<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 March 31, 1997 Commission File No. 000-21429
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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 April 29,
1997:
Common Stock, par value $.01 11,796,437 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 MARCH 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
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<S> <C>
Item 1 - Unaudited Condensed Financial Statements
Condensed Balance Sheet (Unaudited)
March 31, 1997 and December 31, 1996 ...........................2
Condensed Statement of Operations (Unaudited)
Three months ended March 31, 1997 and 1996......................3
Condensed Statement of Cash Flows (Unaudited)
Three months ended March 31, 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...................7
PART II - OTHER INFORMATION................................................10
Signatures.................................................................12
</TABLE>
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ARQULE, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA )
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
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ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 34,928 $ 36,586
Marketable securities 500 500
Accounts receivable 250 250
Prepaid expenses and other current assets 258 338
Notes receivable from related parties 176 176
-------- --------
Total current assets 36,112 37,850
Property and equipment, net 6,098 5,293
Other assets 153 139
Notes receivable from related parties 219 227
-------- --------
$ 42,582 $ 43,509
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,297 $ 1,138
Accounts payable and accrued expenses 1,790 1,109
Deferred revenue 2,262 4,163
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Total current liabilities 5,349 6,410
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Capital lease obligations 1,840 1,728
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Deferred revenue 954 750
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Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000
authorized; no shares issued or
outstanding -- --
Common stock, $0.01 par value; 30,000,000
shares authorized; 9,857,112 and
9,851,487 shares issued and outstanding
at March 31, 1997 and December 31, 1996,
respectively 99 99
Additional paid-in capital 46,392 46,102
Accumulated deficit (11,229) (10,934)
-------- --------
35,262 35,267
Deferred compensation (823) (646)
-------- --------
Total stockholders' equity 34,439 34,621
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$ 42,582 $ 43,509
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</TABLE>
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ARQULE, INC.
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
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<S> <C> <C>
Revenue:
Compound development revenue $2,364 $ 675
Compound development revenue
-- related party 895 750
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3,259 1,425
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Costs and expenses:
Cost of revenue 1,464 410
Cost of revenue -- related party 618 384
Research and development 670 540
Marketing, general and administrative 1,173 313
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3,925 1,647
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Loss from operations (666) (222)
Interest income 444 89
Interest expense (73) (33)
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Net loss $ (295) $ (166)
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Net loss per share (pro forma for 1996) $(0.03) $(0.02)
====== ======
Weighted average common shares
outstanding (pro forma for 1996) 9,858 7,438
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</TABLE>
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ARQULE, INC.
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (295) $ (166)
Adjustment to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 426 163
Amortization of deferred compensation 105 --
Decrease (increase) in prepaid expenses and 80 (6)
other current assets
Increase in other assets (14) --
Decrease in notes receivable from related party 8 8
Increase in accounts payable and accrued expenses 681 86
(Decrease) increase in deferred revenue (1,697) 225
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Net cash (used in) provided by operating
activities (706) 310
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Cash flows from investing activities:
Proceeds from sale or maturity of marketable
securities -- 227
Additions to property and equipment (668) (768)
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Net cash used in investing activities (668) (541)
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Cash flows from financing activities: --
Principal payments of capital lease obligations (284) (108)
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Net cash used in financing activities (284) (108)
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Net decrease in cash and cash equivalents (1,658) (339)
Cash and cash equivalents, beginning of period 36,586 2,989
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Cash and cash equivalents, end of period $34,928 $2,650
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</TABLE>
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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
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 ArQule, Inc. as of March 31, 1997,
and the results of its operations for the three month periods ending March
31, 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 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 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 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 for the three months
ended March 31, 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.
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ARQULE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share." SFAS 128 will be effective for the Company's fourth quarter of 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. As the Company has historically 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.
4. SUBSEQUENT EVENT (UNAUDITED)
On April 4, 1997, the Company completed its secondary public 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.
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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 screening 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 revenue to date is primarily attributable to five 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;
and Monsanto Company, entered into in December 31, 1996. Under these
collaborations, the Company has received payments of $16.7 million through
March 31, 1997 and has recognized $13.7 million as revenue. 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. 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 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 $11.2 million through March 31, 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 profitability is dependent on its ability
to market its Mapping Array(TM) and Directed Array(TM) sets to
pharmaceutical, biotechnology and agrichemical companies and the joint
development and commercialization of products in which it has an economic
interest.
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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 or Form 10K
for the year ended December 31, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
REVENUE. The Company's revenue for the three months ended March 31, 1997
increased $1.9 million to $3.3 million from $1.4 million for the same
period in 1996. This increase is 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. Specifically, the increase is attributable to the addition of
collaborative agreements with Roche BioScience and Monsanto Company in
October and December of 1996, respectively.
COST OF REVENUE. The Company's cost of revenue for the three months ended
March 31, 1997 increased $1.3 million to $2.1 million from $.8 million for
the same period in 1996. This increase was primarily attributable to the
costs of additional scientific and facilities 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 its 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 March 31, 1997 increased $0.2 million
to $0.7 million from $0.5 million for the same period in 1996. This
increase was 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.
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MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's marketing,
general and administrative expenses for the three months ended March 31,
1997 increased $0.9 million to $1.2 million from $0.3 million for the same
period in 1996. The increase was primarily associated with increased
business development activities, expenses of being a public company, and
higher levels of administrative support for 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.
NET INTEREST INCOME (EXPENSE). The Company's net interest income for the
three months ended March 31, 1997 was $0.4 million, which compared to $0.1
million for the same period in 1996. Higher interest income in 1997
resulted primarily from the Company holding higher cash balances following
its initial public offering of common stock in October 1996.
NET LOSS. The Company's net loss for the quarter ended March 31, 1997
increased $0.1 million to $0.3 million from $0.2 million for 1996. The
increase was primarily attributable to operating and development expenses
exceeding the increase in revenue generated from corporate collaborations
during 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company held cash and cash equivalents and
marketable securities with a value of $35.4 million. The Company's working
capital at March 31, 1997 was $30.8 million. The Company has funded
operations through March 31, 1997 with sales of preferred stock and common
stock totaling $45.3 million, payments from corporate collaborators
totaling $16.7 million, and the utilization of capital equipment lease
financing totaling $4.7 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 March 31, 1997, the Company had utilized
$4.2 million of the available $8.5 million financing facility.
In April 1997, the Company raised approximately $23.2 million from the sale
of 1.9 million shares of common stock in the Company's secondary public
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
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<PAGE> 11
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.
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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.
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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: May 9, 1997 /s/ James R. Fitzgerald,Jr.
-------------------------------------------
James R. Fitzgerald, Jr.
(Vice President, Chief Financial Officer and
Treasurer)
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EXHIBIT 11
ARQULE, INC.
STATEMENT REGARDING COMPUTATION OF UNAUDITED NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1997
(PROFORMA) --------------
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<S> <C> <C>
Net loss (unaudited) $ (166) $ (295)
Weighted average shares outstanding (unaudited):
Common stock 523 9,858
Assumed conversion of preferred stock 6,209 --
Shares issuable pursuant to SAB 83 using
the treasury stock method 706 --
------ ------
Total shares 7,438 9,858
Net loss per share (unaudited) $(0.02) $(0.03)
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 34,928
<SECURITIES> 500
<RECEIVABLES> 250
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,112
<PP&E> 8,390
<DEPRECIATION> 2,292
<TOTAL-ASSETS> 42,582
<CURRENT-LIABILITIES> 5,349
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 35,163
<TOTAL-LIABILITY-AND-EQUITY> 43,509
<SALES> 3,259
<TOTAL-REVENUES> 3,259
<CGS> 2,082
<TOTAL-COSTS> 3,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73
<INCOME-PRETAX> (295)
<INCOME-TAX> 0
<INCOME-CONTINUING> (295)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (295)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
