<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, 1998 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)
(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 May 5, 1998:
Common Stock, par value $.01 11,962,978 shares outstanding
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ARQULE, INC.
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Unaudited Condensed Financial Statements
Condensed Balance Sheet (Unaudited)
March 31, 1998 and December 31, 1997 ................................ 2
Condensed Statement of Operations (Unaudited)
Three months ended March 31, 1998 and 1997 .......................... 3
Condensed Statement of Cash Flows (Unaudited)
Three months ended March 31, 1998 and 1997 .......................... 4
Notes to Unaudited Condensed Financial Statements ..................... 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................... 7
PART II - OTHER INFORMATION ............................................... 11
Item 2 - Use of Proceeds .................................................. 11
Signatures ................................................................ 12
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ARQULE, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13,262 $ 15,137
Marketable securities 33,373 34,145
Accounts receivable 248 1,833
Accounts receivable related party 1,200 1,300
Inventory 842 953
Prepaid expenses and other current assets 682 520
Notes receivable from related parties 30 30
-------- --------
Total current assets 49,637 53,918
Property and equipment, net 14,669 12,654
Other assets 156 156
Notes receivable from related parties 189 197
-------- --------
$ 64,651 $ 66,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,146 $ 1,174
Accounts payable and accrued expenses 813 2,804
Deferred revenue 2,426 3,917
Deferred revenue related party 728 --
-------- --------
Total current liabilities 5,113 7,895
-------- --------
Capital lease obligations 922 1,213
-------- --------
Deferred revenue 318 477
-------- --------
Shareholders' Equity:
Common stock, $0.01 par value; 30,000,000
shares authorized; 11,942,882 and 11,877,315
shares issued and outstanding at March 31, 1998
and December 31, 1997, respectively 119 119
Additional paid-in capital 69,459 68,418
Accumulated deficit (10,572) (10,643)
-------- --------
59,006 57,894
Deferred compensation (708) (554)
-------- --------
Total stockholders' equity 58,298 57,340
-------- --------
$ 64,651 $ 66,925
======== ========
</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,
1998 1997
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<S> <C> <C>
Revenue:
Compound development revenue $ 2,928 $2,364
Compound development revenue - related party 2,758 895
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Total revenue 5,686 3,259
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Costs and expenses:
Cost of revenue 1,690 1,464
Cost of revenue - related party 1,593 618
Research and development 1,689 670
Marketing, general and administrative 1,290 1,173
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Total costs and expenses 6,262 3,925
------- ------
Loss from operations (576) (666)
Interest income 702 444
Interest expense (55) (73)
------- ------
Net income (loss) $ 71 $ (295)
======= ======
Basic net income (loss) per share $ 0.01 $(0.03)
======= ======
Weighted average common shares outstanding 11,884 9,776
======= ======
Diluted net income (loss) per share $ 0.01 $(0.03)
======= ======
Weighted average common shares and equivalents
outstanding 13,091 9,776
======= ======
</TABLE>
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ARQULE, INC.
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss) $ 71 $ (295)
Adjustment to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 889 426
Amortization of deferred compensation 192 105
Decrease in accounts receivable 1,685 --
Decrease in inventory 111 --
(Increase) decrease in prepaid expenses and other
current assets (162) 80
Increase in other assets -- (14)
Decrease in notes receivable from related party 8 8
(Decrease) increase in accounts payable and accrued expenses (1,991) 681
Decrease in deferred revenue (922) (1,697)
-------- -------
Net cash used in operating activities (119) (706)
-------- -------
Cash flows from investing activities:
Purchases of available-for-sale securities (13,128) --
Proceeds from sale or maturity of marketable securities 13,900 --
Additions to property and equipment (2,904) (668)
-------- -------
Net cash used in investing activities (2,132) (668)
-------- -------
Cash flows from financing activities:
Principal payments of capital lease obligation (319) (284)
Proceeds from issuance of common stock 695 --
-------- -------
Net cash used in financing activities 376 (284)
-------- -------
Net decrease in cash and cash equivalents (1,875) (1,658)
Cash and cash equivalents, beginning of period 15,137 36,586
-------- -------
Cash and cash equivalents, end of period $ 13,262 $34,928
======== =======
</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, 1997 thereto included in the Company's Form 10-K filed
with the Securities and Exchange Commission on March 17, 1998 and the
Company's Form 10-K/A filed with the Securities and Exchange Commission on
April 17, 1998. 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 March 31, 1998, and the results of its operations for
the three month periods ended March 31, 1998 and 1997. The results of
operations for such interim periods are not necessarily indicative of the
results to be achieved for the full year.
2. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of cash equivalents held by the Company at
March 31, 1998 and December 31, 1997 which are carried at amortized cost
approximating fair market value: (In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Obligations $ 2,600 $ 2,200
Corporate Notes 30,373 31,945
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$33,373 $34,145
======= =======
</TABLE>
All of the Company's marketable securities are classified as current at
March 31, 1998 and December 31, 1997 as these funds are highly liquid and
are available to meet working capital needs and to fund current operations.
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ARQULE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTIES
In January 1998, the Company elected an individual to its Board of
Directors who is also an employee of Wyeth-Ayerst (a subsidiary of American
Home Products). Solvay Duphar BV remains a related party.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards, No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
effective for fiscal years beginning after December 15, 1997. The Company
does not meet the requirements for reporting under either of these
statements.
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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 agrochemical industries. ArQule manufactures and delivers two types of
arrays of synthesized compounds to its pharmaceutical, biotechnology and
agrochemical 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 seven major
corporate collaborations: Amersham Pharmacia Biotech AB; Abbott
Laboratories; Solvay Duphar B.V.; Roche Bioscience; Monsanto Company;
American Home Products; and Sankyo Ltd. 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. License option fees are recognized as the options are
granted because such fees are nonrefundable and the Company has no further
obligations to fulfill. Technology access fees are recognized over the
length of the research and development agreements. 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 third consecutive quarter of profitability
during the three months ended March 31, 1998, 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
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<PAGE> 9
potential for enhancing longer term equity value but may result in near
term earnings fluctuations or impact profitability.
The Company has incurred a cumulative net loss of $10.6 million through
March 31, 1998. 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 Exhibit 99.1 to the Company's Annual
Report on Forms 10K and 10K-A for the year ended December 31, 1997.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUE. The Company's revenue for the three months ended March 31, 1998
increased $2.4 million to $5.7 million from $3.3 million for the same
period in 1997. 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. The increase is primarily attributable to the addition of
collaborative agreements with American Home Products and Sankyo in July
1997 and November 1997, respectively.
COST OF REVENUE. The Company's cost of revenue for the three months ended
March 31, 1998 increased $1.2 million to $3.3 million from $2.1 million for
the same period in 1997. This increase is 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 March 31, 1998 increased $1.0 million
to $1.7 million from $0.7 million for the same period in 1997. This
increase is the result of the Company's expansion of its chemistry
capabilities 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 March 31,
1998 increased $0.1 million to $1.3 million from $1.2 million for the same
period in 1997. This increase is primarily associated with increased
marketing and business development activities and higher levels of
administrative support related to the Company's growth. These expenses will
likely increase in the aggregate in future periods to support the projected
growth of the Company.
NET INTEREST INCOME. The Company's net interest income for the three months
ended March 31, 1998 was $0.6 million, compared to $0.4 million for the
same period in 1997. Higher interest income in 1998 resulted primarily from
the Company holding higher cash and marketable securities balances
following its follow-on offering of common stock in April 1997.
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<PAGE> 11
NET INCOME (LOSS). The Company's net income for the three months ended
March 31, 1998 was $0.1 million as compared to a net loss of ($0.3) for the
same period in 1997. The first quarter net income for 1998 is primarily
attributable to increase in revenues from the Company's growing
collaborator base and higher net interest income recognized during 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company held cash and cash equivalents and
marketable securities with a value of $46.6 million. The Company's working
capital at March 31, 1998 was $44.5 million. The Company has funded
operations through March 31, 1998 with sales of common stock, payments from
corporate collaborators, and the utilization of capital equipment lease
financing. 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, 1998, the Company had utilized $4.5 million of
the available $8.5 million financing facility.
The Company expects that its available cash and marketable securities,
together with operating revenues, investment income and lease financing
arrangements, will be sufficient to finance its working capital and capital
requirements for the foreseeable future. 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.
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ARQULE, INC.
PART II - OTHER INFORMATION
Item 1 - None
Item 2 - Use of Proceeds from Registered Securities
A Registration Statement on Form S-1 (File No. 333-11105) registering
2,875,000 shares of the Company's Common Stock, filed in connection with
the Company's Initial Public Offering (the "IPO") was declared effective by
the Securities and Exchange Commission on October 16, 1996. Exercise of the
over-allotment option was initiated on November 13, 1996 and was closed on
November 18, 1996.
The Company and its selling shareholders sold, in aggregate, all 2,875,000
shares registered in the IPO, with an aggregate-offering price to the
public of $34.5 million. The managing underwriters of the IPO were
Hambrecht & Quist LLC, Oppenheimer & Co., Inc. and Vector Securities
International Inc.
In connection with the IPO, the Company incurred total expenses of $3.0
million, including underwriting discounts and commissions of $2.4 million
and other expenses of $0.6 million. After such expenses, the Company's net
proceeds from the IPO were $31.5 million. The amount of net offering
proceeds used by the Company as of March 31, 1998 was as follows:
approximately $12.4 million for the fixed asset additions and approximately
$1.8 million for capital lease obligations.
Items 3-5 - None
Item 6(a) - Exhibits:
EXHIBITS DESCRIPTION
-------- -----------
11.1 Statement Re Computation of Unaudited Net Income (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.
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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 8, 1998 /s/ James R. Fitzgerald, Jr.
-------------------------------------------------------
James R. Fitzgerald, Jr.
(Vice President, Chief Financial Officer and Treasurer)
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ARQULE, INC.
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
11.1 Statement Re Computation of Unaudited Net Income (Loss) Per Share
27 Financial Data Schedule
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<PAGE> 1
Exhibit 11.1
ArQule, Inc.
Statement Re Computation of Unaudited Net Income (Loss) Per Share
(In Thousands, Except Per Share Data)
Three Months Ended March 31,
(Unaudited)
1998 1997
------- ------
Net income (loss) $ 71 $ (295)
======= ======
Weighted average shares outstanding:
Common Stock 11,884 9,776
Weighted average common shares outstanding 11,884 9,776
======= ======
Basic net income (loss) per share $ 0.01 $(0.03)
======= ======
Three Months Ended March 31,
(Unaudited)
1998 1997
------- ------
Net income (loss) $ 71 $ (295)
======= ======
Weighted average shares outstanding:
Common Stock 11,884 9,776
Stock option common stock equivalents 1,198 --
Unvested restricted common stock equivalents 9 --
Weighted average common shares and
equivalents outstanding 13,091 9,776
======= ======
Diluted net income (loss) per share $ 0.01 $(0.03)
======= ======
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 13,262
<SECURITIES> 33,373
<RECEIVABLES> 1,448
<ALLOWANCES> 0
<INVENTORY> 842
<CURRENT-ASSETS> 49,637
<PP&E> 20,005
<DEPRECIATION> 5,336
<TOTAL-ASSETS> 64,651
<CURRENT-LIABILITIES> 5,113
<BONDS> 0
0
0
<COMMON> 119
<OTHER-SE> 58,298
<TOTAL-LIABILITY-AND-EQUITY> 64,651
<SALES> 5,686
<TOTAL-REVENUES> 5,686
<CGS> 3,283
<TOTAL-COSTS> 6,262
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 647
<INCOME-PRETAX> 71
<INCOME-TAX> 0
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
