<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2000 Commission File No. 000-21429
ARQULE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3221586
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
</TABLE>
19 PRESIDENTIAL WAY, WOBURN, MASSACHUSETTS 01801
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(781) 994-0300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO __
Number of shares outstanding of the registrant's Common Stock as of October 18,
2000: 13,619,152
Common Stock, par value $.01.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
ARQULE, INC.
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1 -- Unaudited Consolidated Financial Statements
Consolidated Balance Sheet (Unaudited) September 30, 2000
and December 31, 1999............................................. 3
Consolidated Statement of Operations (Unaudited) Three
months ended September 30, 2000 and 1999 and nine
months ended September 30, 2000 and 1999.......................... 4
Consolidated Statement of Cash Flows (Unaudited) Nine
months ended September 30, 2000 and 1999.......................... 5
Notes to Unaudited Consolidated Financial Statements................. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 8
PART II -- OTHER INFORMATION.............................................. 11
Signatures................................................................ 12
2
<PAGE> 3
ARQULE, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,168 $ 4,208
Marketable securities..................................... 31,455 32,213
Accounts receivable....................................... 300 2,529
Accounts receivable related party......................... 1,499 1,424
Inventory................................................. 320 486
Prepaid expenses and other current assets................. 543 579
-------- --------
Total current assets.............................. 46,285 41,439
Property and equipment, net............................... 31,558 34,093
Non-current marketable securities......................... 3,073 --
Other assets.............................................. 1,786 1,814
-------- --------
$ 82,702 $ 77,346
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 4,028 $ 5,719
Current portion of capital lease obligations.............. 21 316
Current portion of long-term debt......................... 4,375 2,525
Deferred revenue.......................................... 15,863 14,375
Deferred revenue related party............................ 535 1,133
-------- --------
Total current liabilities......................... 24,822 24,068
Long-term debt.............................................. 8,075 10,700
Deferred revenue............................................ 2,932 3,825
-------- --------
Total liabilities................................. 35,829 38,593
Stockholders' Equity:
Common stock, $0.01 par value; 30,000,000 shares
authorized; 13,614,277 and 12,864,225 shares issued and
outstanding at September 30, 2000 and December 31,
1999, respectively..................................... 136 129
Additional paid-in capital................................ 79,329 73,167
Deferred compensation..................................... (262) (5)
Unrealized loss on marketable securities.................. (37) --
Accumulated deficit....................................... (32,293) (34,538)
-------- --------
Total stockholders' equity........................ 46,873 38,753
-------- --------
$ 82,702 $ 77,346
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
3
<PAGE> 4
ARQULE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenue:
Compound development revenue........................... $11,471 $ 2,457 $28,704 $ 6,630
Compound development revenue -- related parties........ 2,314 2,403 7,553 6,833
------- ------- ------- --------
Total revenue.................................. 13,785 4,860 36,257 13,463
------- ------- ------- --------
Costs and expenses:
Cost of revenue........................................ 4,195 2,071 12,396 5,754
Cost of revenue -- related parties..................... 846 2,021 3,368 5,931
Research and development............................... 4,179 3,248 12,772 9,751
Marketing, general and administrative.................. 1,943 1,643 6,395 4,380
------- ------- ------- --------
Total costs and expenses....................... 11,163 8,983 34,931 25,816
------- ------- ------- --------
Income (loss) from operations.................. 2,622 (4,123) 1,326 (12,353)
Interest income.......................................... 649 482 1,743 1,310
Interest expense......................................... (293) (16) (824) (174)
------- ------- ------- --------
Net income (loss)...................................... $ 2,978 $(3,657) $ 2,245 $(11,217)
======= ======= ======= ========
Basic net income (loss) per share........................ $ 0.22 $ (0.29) $ 0.17 $ (0.90)
======= ======= ======= ========
Weighted average common shares outstanding -- Basic...... 13,586 12,715 13,437 12,522
======= ======= ======= ========
Diluted net income (loss) per share...................... $ 0.20 $ (0.29) $ 0.15 $ (0.90)
======= ======= ======= ========
Weighted average common shares outstanding -- Diluted.... 14,891 12,715 14,710 12,522
======= ======= ======= ========
Comprehensive income (loss)
Net income (loss)...................................... $ 2,978 $(3,657) $ 2,245 $(11,217)
Unrealized gain (loss) on investment securities........ 61 -- (37) --
------- ------- ------- --------
Comprehensive income (loss).............................. $ 3,039 $(3,657) $ 2,208 $(11,217)
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
<PAGE> 5
ARQULE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income (loss)......................................... $ 2,245 $(11,217)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 5,486 4,209
Amortization of deferred compensation.................. 461 275
Decrease in accounts receivable........................ 2,154 2,707
Decrease (increase) in inventory....................... 166 (36)
Decrease in prepaid expenses and other current
assets................................................ 36 436
Decrease (increase) in other assets.................... 28 (78)
(Decrease) increase in accounts payable and accrued
expenses.............................................. (1,691) 2,293
(Decrease) increase in deferred revenue................ (3) 13,784
-------- --------
Net cash provided by operating activities............ 8,882 12,373
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities............. (47,230) (51,359)
Proceeds from sale or maturity of marketable
securities............................................ 44,878 45,476
Proceeds from tenant improvement allowance............. 2,212 --
Additions to property and equipment.................... (5,163) (16,838)
-------- --------
Net cash used in investing activities................ (5,303) (22,721)
-------- --------
Cash flows from financing activities:
Principal payments of capital lease obligation......... (295) (723)
Principal payments of long-term debt................... (775) --
Borrowings of long-term debt........................... -- 11,413
Proceeds from issuance of common stock................. 5,451 911
-------- --------
Net cash provided by financing activities............ 4,381 11,601
-------- --------
Net increase in cash and cash equivalents.............. 7,960 1,253
Cash and cash equivalents, beginning of period......... 4,208 5,780
-------- --------
Cash and cash equivalents, end of period............... $ 12,168 $ 7,033
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
<PAGE> 6
ARQULE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to these rules and
regulations. These consolidated financial statements should be read in
conjunction with our audited financial statements and footnotes related thereto
for the year ended December 31, 1999 included in our annual report on Form 10-K
filed with the Securities and Exchange Commission on March 23, 2000. The
unaudited consolidated financial statements include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly our financial position as of September 30, 2000, and
the results of our operations for the three and nine month periods ended
September 30, 2000 and 1999. The results of operations for such interim periods
are not necessarily indicative of the results to be achieved for the full year.
2. NEW ACCOUNTING PRONOUNCEMENTS
During April 2000, the Financial Accounting Standards Board issued
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of Accounting Principles Board Opinion
No. 25". Among other issues, FIN 44 clarifies (a) the definition of an employee,
(b) the criteria for determining whether a stock award plan qualifies as
non-compensatory, and (c) the accounting consequence of various award
modifications. This interpretation became effective July 1, 2000. We evaluated
the effects of FIN 44 on our financial position and results of operations and
have determined any such effects to be immaterial.
During June 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101B, an amendment to SAB 101, "Revenue
Recognition in Financial Statements." SAB 101B defers the required
implementation of SAB 101 until the fiscal quarter ended December 31, 2000. We
have evaluated SAB 101 and have determined that the effects on our financial
position and results of operations are not material.
During June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard ("FAS") No. 138, "Accounting for Certain Derivative
Instruments -- An amendment of FAS 133 "Accounting for Derivative Instruments
and Hedging Activities". FAS 138 shall be effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. We do not expect FAS 138 to have
a material impact on our financial position and results of operations.
3. JOHNSON & JOHNSON AMENDMENT
On August 14, 2000, we announced an amendment to our 1998 collaboration
agreement with The R.W. Johnson Pharmaceutical Research Institute ("PRI"), a
Johnson & Johnson Company, to discover new lead compounds for a variety of
therapeutic areas. The amended agreement includes a subscription to our Compass
Array(TM) libraries in lieu of other deliverables. The financial terms of the
agreement were not altered by the amendment.
4. EARNINGS PER SHARE
We calculate earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share". Basic earnings per share is
computed by dividing the net income available to common shareholders by the
weighted average number of shares of common stock outstanding. For purposes of
calculating diluted earnings per share the denominator includes both the
weighted average number of shares of common stock outstanding and the number of
dilutive common stock equivalents such as stock options. Options to purchase
approximately 0.2 million and 0.5 million shares were outstanding for the three
and nine
6
<PAGE> 7
ARQULE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended at September 30, 2000, respectively, but were not included in the
computation of diluted earnings per share because the exercise prices of the
options were greater than the average market price of our common stock during
the period.
Shares used in calculating basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average number of shares of common stock
outstanding............................................... 13,586 12,715 13,437 12,522
Dilutive stock options...................................... 1,305 -- 1,273 --
------ ------ ------ ------
Weighted average common shares and equivalents
outstanding............................................... 14,891 12,715 14,710 12,522
====== ====== ====== ======
</TABLE>
7
<PAGE> 8
ARQULE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are engaged in the production and development of novel chemical
compounds with commercial potential in the pharmaceutical and biotechnology
industries. We primarily manufacture arrays of synthesized compounds for
delivery to our customers for use in lead compound generation and lead compound
optimization activities. We also offer other research and development services
to meet the needs of our customers. In addition, we have established a number of
joint drug discovery programs with biotechnology companies and academic
institutions, and are pursuing a limited number of our own internal drug
discovery programs.
We primarily generate revenue through our collaborative agreements for
production and delivery of compound arrays and other research and development
services. Under most of these collaborative agreements, we are also entitled to
receive milestone and royalty payments if the customer develops products
resulting from the collaboration. To date, we have received two milestone
payments and no royalty payments. In addition, we have not yet realized any
significant revenue from our joint discovery programs with biotechnology
companies and academic institutions, or from our internal drug discovery
programs. Quarterly variations in financial performance may be expected because
levels of revenue are dependent on expanding or continuing existing
collaborations, entering into additional corporate collaborations, receiving
future milestones and royalty payments, and realizing value from ongoing drug
discovery programs, all of which are difficult to anticipate.
We will continue to invest in technologies that enhance and expand our
capabilities in drug discovery. These continued investments in technology are
intended to enhance the novelty, diversity, and medical relevance of our
compound arrays and to augment the power and scope of our chemistry
capabilities. In addition to investments in technology, we may invest in
internal lead optimization programs with the goal of delivering clinical
candidates. In November 1999, we moved our main operations to a new facility in
Woburn, Massachusetts, which includes 128,000 square feet of laboratory and
office space. Investments of this nature may result in near term earnings
fluctuations or impact the magnitude of profitability or loss.
We have incurred a cumulative net loss of $32.3 million through September
30, 2000. Losses have resulted principally from costs incurred in research and
development activities related to our efforts to develop our technologies and
from the associated administrative costs required to support those efforts.
While we were profitable in the second and third quarters of fiscal year 2000,
our ability to achieve sustained profitability is dependent on a number of
factors, including our ability to perform under our collaborations at the
expected cost, expand or continue existing collaborations, time additional
investments in technology and realize value from the development and
commercialization of products in which we have an economic interest, all of
which are difficult to anticipate.
The Management's Discussion and Analysis of Financial Condition and Results
of Operation contains forward-looking statements reflecting management's current
expectations regarding our future performance. Such expectations are based on
certain assumptions regarding the progress of product development efforts under
collaborative agreements, the executions of new collaborative agreements and
other factors relating to our growth. Such expectations may not materialize if
product development efforts are delayed or suspended, if negotiations with
potential collaborators are delayed or unsuccessful or if other assumptions
prove incorrect. See also "Important Factors Regarding Forward-Looking
Statements" described more fully in Exhibit 99.1 to our Annual Report on Form
10-K for the year ended December 31, 1999.
8
<PAGE> 9
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Our revenue for the three months ended September 30, 2000
increased $8.9 million to $13.8 million from $4.9 million for the same period in
1999. Revenue was $36.3 million and $13.5 million for the nine months ended
September 30, 2000 and 1999, respectively. These increases are primarily due to
the amortization of upfront fees and fees for delivery of Custom Array(TM) sets
to Pfizer Inc and Bayer AG and from other delivery fees earned from our
collaborations.
COST OF REVENUE. Our cost of revenue for the three months ended September
30, 2000 increased $0.9 million to $5.0 million from $4.1 million for the same
period in 1999. Cost of revenue was $15.8 million and $11.7 million for the nine
months ended September 30, 2000 and 1999, respectively. Our gross margin as a
percentage of sales was 63.4% and 56.5% for the three and nine months ended
September 30, 2000 as compared to 15.8% and 13.2% for the comparable periods in
the prior year. Our gross margin as a percentage of sales was higher in 2000 due
to the higher gross margin on the Pfizer collaboration and other economies of
scale.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
for the three months ended September 30, 2000 increased $1.0 million to $4.2
million from $3.2 million for the same period in 1999. Research and development
expenses were $12.8 million and $9.8 million for the nine months ended September
30, 2000 and 1999, respectively. This increase is the result of our ongoing
efforts to augment and enhance our chemistry capabilities and related
proprietary technologies as we expand our lead optimization programs.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Our marketing, general and
administrative expenses for the three months ended September 30, 2000 increased
$0.3 million to $1.9 million from $1.6 million for the same period in 1999.
Marketing, general and administrative expenses were $6.4 million and $4.4
million for the nine months ended September 30, 2000 and 1999, respectively.
These increases have been primarily associated with increased administrative
costs to support our growth during 2000.
NET INTEREST INCOME. Our net interest income for the three months ended
September 30, 2000 decreased $0.1 million to $0.4 million from $0.5 million for
the same period in 1999. Net interest income was $0.9 million and $1.1 million
for the nine months ended September 30, 2000 and 1999, respectively. Net
interest income decreased due to higher interest expense in 2000 resulting
primarily from our higher average debt balance on our term loan with Fleet
National Bank.
NET INCOME (LOSS). Our net income for the three months ended September 30,
2000 was $3.0 million, compared to a net loss of $(3.7) million for the same
period in 1999. Our net income (loss) was $2.2 million and $(11.2) million for
the nine months ended September 30, 2000 and 1999, respectively. Our net income
in 2000 has been primarily attributable to increased revenue from our
collaborator base.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we held cash, cash equivalents and marketable
securities with a value of $46.7 million, compared to $36.4 million at December
31, 1999. Our working capital at September 30, 2000 was $21.5 million. We have
funded operations through September 30, 2000 with sales of common stock,
revenues from corporate collaborators, and the utilization of capital equipment
lease financing. On March 18, 1999, we consummated a term loan agreement with
Fleet National Bank to support our facilities expansion. Under this agreement,
we borrowed $14.0 million of the potential $15.0 million available. As of
September 30, 2000, we have made four principal payments of $0.4 million each.
Cash flows from operating activities for the nine months ended September
30, 2000 decreased $3.5 million to $8.9 million from $12.4 million for the same
period in 1999. This decrease reflects primarily the timing of payments from our
corporate collaborations. Cash flows used in investing activities for the nine
months ended September 30, 2000 decreased $17.4 million to $5.3 million from
$22.7 million for the same period in 1999. During 1999 we completed our facility
expansion in Woburn. Cash flows from financing
9
<PAGE> 10
activities for the nine months ended September 30, 2000 decreased $7.2 million
to $4.4 million from $11.6 million for the same period in 1999. In 1999 we
borrowed $11.4 million under our Fleet Term Loan agreement to finance our
facilities expansion.
We expect that our available cash and marketable securities, together with
operating revenues and investment income will be sufficient to finance our
working capital and capital requirements for the foreseeable future. Our cash
requirements may vary materially from those now planned depending upon the
results of our drug discovery and development strategies, our ability to enter
into any additional corporate collaborations in the future and the terms of such
collaborations, the results of research and development, the need for currently
unanticipated capital expenditures, competitive and technological advances,
acquisitions and other factors. We cannot guarantee that we will be able to
obtain additional customers for our products and services, or that such products
and services will produce revenues adequate to fund our operating expenses. If
we experience increased losses, we may have to seek additional financing from
public or private sales of our securities, including equity securities. There
can be no assurance that additional funding will be available when needed or on
acceptable terms.
10
<PAGE> 11
ARQULE, INC.
PART II -- OTHER INFORMATION
Items 1-5 -- None
Item 6(a) -- Exhibits:
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
Item 6(b) -- None
11
<PAGE> 12
ARQULE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ArQule, Inc.
/s/ DAVID C. HASTINGS
--------------------------------------
David C. Hastings
(Vice President, Chief Financial
Officer and Treasurer)
Date: October 20, 2000
12
<PAGE> 13
ARQULE, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
13
