<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, 1997 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)
(781) 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 November 10,
1997:
Common Stock, par value $.01 11,888,909 shares outstanding
<PAGE> 2
ARQULE, INC.
QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Unaudited Condensed Financial Statements
Condensed Balance Sheet (Unaudited)
September 30, 1997 and December 31, 1996 ....................... 2
Condensed Statement of Operations (Unaudited)
Three months ended September 30, 1997 and 1996
and nine months ended September 30, 1997 and 1996............... 3
Condensed Statement of Cash Flows (Unaudited)
Nine months ended September 30, 1997 and 1996................... 4
Notes to Unaudited Condensed Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 8
PART II - OTHER INFORMATION................................................. 12
Item 6 - Exhibits and Reports on Form 8-K................................... 12
Signatures ................................................................ 13
<PAGE> 3
ARQULE, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA )
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,327 $ 36,586
Marketable securities 44,809 500
Accounts receivable 750 250
Prepaid expenses and other current assets 56 338
Notes receivable from related parties 176 176
-------- --------
Total current assets 54,118 37,850
Property and equipment, net 9,053 5,293
Other assets 166 139
Notes receivable from related parties 204 227
-------- --------
$ 63,541 $ 43,509
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease
obligations $ 1,383 $ 1,138
Accounts payable and accrued expenses 1,551 1,109
Deferred revenue 2,245 4,163
-------- --------
Total current liabilities 5,179 6,410
Capital lease obligations 1,391 1,728
Deferred revenue 636 750
Shareholders' Equity:
Common stock, $0.01 par value; 30,000,000
shares authorized; 11,879,214 and
9,851,487 shares issued and outstanding
at September 30, 1997 and December 31,
1996, respectively 119 99
Additional paid-in capital 68,252 46,102
Accumulated deficit (11,361) (10,934)
-------- --------
57,010 35,267
Deferred compensation (675) (646)
-------- --------
Total stockholders' equity 56,335 34,621
-------- --------
$ 63,541 $ 43,509
======== ========
</TABLE>
-2-
<PAGE> 4
ARQULE, INC.
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue:
Compound development revenue $ 3,814 $ 675 $ 8,542 $ 2,150
Compound development revenue - related party 895 750 2,685 2,250
-------- ------- -------- -------
Total revenue 4,709 1,425 11,227 4,400
-------- ------- -------- -------
Costs and expenses:
Cost of revenue 2,404 645 5,497 1,607
Cost of revenue - related party 616 709 1,849 1,682
Research and development 1,127 835 2,954 1,954
Marketing, general and administrative 1,012 735 3,112 1,563
-------- ------- -------- -------
Total costs and expenses 5,159 2,924 13,412 6,806
-------- ------- -------- -------
Loss from operations (450) (1,499) (2,185) (2,406)
Interest income 811 71 1,958 243
Interest expense (58) (9) (200) (28)
-------- ------- -------- -------
Net income (loss) $ 303 $(1,437) $ (427) $(2,191)
======== ======= ======== =======
Net income (loss) per share
(pro forma for 1996) $ 0.02 $ (0.21) $ (0.04) $ (0.30)
======== ======= ======== =======
Weighted average common shares outstanding
(pro forma for 1996) 12,996 6,743 10,767 7,210
======== ======= ======== =======
</TABLE>
-3-
<PAGE> 5
ARQULE, INC.
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (427) $(2,191)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,552 876
Amortization of deferred compensation 300 --
Increase in accounts receivable (500) --
Decrease in prepaid expenses and other current
assets 282 50
Increase in other assets (27) (500)
Decrease (increase) in notes receivable from related
party 23 (250)
Increase in accounts payable and accrued expenses 442 506
(Decrease) increase in deferred revenue (2,032) 1,600
-------- -------
Net cash (used in) provided by operating activities (387) 91
-------- -------
Cash flows from investing activities:
Purchase of available-for-sale marketable securities (52,957) (5,434)
Proceeds from sale or maturity of available-for-sale
marketable securities 8,648 7,707
Proceeds from issuance of common stock 21,841 --
Additions to property and equipment (4,456) (2,476)
-------- -------
Net cash used in investing activities (26,924) (203)
-------- -------
Cash flows from financing activities:
Principal payments of capital lease obligation (948) (496)
-------- -------
Net cash used in financing activities (948) (496)
-------- -------
Net decrease in cash and cash equivalents (28,259) (608)
Cash and cash equivalents, beginning of period 36,586 2,989
-------- -------
Cash and cash equivalents, end of period $ 8,327 $ 2,381
======== =======
</TABLE>
-4-
<PAGE> 6
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
Company's audited financial statements and related footnotes for the year
ended December 31, 1996 thereto included in the Company's Form 10-K filed
with the Securities and Exchange Commission on March 31,1997. 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 the
Company as of September 30, 1997, and the results of its operations for
the three and nine month periods ended September 30, 1997 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. NET INCOME (LOSS) PER SHARE (UNAUDITED)
Net Income Per Share in 1997
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." SFAS 128 will become effective for the Company's
fiscal periods ending after December 15, 1997 and requires the restatement
of all previously reported earnings per share data that are presented.
Early adoption of SFAS 128 is not permitted. SFAS 128 replaces primary and
fully diluted earnings per share with basic and diluted earnings per
share. For the reporting period where the Company has reported net losses,
earnings per share as computed under the provisions of SFAS 128 is not
expected to differ from the earnings per share amounts previously reported
by the Company. For the three months ended September 30, 1997, the Company
reported a profit and earnings per share of $0.02. Implementation of
diluted earnings per share to be presented under SFAS 128 will not be
materially different.
The net income per share calculation for the third quarter of 1997
includes common stock equivalents as a result of stock options
outstanding. These options are not included in any net loss per share
calculations presented as they are considered anti-dilutive. Fully diluted
earnings per share does not differ from primary earnings per share and is
not presented.
-5-
<PAGE> 7
ARQULE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Proforma Net Loss Per Share in 1996
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 on October 16, 1996.
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 the Company's Registration Statement (Commission File
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 for the three and
nine months ended September 30, 1996 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.
3. FOLLOW-ON OFFERING OF COMMON STOCK (UNAUDITED)
On April 4, 1997, the Company completed a follow-on offering of 1,932,500
shares of Common Stock at $12.00 per share, which included the
underwriters' exercise of their over-allotment option of 300,000 shares of
Common Stock on April 14, 1997. The combined gross proceeds raised by
ArQule from the offering and over-allotment option was approximately
$23,190,000.
4. CASH EQUIVALENTS AND MARKETABLE SECURITIES (UNAUDITED)
The following is a summary of cash equivalents held by the Company at
September 30, 1997 and December 31, 1996 which are carried at fair market
value: (In thousands)
SEPT. 30, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------
Money Market $1,526 $36,126
U.S. Government Debt Securities 1,994 --
Corporate Notes 2,773 --
------ -------
$6,293 $36,126
====== =======
-6-
<PAGE> 8
ARQULE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of available-for-sale marketable securities
held by the Company at September 30, 1997 and December 31, 1996 which are
carried at fair market value: (In thousands)
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED AMORTIZED
SEPTEMBER 30, 1997 MATURITY TERM FAIR VALUE GAINS LOSSES COST
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government
Debt Securities Within 1 year $13,936 7 (1) $13,930
Corporate Notes Within 1 year 30,873 19 (5) 30,859
------ ---- ---- -------
$44,809 26 (6) $44,789
======= ==== ==== =======
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
U.S. Government
Debt Securities Within 1 year $ 500 - - $ 500
--------- - - --------
$ 500 - - $ 500
========= = = ========
</TABLE>
All of the Company's marketable securities are classified as current at
September 30, 1997 and December 31, 1996 as these funds are highly liquid
and are available to meet working capital needs and to fund current
operations.
5. AMERICAN HOME PRODUCTS COLLABORATION (UNAUDITED)
On July 3, 1997, the Company and Wyeth-Ayerst Pharmaceuticals, a division
of American Home Products Corporation (AHP), signed a collaborative
agreement to discover and optimize drug candidates (the "Collaborative
Agreement"). The Collaborative Agreement provides that AHP will pay ArQule
approximately $28 million over the term of the Collaborative Agreement,
including a $2 million equity investment in ArQule to be paid in 1998. AHP
will make further primarily research payments to ArQule throughout the
five-year collaboration as development milestones are reached. In
addition, ArQule will be entitled to royalties from sales of any products
emanating from this collaboration. On July 3, 1997, under the terms of the
Collaborative Agreement, AHP made an initial payment to the Company of
$2.3 million upon commencement of the collaboration. The five-year
collaboration will provide AHP with access to ArQule's annual Mapping
Array(TM) Program as well as access to ArQule's Directed Array(TM) Program
for a minimum of 15 of AHP's selected pharmaceutical targets.
-7-
<PAGE> 9
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 in the pharmaceutical, biotechnology
and agrichemical industries. ArQule manufactures and delivers two types of
arrays of synthesized compounds to its pharmaceutical, biotechnology and
agrichemical partners: (i) Mapping Array(TM) compound sets, which are
arrays of novel, diverse small molecule compounds used for generating
leads and (ii) Directed Array(TM) 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 primarily through compound
development from collaborative agreements, which provide for the
development and delivery of Mapping Array(TM) and Directed Array(TM) sets.
The Company's revenues to date are primarily attributable to six major
corporate collaborations: Pharmacia Biotech AB, entered into in March
1995; Abbott Laboratories, entered into in June 1995; Solvay Duphar B.V.,
entered into in November 1995; Roche Bioscience, entered into in September
1996; Monsanto Company, entered into in December 1996; and American Home
Products entered into in July 1997. The Company recognizes revenue under
its corporate collaborations as related work is performed or as arrays are
delivered. Payments received from corporate partners prior to the
completion of the related work or before array delivery are recorded as
deferred revenue. The Company is also entitled to receive milestone and
royalty payments if products generated under the collaborations are
developed. The Company has not received any milestone or royalty payments
to date. The Company has additionally entered into joint discovery
agreements with a number of biotechnology companies to which it has
provided Mapping Array(TM) and Directed Array(TM) sets in exchange for
joint ownership interests in any resulting drug candidates. These
arrangements have not yet yielded any significant revenue for the Company.
The Company experienced its first quarter of profitability during the
three months ended September 30, 1997, reflecting the increase in revenues
resulting from ArQule's growing collaborator base. Quarterly variations in
future financial performance may be expected as increases in revenue are
dependent on expanding existing collaborations, additional corporate
collaborations, and future milestone payments, which are inconsistent and
difficult to anticipate. In addition, the Company will continue to
aggressively invest in new technologies to expand its drug discovery
capabilities. The Company also expects that strategic opportunities will
arise to broaden the Company's participation in drug discovery and to
extend the Company's proprietary technology platform to industry segments
beyond pharmaceutical and agrochemical product discovery. Strategic
investments of this nature have the potential for enhancing longer term
equity value but may result in near term earnings fluctuations or impact
profitability.
-8-
<PAGE> 10
The Company has incurred a cumulative net loss of $11.4 million through
September 30, 1997. 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
continued profitability is dependent on its ability to market its Mapping
Array(TM) and Directed Array(TM) programs to pharmaceutical, biotechnology
and agrichemical companies and the joint development and commercialization
of products in which it has an economic interest.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements reflecting
management's current expectations regarding the Company's future financial
performance. Such expectations are based on certain assumptions regarding
the progress of product development efforts under collaborative
agreements, the execution of new collaborative agreements and other
factors relating to the Company's 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 the
Company's Annual Report on Form 10K for the year ended December 31, 1996.
-9-
<PAGE> 11
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUE. The Company's revenue for the three months ended September 30,
1997 increased $3.3 million to $4.7 million from $1.4 million for the same
period in 1996. Revenue was $11.2 million and $4.4 million for the nine
months ended September 30, 1997 and 1996, respectively. These increases
are primarily due to increased compound development revenue from work
performed on and the delivery of Mapping Array(TM) and Directed Array(TM)
sets under the Company's collaborative agreements. The increase is
primarily attributable to the addition of collaborative agreements with
Roche BioScience, Monsanto Company and American Home Products in October
1996, December 1996 and July 1997, respectively.
COST OF REVENUE. The Company's cost of revenue for the three months ended
September 30, 1997 increased $1.6 million to $3.0 million from $1.4
million for the same period in 1996. Cost of revenue was $7.3 million and
$3.3 million for the nine months ended September 30, 1997 and 1996,
respectively. These increases are primarily attributable to the costs of
additional facilities and scientific personnel and the necessary supplies
and overhead expenses related to the performance of the work and the
delivery of the Mapping Array(TM) and Directed Array(TM) sets pursuant to
the Company's collaborative agreements. The Company anticipates that the
aggregate cost of revenue will increase over the next several years as its
business expands.
RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and development
expenses for the three months ended September 30, 1997 increased $0.3
million to $1.1 million from $0.8 million for the same period in 1996.
Research and development expenses were $3.0 million and $2.0 million for
the nine months ended September 30, 1997 and 1996, respectively. These
increases are the result of the Company's expansion of its chemical
libraries and related proprietary technologies. The Company expects
research and development spending to increase over the next several years
as the Company further expands its chemistry discovery and development
programs.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's marketing,
general and administrative expenses for the three months ended September
30, 1997 increased $0.3 million to $1.0 million from $0.7 million for the
same period in 1996. Marketing, general and administrative expenses were
$3.1 million and $1.6 million for the nine months ended September 30, 1997
and 1996, respectively. These increases are primarily associated with
increased marketing and business development activities, expenses of being
a public company, and higher levels of administrative support in concert
with the Company's growth during 1997. These expenses will likely increase
in the aggregate in future periods to support the projected growth of the
Company.
-10-
<PAGE> 12
NET INTEREST INCOME (EXPENSE). The Company's net interest income for the
three months ended September 30, 1997 was $0.8 million, compared to $0.1
million for the same period in 1996. Net interest income was $1.8 million
and $0.2 million for the nine months ended September 30, 1997 and 1996,
respectively. Higher interest income in 1997 resulted primarily from the
Company holding higher cash and marketable securities balances following
its initial and follow-on offerings of common stock in October 1996 and
April 1997, respectively.
NET INCOME (LOSS). The Company's net income for the three months ended
September 30, 1997 was $0.3 million as compared to a net loss of $1.4 for
the same period in 1996. The net loss was $0.4 million and $2.2 million
for the nine months ended September 30, 1997 and 1996, respectively. The
third quarter net income for 1997 is primarily attributable to increase in
revenues from the Company's growing collaborator base and higher net
interest income recognized during 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company held cash and cash equivalents and
marketable securities with a value of $53.1 million. The Company's working
capital at September 30, 1997 was $48.9 million. The Company has funded
operations through September 30, 1997 with sales of preferred stock and
common stock totaling $66.8 million, payments from corporate collaborators
totaling $23.8 million, and the utilization of capital equipment lease
financing totaling $5.3 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 through leases with terms
of 42 months in duration. As of September 30, 1997, the Company had
utilized $4.5 million of the available $8.5 million financing facility.
In April 1997, the Company raised gross proceeds of approximately $23.2
million from the sale of 1.9 million shares of Common Stock in the
Company's follow-on offering.
Management estimates that 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 March 1999. 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, the need for currently unanticipated
capital expenditures, competitive and technological advances, acquisitions
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. The Company may have to seek additional
financing from public or private sales of its securities, including equity
securities. There can be no assurance that additional funding will be
available when needed or on acceptable terms.
-11-
<PAGE> 13
ARQULE, INC.
PART II - OTHER INFORMATION
Items 1-5 - None
Item 6(a) - Exhibits:
EXHIBITS DESCRIPTION
-------- -----------
10.1: Second Amendment to Option Agreement and Research
and Development Agreement between the Company and
Pharmacia Biotech AB dated September 23, 1996.
10.2: Third Amendment to Option Agreement and Research and
Development Agreement between the Company and
Pharmacia Biotech AB dated June 24, 1997.
10.3: First Allonge to Promissory Note between the Company
and Eric B. Gordon dated July 16, 1997.
11: Statement Regarding Computation of Unaudited Pro
Forma Net Loss Per Share
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.
-12-
<PAGE> 14
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 12, 1997 /s/ James R. Fitzgerald, Jr.
---------------------------------------------
James R. Fitzgerald, Jr.
(Vice President, Chief Financial
Officer and Treasurer)
-13-
<PAGE> 15
ARQULE, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1:* Second Amendment to Option Agreement and Research and
Development Agreement between the Company and Pharmacia
Biotech AB dated September 23, 1996.
10.2:* Third Amendment to Option Agreement and Research and
Development Agreement between the Company and Pharmacia
Biotech AB dated June 24, 1997.
10.3: First Allonge to Promissory Note between the Company
and Eric B. Gordon dated July 16, 1997.
11: Statement Regarding Computation of Unaudited Pro
Forma Net Loss Per Share
27: Financial Data Schedule
* Confidential treatment has been requested for certain portions of these
exhibits pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended.
-14-
<PAGE> 1
September 23, 1996
BY FACSIMILE - 011 46 18 166301 & FED EX
- ----------------------------------------
Mr. Ulf Lundberg
General Counsel
Pharmacia Biotech AB
Bjorkgatan 30
D-751 82 Uppsala, Sweden
Re: Second Amendment to Option Agreement and Research Agreement
-----------------------------------------------------------
Dear Mr. Lundberg:
Reference is hereby made to the Option Agreement (the "Option Agreement")
and the Research and Development Agreement (the "Research Agreement"), each
effective as of March 10, 1995, and each as amended by that certain letter
agreement dated as of February 13, 1996 ("Amendment No. 1"), by and between
ArQule, Inc. ("ArQule") and Pharmacia Biotech AB ("Pharmacia"). In consideration
of the mutual covenants and agreements hereinafter set forth and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
undersigned hereby acknowledge and agree as follows:
A. In accordance with Section 2.2.1 of the Option Agreement, Pharmacia
hereby confirms to ArQule that it has elected to extend the Option Period of its
Option Rights for Subfield I (as such capitalized terms are defined in the
Option Agreement) through April 1, 1997 in accordance with Section 2.2.1(a) of
the Option Agreement.
1. The Project Plan is hereby amended by replacing the Research Project
(as such capitalized terms are defined in the Research Agreement) entitled
"Research Plan for the Second Ligand Design Project" attached to Amendment No. 1
with the Research Project entitled "Research Plan for the Third Ligand Design
Project", a copy of which is attached hereto (as so amended, the "Amended
Research Project"), for the period commencing on October 1, 1996 and continuing
until April 1, 1997. The parties agree that the Amended Research Project has
been approved by the Research Committee, as required under Section 2.2 of the
Research Agreement.
<PAGE> 2
Mr. Ulf Lundberg
September 23, 1996
Page 2
2. In consideration of the research to be conducted by ArQule as provided
in the Amended Research Project, Pharmacia hereby agrees to pay ArQule $**,
payable on or before October 1, 1996.
Except as otherwise expressly amended by this letter agreement, each of the
terms conditions and provisions of the Option Agreement and the Research
Agreement, as heretofore amended by Amendment No. 1, shall remain in full force
and effect. This letter agreement may be signed in one or more counterparts,
each of which when taken together shall constitute one and the same instrument.
Very truly yours,
ARQULE, INC.
By: /s/ Eric B. Gordon
--------------------------------------
Eric B. Gordon
President and
Chief Executive Officer
Agreed to and Accepted
this twenty-fifth day of September 1996
PHARMACIA BIOTECH AB
By: /s/ Arne Forsell
-------------------------------------
Name: Arne Forsell
Title: President and CEO
**Confidential treatment has been requested for the marked portion.
<PAGE> 3
Research Plan for the Third "Ligand Design" Project
Research Plan for the Third
"Ligand Design" Project
AN ARQULE/PHARMACIA BIOTECH COOPERATION
Effective date for this project will be 1 of October 1996 - 1 of April 1997
CONTENTS
1. DESCRIPTION OF THE CURRENT PROJECT
1.1 Object of the project
1.2 Organization
1.2.1 Project Leaders and Reference Groups
1.2.2 Project Resources
1.3 Project Presentations
1.3.1 Synthesis
1.3.2 Analysis
1.3.3 Structural Biology/Modeling
1.3.4 Screening
1.3.5 Intellectual Property
1.3.6 Publication
2. MILESTONES
3. PROPERTIES
4. TIME PLAN
* *
**Confidential treatment has been requested for the marked portion.
<PAGE> 1
June 24, 1997
BY FACSIMILE - 011 46 18 16 64 58 & FEDERAL EXPRESS
- ---------------------------------------------------
Maris Hartmanis, Ph.D.
Vice President, Research & Development
Pharmacia Biotech AB
Bjorkgatan 30
S-751 82 Uppsala
SWEDEN
Re: Third Amendment to Option Agreement and Research Agreement
----------------------------------------------------------
Dear Dr. Hartmanis:
Reference is hereby made to the Option Agreement (the "Option Agreement")
and the Research and Development Agreement (the "Research Agreement"), each
effective as of March 10, 1995, and each as amended by those certain letter
agreements dated as of February 13, 1996 ("Amendment No. 1") and September 23,
1996 ("Amendment No. 2"), by and between ArQule, Inc. ("ArQule") and Pharmacia
Biotech AB ("Pharmacia"). In consideration of the mutual covenants and
agreements hereinafter set forth and other valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the undersigned hereby
acknowledge and agree as follows:
1. In accordance with Section 2.2.1 of the Option Agreement, Pharmacia
hereby confirms to ArQule that, by letter dated April 24, 1997; it has elected
to extend the Option Period for its Option Rights for Subfiled I (as such
capitalized terms are defined in the Option Agreement) through October 30, 1997
in accordance with Section 2.2.1(a) of the Option Agreement. Pharmacia and
ArQule acknowledge that this extension of the Option Period represents the third
and final extension available under the Option Agreement. Pharmacia and ArQule
hereby agree to modify Section 2.3. of the Option Agreement to extend the
Negotiation Period as follows. Pharmacia and ArQule will negotiate in good faith
the terms and conditions of a license agreement for Subfield I not later than
December 31, 1997. In the event that the parties have not executed a license
agreement for Subfield I by December 31, 1997, ArQule shall be free to license
the ArQule Technology in Subfield I to any third party on any terms.
2. The Project Plan shall be amended, in accordance with the terms of the
Research Agreement, by replacing the Research Project (as such capitalized terms
are defined in the Research Agreement) entitled "Research Plan for the Third
Ligand Design Project" attached to Amendment No. 2 with the Research Project
entitled "Research Plan to Develop Prototypical Affinity Chromatography Media
with Synthetic Ligands", a copy of which is
<PAGE> 2
Dr. Maris Hartmanis
June 24, 1997
Page 2
attached hereto (as so amended, the "Amended Research Project"), for the period
commencing on July 1, 1997 and continuing until December 31, 1997. The parties
acknowledge that the July 1 commencement date is based on a two-month extension
to the Negotiation Period at the conclusion of the second six-month extension to
the Option Period. The parties agree that the Amended Research Project has been
approved by the Research Committee, as required under Section 2.2. of the
Research Agreement.
3. In consideration of the research to be conducted by ArQule as provided
in the Amended Research Project, Pharmacia hereby agrees to pay ArQule $**,
payable on or before July 1, 1997.
Except as otherwise expressly amended by this letter agreement, each of the
terms conditions and provisions of the Option Agreement and the Research
Agreement, as hereto fore amended by Amendment No. 2, shall remain in full force
and effect. This letter agreement may be signed in one or more counterparts,
each of which when taken together shall constitute one and the same instrument.
Very truly yours,
ARQULE, INC.
By: /s/ Eric B Gordon
--------------------------------------
Eric B. Gordon
President and
Chief Executive Officer
Agreed to and Accepted
this 27th day of June, 1997
PHARMACIA BIOTECH AB
By: /s/ Dr. Maris Hartmanis
--------------------------------
Dr. Maris Hartmanis
Vice-President
cc: Joseph C. Hogan, Chairman, Senior Vice President, and Chief
Scientific Officer
Michael D. Rivard, General Counsel
John Sorvillo, Vice President, Business Department
Ulf Lundberg, General Counsel
Johan Von Heijne, Manager, Strategic Planning
**Confidential treatment has been requested for the marked portion.
<PAGE> 3
Research Plan for Third Option Period of the Pharmacia Biotech--
ArQule Collaboration
Effective date for this research plan will be
July 1, 1997 - December 31, 1997.
* *
**Confidential treatment has been requested for the marked portion.
<PAGE> 1
FIRST ALLONGE TO PROMISSORY NOTE
This FIRST ALLONGE dated as of July 16, 1997 between ArQule, Inc., a
Delaware corporation (the "HOLDER"), and Eric B. Gordon (the "MAKER"), to the
Promissory Note dated as of July 9, 1996 in the amount of $250,000 (as the same
may be further amended, modified or supplemented from time to time, the "NOTE"),
payable to the order of the Holder and made by the Maker.
RECITALS
WHEREAS, the Maker and the Holder have agreed to amend the Note to extend
the dates on which the payments of principal and interest are due by amending
Schedule I.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are acknowledged, the Maker and the Holder hereby agree, with effect from
the date first set forth above, as follows:
1. The Note is hereby amended as follows:
1.1 The first paragraph of the Note is hereby deleted and replaced
with the following:
FOR VALUE RECEIVED, the undersigned, Eric B. Gordon, an
individual with a place of residence at 2 Charles Davis Drive,
Wenham, Massachusetts 01984 (hereinafter called "MAKER"), by this
secured promissory note (hereinafter called this "NOTE"),
promises unconditionally to pay to the order of ArQule, Inc., a
Delaware corporation with a principal place of business at 200
Boston Avenue, Medford, Massachusetts 02155 (hereinafter called
"HOLDER"), on or before February 15, 2000, the principal sum of
TWO HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($250,000.00), with
interest (computed on the basis of actual days elapsed and a
365-day year) from August 15, 1996 on the principal amount unpaid
at a rate equal to the lowest applicable federal rate of interest
as set forth in Section 1274 of the Internal Revenue Code of
1986, as amended.
1.2 The first sentence of the second paragraph is deleted.
1.3 The Payment Schedule set forth in Schedule I is hereby deleted in
its entirety and replaced with the attached Schedule I.
2. The Note is, and shall continue to be, in full force and effect as
modified hereby, and is hereby in all respects ratified and confirmed. The
Holder is hereby authorized to attach this Allonge to the Note.
<PAGE> 2
WITNESS the execution hereof under seal as of the day and year first above
written.
ARQULE, INC.
By: /s/ Allan Ferguson
------------------
Title: Director
/s/ Eric B. Gordon
------------------
Eric B. Gordon
<PAGE> 3
Schedule I
----------
Payment Schedule
<TABLE>
<CAPTION>
Date Principal Due Interest Due(1) Total Payment Due Principal Balance
- ---- ------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
February 15, 1998 $83,333 $22,670.68 $106,003.68 $166,667
February 15, 1999 $83,333 $10,066.69 $ 93,399.69 $ 83,333
February 15, 2000 $83,333 $ 5,033.31 $ 88,366.31 --
</TABLE>
- --------
(1) Based upon the applicable federal rate of interest of 6.04%, as
announced for the month of July, 1996.
<PAGE> 1
EXHIBIT 11
ARQULE, INC.
STATEMENT REGARDING COMPUTATION OF UNAUDITED NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------------------- ------------------------
(PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C>
Net income (loss) (unaudited) $ 303 $(1,437) $ (427) $(2,191)
======= ======= ======== =======
Weighted average shares outstanding (unaudited):
Common stock 11,850 523 10,767 523
Common stock equivalent options 1,146 -- -- --
Assumed conversion of preferred stock -- 6,220 -- 6,216
Shares issuable pursuant to SAB 83 using
the treasury stock method -- 0 -- 471
------- ------- -------- -------
Total shares 12,996 6,743 10,767 7,210
======= ======= ======== =======
Net income (loss) per share (unaudited) $ 0.02 $ (0.21) $ (0.04) $ (0.30)
======= ======= ======== =======
</TABLE>
* Fully diluted loss per share in 1997 would be identical and therefore is not
presented.
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 8,327
<SECURITIES> 44,809
<RECEIVABLES> 750
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,118
<PP&E> 12,473
<DEPRECIATION> 3,420
<TOTAL-ASSETS> 63,541
<CURRENT-LIABILITIES> 5,179
<BONDS> 0
0
0
<COMMON> 119
<OTHER-SE> 56,891
<TOTAL-LIABILITY-AND-EQUITY> 63,541
<SALES> 11,227
<TOTAL-REVENUES> 11,227
<CGS> 7,346
<TOTAL-COSTS> 13,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> (427)
<INCOME-TAX> 0
<INCOME-CONTINUING> (427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (427)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
