<PAGE> 1
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, 1996 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)
200 BOSTON AVENUE, MEDFORD, MASSACHUSETTS 02155
(Address of Principal Executive Offices)
(617) 395-4100
(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 October 31,
1996:
Common Stock, par value $.01 9,476,487 shares outstanding
* The Company has been subject to such filing requirements since its
Registration Statement Number 333-11105 on Form S-1 was declared
effective on October 16, 1996.
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ARQULE, INC.
QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Condensed Financial Statements
Condensed Balance Sheet (Unaudited)
December 31, 1995 and September 30, 1996 ..................... 2
Condensed Statement of Operations (Unaudited)
Three months ended September 30, 1995 and 1996 and
nine months ended September 30, 1995 and 1996 ................ 3
Condensed Statement of Cash Flows (Unaudited)
Nine months ended September 30, 1995 and 1996 ................ 4
Notes to Unaudited Condensed Financial Statements ................. 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 7
PART II - OTHER INFORMATION ............................................... 10
Signatures ................................................................ 11
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ARQULE, INC.
<TABLE>
CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,989 $ 2,381
Marketable securities 4,802 2,529
Restricted cash 50 50
Prepaid expenses and other current assets 73 23
Note receivable from related party 93 70
------------------------
Total current assets 8,007 5,053
Restricted cash 50 50
Property and equipment, net 1,994 5,265
Other assets 49 549
Note receivable from related party 90 340
------------------------
$10,190 $ 11,257
========================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of capital lease obligation $ 514 $ 986
Accounts payable and accrued expenses 769 1,133
Deferred revenue 1,650 2,708
------------------------
Total current liabilities 2,933 4,827
------------------------
Capital lease obligation 911 1,591
------------------------
Deferred revenue 458 1,000
------------------------
Series B mandatorily redeemable convertible
preferred stock 6,888 6,903
------------------------
Stockholders' deficit:
Series A convertible preferred stock 2,486 2,628
Common stock 5 5
Additional paid-in capital 4,435 4,435
Accumulated deficit (7,926) (10,132)
------------------------
Total stockholders' deficit (1,000) (3,064)
------------------------
$10,190 $ 11,257
========================
</TABLE>
2
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ARQULE, INC.
<TABLE>
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
------------------- --------------------
<S> <C> <C> <C> <C>
Revenue:
Compound development revenue $ 759 $ 675 $ 1,280 $ 2,150
Compound development
revenue -- related party 0 750 0 2,250
License option fees 0 0 1,000 0
------------------ -------------------
759 1,425 2,280 4,400
------------------ -------------------
Costs and expenses:
Cost of revenue 550 645 942 1,607
Cost of revenue -- related party 0 709 0 1,682
Research and development 413 835 1,626 1,954
General and administrative 384 735 1,190 1,563
------------------ -------------------
1,347 2,924 3,758 6,806
------------------ -------------------
Loss from operations (588) (1,499) (1,478) (2,406)
Interest income 17 71 28 243
Interest expense (167) (9) (357) (28)
------------------ -------------------
Net loss $ (738) $(1,437) $(1,807) $(2,191)
================== ===================
Pro forma net loss per share $ (0.21) $ (0.30)
======= =======
Shares used in computing
pro forma net loss per share 6,743 7,210
======= =======
</TABLE>
3
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ARQULE, INC.
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Increase (Decrease) in Cash and Cash Equivalents
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1996
------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,807) $(2,191)
Adjustment to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 350 876
Amortization of debt discount 157 0
Decrease in prepaid expenses and other current assets 14 50
Increase in other assets 0 (500)
Increase in notes receivable from related party 0 (250)
Increase in accounts payable and accrued expenses 136 506
Increase in deferred revenue 1,958 1,600
-----------------------
Net cash provided by operating activities 808 91
-----------------------
Cash flows from investing activities:
Purchases of marketable securities 0 (5,434)
Proceeds from sale or maturity of marketable securities 0 7,707
Decrease in restricted cash 188 0
Additions to property and equipment (372) (2,476)
-----------------------
Net cash used in investing activities (184) (203)
-----------------------
Cash flows from financing activities:
Proceeds from bridge financing -- related party 700 0
Principal payments of capital lease obligation (269) (496)
-----------------------
Net cash provided by (used in) financing activities 431 (496)
-----------------------
Net increase (decrease) in cash and cash equivalents 1,055 (608)
Cash and cash equivalents, beginning of period 425 2,989
-----------------------
Cash and cash equivalents, end of period $ 1,480 $ 2,381
=======================
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations of $279 and $1,648 were incurred in the nine
months ended September 30, 1995 and 1996, respectively, when the Company entered
into leases for various machinery and equipment, furniture and fixtures, and
leasehold improvements.
During 1995, the Company converted $2,400 of bridge loans into 1,920 shares
of Series A convertible preferred stock. In addition, during 1996, the Company
converted $142 of interest relating to the bridge loans into 113 shares of
Series A convertible preferred stock.
4
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ARQULE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared by
the Company without audit, 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 such
rules and regulations. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Registration Statement Number 333-11105 on Form S-1, originally filed
with the Securities and Exchange Commission on August 29, 1996 as amended. The
unaudited condensed financial statements include, in the opinion of management,
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of ArQule, Inc. as of September 30, 1996,
and the results of its operations for the three and nine month periods ending
September 30, 1995 and 1996. The results of operations for such interim periods
are not necessarily indicative of the results to be achieved for the full year.
2. DEFERRED ISSUANCE COSTS (UNAUDITED)
As of September 30, 1996, $500,000 of costs related to the initial public
offering of the Company's common stock (Note 5) have been deferred, and will be
offset against the proceeds of the offering. These costs are reflected on the
balance sheet as other assets.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES (UNAUDITED)
<TABLE>
Accounts payable and accrued expenses consist of the following (in thousands):
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Accounts payable $369 $ 371
Accrued professional fees 176 562
Accrued employee costs 42 165
Accrued interest expense 142 0
Other accrued expenses 40 35
---- ------
$769 $1,133
==== ======
</TABLE>
5
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ARQULE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is determined by dividing the net loss by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period, assuming the conversion of all convertible
preferred stock which occurred upon the closing of the public offering of the
Company's common stock as described in Note 5.
Common stock equivalents, although anti-dilutive, issued at prices below the
offering price per share during the twelve month period preceding the initial
filing of Registration Statement Number 333-11105 have been included in the
calculation of pro forma net loss per share using the treasury stock method and
the initial public offering price of $12.00 per share as if outstanding for all
periods presented through June 30, 1996.
Historical net loss per share has not been presented as the Series A convertible
preferred stock would have been omitted from the weighted average shares
outstanding as it is anti-dilutive and was issued more than twelve months prior
to the public offering.
5. SUBSEQUENT EVENT (UNAUDITED)
On October 16, 1996, the Company completed its initial public offering of
2,500,000 shares of common stock which resulted in net proceeds of approximately
$27.9 million. In conjunction with the initial public offering, all of the
Company's outstanding preferred stock was converted into 6,219,948 shares of
common stock.
6
<PAGE> 8
ARQULE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
OVERVIEW
ArQule is engaged in the discovery and development of novel chemical
compounds with commercial potential with an initial focus on the pharmaceutical
and biotechnology industries. ArQule manufactures and delivers two types of
arrays of synthesized compounds to its pharmaceutical and biotechnology
partners: (i) Mapping Array compound sets, which are arrays of novel, diverse
small molecule compounds used for screening and (ii) Directed Array compound
sets, which are arrays of analogs of a particular lead compound (identified from
a Mapping Array set or otherwise), synthesized for the purpose of optimizing
such lead compounds.
The Company currently generates revenue through compound development
and through license option fees. Compound development revenue relates to revenue
from collaborative agreements, which provide for the development and delivery of
Mapping Array and Directed Array sets. License option fee revenue represents
payments made to the Company for the option to license certain ArQule compounds.
The Company's revenue to date is primarily attributable to four major corporate
collaborations: Pharmacia Biotech AB which was entered into in March 1995;
Abbott Laboratories which was entered into in June 1995; Solvay Duphar B.V.
which was entered into in November 1995; and Roche Bioscience which was entered
into in September 1996. Under these collaborations, the Company has received
payments of $11.4 million through September 30, 1996 ($1.0 million for license
option fees; $10.4 million for compound development), of which $7.7 million has
been recognized as revenue ($1.0 million for license option fees; $6.7 million
for compound development). The Company recognizes revenue under its corporate
collaborations as related work is performed and arrays are delivered. Payments
received from corporate partners prior to the completion of the related work are
recorded as deferred revenue. License option fees are recognized as the options
are granted because such fees are nonrefundable and the Company has no further
obligations to fulfill. Cost of revenue represents the actual costs incurred in
connection with the development, production and delivery of compounds. The
Company is entitled to receive milestone and royalty payments if products
generated under the collaborations are developed. In addition, the Company has
entered into joint discovery agreements with a number of biotechnology companies
to which it has provided Mapping Array and Directed Array sets in exchange for
joint ownership of resulting drug candidates. These arrangements have not yet
yielded any significant revenue for the Company.
The Company has not been profitable since incorporation and has
incurred a cumulative net loss of $10.1 million through September 30, 1996.
Losses have resulted principally from costs incurred in research and development
activities related to the Company's efforts to develop its technologies and from
the associated administrative costs required to support those efforts. The
Company's ability to achieve profitability is dependent on its ability to market
its Mapping Array and Directed Array sets to
7
<PAGE> 9
pharmaceutical and biotechnology companies and the joint development and
commercialization of products in which it has an economic interest.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenue. The Company's revenue was $0.8 million and $1.4 million for
the three months ended September 30, 1995 and 1996, respectively. Revenue was
$2.3 million and $4.4 million for the nine months ended September 30, 1995 and
1996, respectively. The increase was due primarily to an increase in compound
development revenue related to the performance of work and the delivery of
Mapping Array and Directed Array sets under the Company's collaborative
agreements. In the nine months ended September 30, 1995, the Company also
recognized a $1.0 million license option fee related to the Pharmacia
collaborative agreement.
Cost of revenue. The Company's cost of revenue was $0.6 million and
$1.4 million for the three months ended September 30, 1995 and 1996,
respectively. Cost of revenue was $0.9 million and $3.3 million for the nine
months ended September 30, 1995 and 1996, respectively. The increase was
primarily attributable to facilities expansion, additional scientific personnel
and the increased expenditures for supplies and overhead related to the
performance of the work and the delivery of the Mapping Array and Directed Array
sets pursuant to its collaborative agreements.
Research and development expenses. The Company's research and
development expenses were $0.4 million and $0.8 million for the three months
ended September 30, 1995 and 1996, respectively. Research and development
expenses were $1.6 million and $2.0 million for the nine months ended September
30, 1995 and 1996, respectively. The increase is due primarily to the
advancement of internal research programs.
General and administrative expenses. The Company's general and
administrative expenses were $0.4 million and $0.7 million for the three months
ended September 30, 1995 and 1996, respectively. General and administrative
expenses were $1.2 million and $1.6 million for the nine months ended September
30, 1995 and 1996, respectively. The increase in general and administrative
expense is due primarily to increased personnel costs and corporate activity.
Net interest income (expense). The Company's net interest expense was
$0.2 million for the three months ended September 30, 1995, which compared to
net interest income of $0.1 million for the three months ended September 30,
1996. Net interest expense was $0.3 million for the nine months ended September
30, 1995, and net interest income was $0.2 million for the nine months ended
September 30, 1996. Higher net interest income in 1996 resulted primarily from
the Company holding higher cash balances following an equity investment in
November 1995 by one of its corporate collaborators.
Net loss. The Company's net loss was $0.7 million and $1.4 million for
the three month periods ended September 30, 1995 and 1996, respectively. Net
loss was $1.8
8
<PAGE> 10
million and $2.2 million for the nine months ended September 30,
1995 and 1996, respectively. The change is primarily attributable to the
continued increase in research and development activity levels as the Company
further expanded its chemistry discovery and development programs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company held cash and cash equivalents and
marketable securities with a value of $4.9 million. The Company's working
capital at September 30, 1996 was $0.2 million. The Company has funded
operations to date with sales of preferred stock and common stock totaling $13.6
million, payments from corporate collaborators totaling $11.4 million, and the
utilization of capital equipment lease financing totaling $3.6 million. The
Company has maintained a master lease agreement since February 1994. Under the
terms of this agreement, the Company has funded certain capital expenditures
with lease schedules ranging from 40 to 42 months in duration. As of September
30, 1996, the Company had utilized $3.1 million of the available $5.0 million
financing facility.
For the nine months ended September 30, 1996, the Company used $0.2
million and $0.5 million in investing and financing activities, respectively.
These uses primarily reflect purchases of capital equipment and repayment of
capital lease obligations. For the nine months ended September 30,1996, net cash
provided by operating activities was $0.1 million reflecting the net loss of
$2.2 million, offset primarily by an increase in deferred revenue due to
additional payments received from corporate collaborators.
On October 16, 1996, the Company raised approximately $27.9 million
from the sale of 2.5 million shares of Common Stock in the Company's initial
public offering. In conjunction with the initial public offering, all
outstanding shares of preferred stock were converted to shares of Common Stock.
Management estimates that the proceeds from the initial public
offering, together with the Company's existing cash equivalents, short-term
investments, cash generated from operations and research funding from corporate
collaborators, will enable the Company to maintain its current and planned
operations at least through December 1998. The Company's cash requirements may
vary materially from those now planned depending upon the results of its drug
discovery and development strategies, the ability of the Company to enter into
any corporate collaborations in the future and the terms of such collaborations,
the results of research and development, competitive and technological advances,
and other factors. There can be no assurance that the Company will be able to
obtain additional customers for the Company's products and services, or that
such products and services will produce revenues adequate to fund the Company's
operating expenses. If the Company experiences increased losses, the Company may
have to seek additional financing from public or private sale of its securities,
including equity securities. There can be no assurance that additional funding
will be available when needed or on acceptable terms.
9
<PAGE> 11
ARQULE, INC.
PART II - OTHER INFORMATION
Items 1 - 5 - None
Item 6(a) - Exhibit Index:
Exhibit 11: Statement Regarding Computation of Unaudited
Pro Forma Net Loss Per Share
Exhibit 27: Financial Data Schedule
Item 6(b) - REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
10
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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.
Date: November 27, 1996 /s/ James R. Fitzgerald, Jr.
----------------------------------------
James R. Fitzgerald, Jr.
Vice President, Chief Financial Officer
and Treasurer
11
<PAGE> 1
EXHIBIT 11
ARQULE, INC.
<TABLE>
STATEMENT REGARDING COMPUTATION OF UNAUDITED PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
-------------------------------
<S> <C> <C>
Net loss (unaudited) $(1,437) $(2,191)
=======================
Weighted average shares outstanding (unaudited):
Common stock 523 523
Assumed conversion of preferred stock 6,220 6,216
Shares issuable pursuant to SAB 83 using the treasury stock method 0 471
-----------------------
Total shares 6,743 7,210
=======================
Unaudited pro forma net loss per share $ (0.21) $(0.30)
=======================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 2,989 2,381
<SECURITIES> 4,802 2,529
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,007 5,053
<PP&E> 2,691 6,815
<DEPRECIATION> 697 1,550
<TOTAL-ASSETS> 10,190 11,257
<CURRENT-LIABILITIES> 2,933 4,827
<BONDS> 0 0
<COMMON> 5 5
6,888 6,903
2,486 2,628
<OTHER-SE> (3,491) (5,697)
<TOTAL-LIABILITY-AND-EQUITY> 10,190 11,257
<SALES> 3,330 4,400
<TOTAL-REVENUES> 3,330 4,400
<CGS> 1,644 3,289
<TOTAL-COSTS> 5,296 6,806
<OTHER-EXPENSES> 286 215
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 419 (28)
<INCOME-PRETAX> (2,252) (2,191)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,252) (2,191)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,252) (2,191)
<EPS-PRIMARY> (.33) (.30)
<EPS-DILUTED> (.33) (.30)
</TABLE>
