<PAGE> 1
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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, 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)
19 PRESIDENTIAL WAY, WOBURN, MASSACHUSETTS 01801
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(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.
[X] YES [ ] NO
Number of shares outstanding of the registrant's Common Stock as of May 3,
2000:
<TABLE>
<S> <C>
Common Stock, par value $.01 13,536,921 shares outstanding
</TABLE>
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ARQULE, INC.
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Unaudited Consolidated Financial Statements
Consolidated Balance Sheet (Unaudited)
March 31, 2000 and December 31, 1999............ 2
Consolidated Statement of Operations (Unaudited)
Three months ended March 31, 2000 and 1999...... 3
Consolidated Statement of Cash Flows (Unaudited)
Three months ended March 31, 2000 and 1999...... 4
Notes to Unaudited Consolidated Financial
Statements...................................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 6
PART II -- OTHER INFORMATION................................ 8
Signatures.................................................. 9
</TABLE>
1
<PAGE> 3
ARQULE, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $12,775 $ 4,208
Marketable securities..................................... 23,949 32,213
Accounts receivable....................................... 1,538 2,529
Accounts receivable related party......................... 1,424 1,424
Inventory................................................. 397 486
Prepaid expenses and other current assets................. 1,201 579
------- -------
Total current assets.............................. 41,284 41,439
Property and equipment, net............................... 32,519 34,093
Other assets.............................................. 1,786 1,814
------- -------
$75,589 $77,346
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 2,854 $ 5,719
Current portion of capital lease obligations.............. 179 316
Current portion of long-term debt......................... 3,013 2,525
Deferred revenue.......................................... 13,493 14,375
Deferred revenue related party............................ 1,082 1,133
------- -------
Total current liabilities......................... 20,621 24,068
------- -------
Long term debt.............................................. 9,825 10,700
Deferred revenue............................................ 2,711 3,825
------- -------
Total liabilities................................. 33,157 38,593
------- -------
Shareholders' Equity:
Common stock, $0.01 par value; 30,000,000 shares
authorized; 13,473,256 and 12,864,225 shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively........................................... 135 129
Additional paid-in capital................................ 78,552 73,167
Accumulated deficit....................................... (35,880) (34,538)
------- -------
42,807 38,758
Deferred compensation....................................... (375) (5)
------- -------
Total stockholders' equity........................ 42,432 38,753
------- -------
$75,589 $77,346
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
2
<PAGE> 4
ARQULE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Revenue:
Compound development revenue.............................. $ 7,690 $ 1,804
Compound development revenue -- related party............. 2,698 2,208
------- -------
Total revenue..................................... 10,388 4,012
------- -------
Costs and expenses:
Cost of revenue........................................... 4,002 1,652
Cost of revenue -- related party.......................... 1,404 2,022
Research and development.................................. 4,188 3,347
Marketing, general and administrative..................... 2,361 1,243
------- -------
Total costs and expenses.......................... 11,955 8,264
------- -------
Loss from operations...................................... (1,567) (4,252)
Interest income............................................. 502 424
Interest expense............................................ (277) (138)
------- -------
Net loss.................................................. $(1,342) $(3,966)
======= =======
Basic net loss per share.................................... $ (0.10) $ (0.32)
======= =======
Weighted average common shares outstanding.................. 13,205 12,317
======= =======
Diluted net loss per share.................................. $ (0.10) $ (0.32)
======= =======
Weighted average common shares and equivalents
outstanding............................................... 13,205 12,317
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
3
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ARQULE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net loss.................................................. $ (1,342) $ (3,966)
Adjustment to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 1,777 1,395
Amortization of deferred compensation..................... 237 78
Decrease in accounts receivable........................... 991 3,072
Decrease in inventory..................................... 89 13
(Increase) decrease in prepaid expenses and other current
assets................................................. (622) 172
Decrease in other assets.................................. 28 12
(Decrease) increase in accounts payable and accrued
expenses............................................... (2,865) 2,331
Decrease in deferred revenue.............................. (2,047) (653)
-------- --------
Net cash (used in) provided by operating activities.... (3,754) 2,454
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities................ (20,260) (13,942)
Proceeds from sale or maturity of marketable securities... 28,524 11,908
Proceeds from tenant improvement allowance................ 2,212 --
Additions to property and equipment....................... (2,415) (3,110)
-------- --------
Net cash provided by (used in) investing activities.... 8,061 (5,144)
-------- --------
Cash flows from financing activities:
Principal payments of capital lease obligation............ (137) (256)
Principal payments of long-term debt...................... (387) --
Proceeds from issuance of common stock.................... 4,784 483
-------- --------
Net cash provided by financing activities.............. 4,260 227
-------- --------
Net increase (decrease) in cash and cash equivalents...... 8,567 (2,463)
Cash and cash equivalents, beginning of period............ 4,208 5,780
-------- --------
Cash and cash equivalents, end of period.................. $ 12,775 $ 3,317
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
4
<PAGE> 6
ARQULE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We have prepared the accompanying consolidated financial statements without
an 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 these rules and
regulations. These consolidated financial statements should be read in
conjunction with our audited financial statements and related footnotes for the
year ended December 31, 1999 thereto 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 March 31, 2000, and the
results of our operations for the three month periods ended March 31, 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. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Machinery and equipment.............................. $14,890 $12,423
Leasehold improvements............................... 26,470 28,050
Furniture and fixtures............................... 1,652 1,651
Computer equipment................................... 7,830 6,747
Construction-in-progress............................. 212 1,980
------- -------
51,054 50,851
Less -- accumulated depreciation and amortization.... 18,535 16,758
------- -------
$32,519 $34,093
======= =======
</TABLE>
3. RECENT ACCOUNTING PRONOUNCEMENTS
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," issued in December 1999, summarizes certain of the Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The statements in the staff accounting bulletins represent
interpretations and practices followed by the Division of Corporation Finance
and the Office of the Chief Accountant in administering the disclosure
requirements of the Federal securities laws.
We do not expect this Staff Accounting Bulletin to have a material effect
on our financial statements.
4. MONSANTO COLLABORATION AMENDMENT
On January 12, 2000, we announced we had extended and expanded our 1996
agreement with Monsanto. The terms of the amended agreement extend the
relationship for an additional year through 2002 and provide Searle, the
pharmaceutical division of Monsanto, with access to our Mapping Array and new
Compass Array libraries in addition to access for the rest of Monsanto for
screening in their pharmaceutical, nutritional, and animal health programs.
5. SUBSEQUENT EVENT
On April 28, 2000, we withdrew our registration statement for our follow-on
offering to sell 2.875 million shares of common stock that we had previously
filed on March 27, 2000.
5
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ARQULE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
OVERVIEW
We are engaged in the production and development of novel chemical
compounds with commercial potential in the pharmaceutical, biotechnology,
bioseparations and agrochemical 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 $35.8 million through March 31,
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. Our
ability to achieve 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, 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
8-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
Revenue. Our revenue for the three months ended March 31, 2000 increased
$6.4 million to $10.4 million from $4.0 million for the same period in 1999.
This increase is primarily due to amortization of upfront
6
<PAGE> 8
fees and fees for delivery of Custom Array sets to Pfizer and Bayer, as well as
increased compound development revenue from work performed on and the delivery
of Mapping Array and Directed Array sets under our other collaborative
agreements.
Cost of revenue. Our cost of revenue for the three months ended March 31,
2000 increased $1.7 million to $5.4 million from $3.7 million for the same
period in 1999. This increase is primarily attributable to the overhead and
depreciation related to additional facilities and scientific personnel and the
necessary supplies and overhead expenses related to the delivery of the Mapping
Array and Directed Array sets pursuant to our collaborative agreements. We
anticipate that the aggregate cost of revenue will increase over the next
several years as our business expands.
Research and development expenses. Our research and development expenses
for the three months ended March 31, 2000 increased $0.9 million to $4.2 million
from $3.3 million for the same period in 1999. This increase is the result of
our ongoing efforts to augment and enhance our chemistry capabilities and
related proprietary technologies.
Marketing, general and administrative expenses. Our marketing, general and
administrative expenses for the three months ended March 31, 2000 increased $1.2
million to $2.4 million from $1.2 million for the same period in 1999. This
increase includes a charge of $0.3 million related to the withdrawal of our
registration statement for our follow-on stock offering.
Net interest income. Our net interest income for the three months ended
March 31, 2000 was $0.2 million, compared to $0.3 million for the same period in
1999. Higher interest expense in 2000 resulted primarily from our higher average
debt balance on our term loan with Fleet National Bank.
Net loss. Our net loss for the three months ended March 31, 2000 was $1.3
million as compared to a net loss of $4.0 million for the same period in 1999.
The decrease in our first quarter net loss for 2000 is primarily attributable to
increased revenues from our collaborator base.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we held cash, cash equivalents and marketable securities
with a value of $36.7 million. Our working capital at March 31, 2000 was $20.7
million. We have funded operations through March 31, 2000 with sales of common
stock, revenue from corporate collaborators and the utilization of capital
equipment lease financing. We have maintained a master lease agreement since
February 1994. Under the terms of this agreement, we funded certain capital
expenditures through leases with terms of 42 months. As of March 31, 2000, we
had utilized $4.5 million of the $8.5 million aggregate amount available under
this lease financing facility. On March 18, 1999, we consummated a term loan
agreement with Fleet National Bank to support our facilities expansion. As of
March 31, 2000 we had utilized $14.0 million of the $15.0 million available
under our term loan agreement with Fleet. As of March 31, 2000, we have made
three principal payments of $0.4 million each.
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 can not guarantee that we will be able to
obtain additional customers for our products and services, or that our 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
the public or private sale of our securities, including equity securities. There
can be no assurance that additional funding will be available when needed or on
acceptable terms.
7
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ARQULE, INC.
PART II -- OTHER INFORMATION
ITEMS 1-5 -- NONE
ITEM 6(a) -- EXHIBITS:
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C>
11.1 Statement Re Computation of Unaudited Net Income (Loss) Per
Share
27 Financial Data Schedule
</TABLE>
ITEM 6(b) -- REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K pursuant to Item 5 with the
Securities and Exchange Commission on March 15, 2000 in order to file our
Amended and Restated Array Delivery and Testing Agreement with Monsanto Company
dated January 11, 2000.
8
<PAGE> 10
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: May 11, 2000
9
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ARQULE, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
11.1 Statement Re Computation of Unaudited Net Loss Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11.1
ArQule, Inc.
Statement Re Computation of Unaudited Net Loss Per Share
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
2000 1999
----------- -----------
<S> <C> <C>
Net loss $ (1,342) $ (3,966)
=========== ===========
Weighted average shares outstanding:
Common Stock 13,205 12,317
Weighted average common shares outstanding 13,205 12,317
=========== ===========
Net loss per share - basic and $ (0.10) $ (0.32)
diluted =========== ===========
</TABLE>
- PAGE 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 12,775
<SECURITIES> 23,949
<RECEIVABLES> 2,962
<ALLOWANCES> 0
<INVENTORY> 397
<CURRENT-ASSETS> 41,284
<PP&E> 51,054
<DEPRECIATION> 18,535
<TOTAL-ASSETS> 75,589
<CURRENT-LIABILITIES> 20,621
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 42,297
<TOTAL-LIABILITY-AND-EQUITY> 75,589
<SALES> 10,388
<TOTAL-REVENUES> 10,388
<CGS> 5,406
<TOTAL-COSTS> 11,955
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> (1,342)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,342)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,342)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
