborative agreements, the executions of new collaborative agreements and
other factors relating to our growth. Such expectations may not materialize if
product development efforts are delayed or suspended, if negotiations with
potential collaborators are delayed or unsuccessful or if other assumptions
prove incorrect. See also "Important Factors Regarding Forward-Looking
Statements" described more fully in Exhibit 99.1 to our Annual Report on Form
10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUE. Our revenue for the three months ended June 30, 2000 increased
$7.5 million to $12.1 million from $4.6 million for the same period in 1999.
Revenue was $22.5 million and $8.6 million for the six months
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ended June 30, 2000 and 1999, respectively. These increases are primarily due to
the amortization of upfront fees and fees for delivery of Custom Array sets to
Pfizer and Bayer and from the success fees earned from our collaborations.
COST OF REVENUE. Our cost of revenue for the three months ended June 30,
2000 increased $1.4 million to $5.3 million from $3.9 million for the same
period in 1999. Cost of revenue was $10.7 million and $7.6 million for the six
months ended June 30, 2000 and 1999, respectively. These increases are primarily
attributable to the overhead and depreciation related to additional facilities
and scientific personnel and the necessary supplies and overhead expenses
related to the delivery of the Mapping Array and Directed Array sets pursuant to
our collaborative agreements.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
for the three months ended June 30, 2000 increased $1.2 million to $4.4 million
from $3.2 million for the same period in 1999. Research and development expenses
were $8.6 million and $6.5 million for the six months ended June 30, 2000 and
1999, respectively. This increase is the result of our ongoing efforts to
augment and enhance our chemistry capabilities and related proprietary
technologies as we expand our lead optimization programs.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Our marketing, general and
administrative expenses for the three months ended June 30, 2000 increased $0.6
million to $2.1 million from $1.5 million for the same period in 1999.
Marketing, general and administrative expenses were $4.5 million and $2.7
million for the six months ended June 30, 2000 and 1999, respectively. These
increases include a charge of $0.3 million related to the withdrawn registration
statement for our follow-on stock offering.
NET INTEREST INCOME. Our net interest income for the three months ended
June 30, 2000 decreased $0.1 million to $0.3 million from $0.4 million for the
same period in 1999. Net interest income was $0.6 million and $0.7 million for
the six months ended June 30, 2000 and 1999, respectively. Higher interest
expense in 2000 resulted primarily from our holding higher average debt balance
on our term loan with Fleet National Bank.
NET INCOME (LOSS). Our net income for the three months ended June 30, 2000
was $0.6 million, compared to a net loss of $(3.6) million for the same period
in 1999. Our net loss was $(0.7) million and $(7.6) million for the six months
ended June 30, 2000 and 1999, respectively. Our net income in 2000 is primarily
attributable to increased revenue from our collaborator base.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we held cash, cash equivalents and marketable securities
with a value of $39.3 million, compared to $36.4 million at December 31, 1999.
Our working capital at June 30, 1999 was $15.8 million. We have funded
operations through June 30, 2000 with sales of common stock, revenues from
corporate collaborators, and the utilization of capital equipment lease
financing. On March 18, 1999, we consummated a term loan agreement with Fleet
National Bank to support our facilities expansion. Under this agreement, we
borrowed $14.0 million of the potential $15.0 million available. As of June 30,
2000, we have made four principal payments of $0.4 million each.
We expect that our available cash and marketable securities, together with
operating revenues and investment income will be sufficient to finance our
working capital and capital requirements for the foreseeable future. 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 any additional corporate collaborations in the future and the terms of such
collaborations, the results of research and development, the need for currently
unanticipated capital expenditures, competitive and technological advances,
acquisitions and other factors. We cannot guarantee that will be able to obtain
additional customers for our products and services, or that such products and
services will produce revenues adequate to fund our operating expenses. If we
experience increased losses, we may have to seek additional financing from
public or 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.
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ARQULE, INC.
PART II -- OTHER INFORMATION
Items 1-3 -- None
Item 4 -- Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 18, 2000, our
stockholders voted as follows:
(a) To elect Dr. Stephen A. Hill as a director:
Total Votes "For"........................................ 10,537,452
Total Votes "Withheld"................................... 685,436
The proposal received a plurality of the votes cast by the stockholders
entitled to vote thereon and, therefore, Dr. Hill was re-elected to the Board of
Directors. In addition, the terms in office of Laura Avakian, Werner Cautreels,
Ph.D., L. Patrick Gage, Ph.D., Tuan Ha-Ngoc, Ph.D., Stephen Dow and Michael
Rosenblatt, M.D. continued after the meeting. Mr. Dow decided not to seek
re-election at the 2000 Annual Meeting and resigned from the Board of Directors
effective July 25, 2000.
(b) To approve an amendment to our Amended and Restated 1994 Equity
Incentive Plan to increase the aggregate number of shares of common stock that
may be issued under the plan by 1,000,000 shares from 4,700,000 to 5,700,000
shares:
Total Votes for the Proposal.............................. 4,688,663
Total Votes Against the Proposal.......................... 2,419,472
Abstentions............................................... 8,730
The proposal received the affirmative vote of a majority of the shares of
common stock present or represented at the meeting and entitled to vote thereon
and, therefore, was adopted.
(c) To approve an amendment to our Amended and Restated 1996 Employee Stock
Purchase Plan to increase the aggregate number of shares of common stock that
may be issued under the plan by 300,000 shares from 120,000 to 420,000 shares:
Total Votes for the Proposal.............................. 7,052,513
Total Votes Against the Proposal.......................... 53,222
Abstentions............................................... 11,130
The proposal received the affirmative vote of a majority of the shares of
common stock present or represented at the meeting and entitled to vote thereon
and, therefore, was adopted.
(d) To approve an amendment to our Amended and Restated 1996 Director Stock
Option Plan to increase the aggregate number of shares of common stock that may
be issued under the plan by 65,500 shares from 125,000 to 190,500 shares:
Total Votes for the Proposal.............................. 6,783,897
Total Votes Against the Proposal.......................... 325,578
Abstentions............................................... 7,390
The proposal received the affirmative vote of a majority of the shares of
common stock present or represented at the meeting and entitled to vote thereon
and, therefore, was adopted.
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Item 5 -- None
Item 6(a) -- Exhibits:
EXHIBITS DESCRIPTION
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10.1 Array Delivery and Testing Agreement between ArQule, Inc.
and G.D. Searle & Co. dated June 20, 2000.(1)
10.2 Termination Agreement between ArQule, Inc. and Pharmacia
Corporation dated June 30, 2000.(1)
10.3 Technology Transfer and License Agreement between ArQule,
Inc. and Amersham Pharmacia Biotech A.B. dated July 10,
2000.(1)
11.1 Statement Re: Computation of Unaudited Net Income (Loss) Per
Share.
27 Financial Data Schedule.
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(1) Certain confidential material contained in this exhibit has been omitted and
filed separately with the Securities and Exchange Commission pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
Item 6(b) -- None
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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.
/s/ DAVID C. HASTINGS
--------------------------------------
David C. Hastings
(Vice President, Chief Financial
Officer and Treasurer)
Date: August 4, 2000
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ARQULE, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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10.1 Array Delivery and Testing Agreement between ArQule, Inc.
and G.D. Searle & Co. dated June 20, 2000.(1)
10.2 Termination Agreement between ArQule, Inc. and Pharmacia
Corporation dated June 30, 2000.(1)
10.3 Technology Transfer and License Agreement between ArQule,
Inc. and Amersham Pharmacia Biotech A.B. dated July 10,
2000.(1)
11.1 Statement Re: Computation of Unaudited Net Income (Loss) Per
Share.
27 Financial Data Schedule.
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(1) Certain confidential material contained in this exhibit has been omitted and
filed separately with the Securities and Exchange Commission pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
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