10-Q 1 e10-q.txt ARQULE, INC. 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 June 30, 2000 Commission File No. 000-21429 ARQULE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 04-3221586 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
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 July 26, 2000: Common Stock, par value $.01 13,557,033 shares outstanding -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 ARQULE, INC. QUARTER ENDED JUNE 30, 2000 TABLE OF CONTENTS
PAGE ---- PART I -- FINANCIAL INFORMATION Item 1 -- Unaudited Consolidated Financial Statements Consolidated Balance Sheet June 30, 2000 (Unaudited) and December 31, 1999........ 3 Consolidated Statement of Operations (Unaudited) Three months ended June 30, 2000 and 1999 and six months ended June 30, 2000 and 1999.......... 4 Consolidated Statement of Cash Flows (Unaudited) Six months ended June 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................................ 10 Item 4 -- Submission of Matters to a Vote of Security Holders................................................... 10 Signatures.................................................. 12
2 3 ARQULE, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, 2000 DECEMBER 31, (UNAUDITED) 1999 ----------- ------------ ASSETS Current Assets: Cash and cash equivalents.............................. $ 9,068 $ 4,208 Marketable securities.................................. 24,930 32,213 Accounts receivable.................................... 1,451 2,529 Accounts receivable related party...................... 1,550 1,424 Inventory.............................................. 344 486 Prepaid expenses and other current assets.............. 743 579 ------- ------- Total current assets.............................. 38,086 41,439 Property and equipment, net............................ 31,869 34,093 Non-current marketable securities...................... 5,257 -- Other assets........................................... 1,786 1,814 ------- ------- $76,998 $77,346 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses.................. $ 3,067 $ 5,719 Current portion of capital lease obligations........... 72 316 Current portion of long-term debt...................... 3,500 2,525 Deferred revenue....................................... 15,551 14,375 Deferred revenue related party......................... 101 1,133 ------- ------- Total current liabilities......................... 22,291 24,068 Long-term debt.............................................. 8,950 10,700 Deferred revenue............................................ 2,313 3,825 Stockholders' Equity: Common stock, $0.01 par value; 30,000,000 shares authorized; 13,557,033 and 12,864,225 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively.................................... 136 129 Additional paid-in capital............................. 79,048 73,167 Deferred compensation.................................. (371) (5) Unrealized loss on marketable securities............... (98) -- Accumulated deficit.................................... (35,271) (34,538) ------- ------- Total stockholders' equity............................. 43,444 38,753 ------- ------- $76,998 $77,346 ======= =======
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 4 ARQULE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2000 1999 2000 1999 ------- ------- ------- ------- Revenue: Compound development revenue................... $ 9,543 $ 2,369 $17,233 $ 4,173 Compound development revenue -- related parties...................................... 2,541 2,222 5,239 4,430 ------- ------- ------- ------- Total revenue............................. 12,084 4,591 22,472 8,603 ------- ------- ------- ------- Costs and expenses: Cost of revenue................................ 4,199 2,031 8,201 3,683 Cost of revenue -- related parties............. 1,118 1,888 2,522 3,910 Research and development....................... 4,405 3,156 8,593 6,503 Marketing, general and administrative.......... 2,091 1,494 4,452 2,737 ------- ------- ------- ------- Total costs and expenses.................. 11,813 8,569 23,768 16,833 ------- ------- ------- ------- Income (loss) from operations............. 271 (3,978) (1,296) (8,230) Interest income..................................... 592 404 1,094 828 Interest expense.................................... (254) (20) (531) (158) ------- ------- ------- ------- Net income (loss).............................. $ 609 $(3,594) $ (733) $(7,560) ======= ======= ======= ======= Basic net income (loss) per share................... $ 0.05 $ (0.29) $ (0.05) $ (0.61) ======= ======= ======= ======= Weighted average common shares outstanding -- Basic.............................. 13,520 12,560 13,362 12,438 ======= ======= ======= ======= Diluted net income (loss) per share................. $ 0.04 $ (0.29) $ (0.05) $ (0.61) ======= ======= ======= ======= Weighted average common shares outstanding -- Diluted............................ 14,398 12,560 13,362 12,438 ======= ======= ======= ======= Comprehensive income (loss) Net income (loss).............................. $ 609 $(3,594) $ (733) $(7,560) Unrealized loss on investment securities....... (98) -- -- -- ------- ------- ------- ------- Comprehensive income (loss)......................... $ 511 $(3,594) $ (733) $(7,560) ======= ======= ======= =======
The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 5 ARQULE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------- 2000 1999 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities: Net loss............................................... $ (733) $ (7,560) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........................ 3,663 2,801 Amortization of deferred compensation................ 402 192 Decrease in accounts receivable...................... 952 3,148 Decrease (increase) in inventory..................... 142 (30) (Increase) decrease in prepaid expenses and other current assets...................................... (164) 341 Decrease in other assets............................. 28 20 (Decrease) increase in accounts payable and accrued expenses............................................ (2,652) 832 Decrease in deferred revenue......................... (1,368) (1,743) -------- -------- Net cash provided by (used in) operating activities...................................... 270 (1,999) -------- -------- Cash flows from investing activities: Purchases of available-for-sale securities........... (38,527) (30,957) Proceeds from sale or maturity of marketable securities.......................................... 40,455 32,226 Proceeds from tenant improvement allowance........... 2,212 -- Additions to property and equipment.................. (3,651) (7,736) -------- -------- Net cash provided by (used in) investing activities...................................... 489 (6,467) -------- -------- Cash flows from financing activities: Principal payments of capital lease obligation....... (244) (581) Principal payments of long-term debt................. (775) -- Borrowings of long-term debt......................... -- 6,200 Proceeds from issuance of common stock............... 5,120 783 -------- -------- Net cash provided by financing activities......... 4,101 6,402 -------- -------- Net increase (decrease) in cash and cash equivalents......................................... 4,860 (2,064) Cash and cash equivalents, beginning of period....... 4,208 5,780 -------- -------- Cash and cash equivalents, end of period............. $ 9,068 $ 3,716 ======== ========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 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 June 30, 2000, and the results of our operations for the three and six month periods ended June 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 ("APB") 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 are currently evaluating the effects, if any, of SAB 101 on our financial position and results of operations. 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 this to have a material impact on our financial position and results of operations. 3. MONSANTO COLLABORATION On June 30, 2000, at the request of Monsanto Company (now Pharmacia Corporation), we replaced our existing collaboration agreement with Monsanto with a new collaboration agreement with G.D. Searle & Co., a subsidiary of Pharmacia Corporation. This transaction was completed in connection with the merger between Monsanto and Pharmacia. The scope of the new agreement is substantially unchanged from that of the prior agreement. However, ArQule will now receive all payments due in 2000 and 2001 immediately. Nonetheless, as compound deliveries and most other obligations are unchanged, we will continue to recognize these payments as revenue over the same time period. We also expanded the scope of the agreement to enable Pharmacia Corporation and its affiliates to screen our compounds, which may result in milestone and royalty payments in the future. 4. AMERSHAM PHARMACIA BIOTECH COLLABORATION On July 10, 2000, we terminated our existing Research Collaboration and License Agreement dated August 13, 1998 with Amersham Pharmacia and entered into a new Technology Transfer and License 6 7 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Agreement with Amersham Pharmacia. Under the new agreement, we will transfer to Amersham Pharmacia certain ArQule technologies to enable them to exploit those technologies in the chromatographic bioseparations field. As a result, we are no longer obligated to perform chemistry services in support of this collaboration. We may in the future receive royalties on products, but at a lower rate than in the prior agreement. We do not anticipate any decrease in revenue or increase in expense for 2000 or 2001 in connection with this collaboration. The change reflects our strategic decision to focus on drug discovery. 7 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, 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 $35.3 million through June 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. 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 10-K for the year ended December 31, 1999. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 REVENUE. Our revenue for the three months ended June 30, 2000 increased $7.5 million to $12.1 million from $4.6 million for the same period in 1999. Revenue was $22.5 million and $8.6 million for the six months 8 9 ended June 30, 2000 and 1999, respectively. These increases are primarily due to the amortization of upfront fees and fees for delivery of Custom Array sets to Pfizer and Bayer and from the success fees earned from our collaborations. COST OF REVENUE. Our cost of revenue for the three months ended June 30, 2000 increased $1.4 million to $5.3 million from $3.9 million for the same period in 1999. Cost of revenue was $10.7 million and $7.6 million for the six months ended June 30, 2000 and 1999, respectively. These increases are 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. RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses for the three months ended June 30, 2000 increased $1.2 million to $4.4 million from $3.2 million for the same period in 1999. Research and development expenses were $8.6 million and $6.5 million for the six months ended June 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 June 30, 2000 increased $0.6 million to $2.1 million from $1.5 million for the same period in 1999. Marketing, general and administrative expenses were $4.5 million and $2.7 million for the six months ended June 30, 2000 and 1999, respectively. These increases include a charge of $0.3 million related to the withdrawn registration statement for our follow-on stock offering. NET INTEREST INCOME. Our net interest income for the three months ended June 30, 2000 decreased $0.1 million to $0.3 million from $0.4 million for the same period in 1999. Net interest income was $0.6 million and $0.7 million for the six months ended June 30, 2000 and 1999, respectively. Higher interest expense in 2000 resulted primarily from our holding higher average debt balance on our term loan with Fleet National Bank. NET INCOME (LOSS). Our net income for the three months ended June 30, 2000 was $0.6 million, compared to a net loss of $(3.6) million for the same period in 1999. Our net loss was $(0.7) million and $(7.6) million for the six months ended June 30, 2000 and 1999, respectively. Our net income in 2000 is primarily attributable to increased revenue from our collaborator base. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, we held cash, cash equivalents and marketable securities with a value of $39.3 million, compared to $36.4 million at December 31, 1999. Our working capital at June 30, 1999 was $15.8 million. We have funded operations through June 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 June 30, 2000, we have made four 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 cannot guarantee that 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. 9 10 ARQULE, INC. PART II -- OTHER INFORMATION Items 1-3 -- None Item 4 -- Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders held on May 18, 2000, our stockholders voted as follows: (a) To elect Dr. Stephen A. Hill as a director: Total Votes "For"........................................ 10,537,452 Total Votes "Withheld"................................... 685,436
The proposal received a plurality of the votes cast by the stockholders entitled to vote thereon and, therefore, Dr. Hill was re-elected to the Board of Directors. In addition, the terms in office of Laura Avakian, Werner Cautreels, Ph.D., L. Patrick Gage, Ph.D., Tuan Ha-Ngoc, Ph.D., Stephen Dow and Michael Rosenblatt, M.D. continued after the meeting. Mr. Dow decided not to seek re-election at the 2000 Annual Meeting and resigned from the Board of Directors effective July 25, 2000. (b) To approve an amendment to our Amended and Restated 1994 Equity Incentive Plan to increase the aggregate number of shares of common stock that may be issued under the plan by 1,000,000 shares from 4,700,000 to 5,700,000 shares: Total Votes for the Proposal.............................. 4,688,663 Total Votes Against the Proposal.......................... 2,419,472 Abstentions............................................... 8,730
The proposal received the affirmative vote of a majority of the shares of common stock present or represented at the meeting and entitled to vote thereon and, therefore, was adopted. (c) To approve an amendment to our Amended and Restated 1996 Employee Stock Purchase Plan to increase the aggregate number of shares of common stock that may be issued under the plan by 300,000 shares from 120,000 to 420,000 shares: Total Votes for the Proposal.............................. 7,052,513 Total Votes Against the Proposal.......................... 53,222 Abstentions............................................... 11,130
The proposal received the affirmative vote of a majority of the shares of common stock present or represented at the meeting and entitled to vote thereon and, therefore, was adopted. (d) To approve an amendment to our Amended and Restated 1996 Director Stock Option Plan to increase the aggregate number of shares of common stock that may be issued under the plan by 65,500 shares from 125,000 to 190,500 shares: Total Votes for the Proposal.............................. 6,783,897 Total Votes Against the Proposal.......................... 325,578 Abstentions............................................... 7,390
The proposal received the affirmative vote of a majority of the shares of common stock present or represented at the meeting and entitled to vote thereon and, therefore, was adopted. 10 11 Item 5 -- None Item 6(a) -- Exhibits:
EXHIBITS DESCRIPTION -------- ----------- 10.1 Array Delivery and Testing Agreement between ArQule, Inc. and G.D. Searle & Co. dated June 20, 2000.(1) 10.2 Termination Agreement between ArQule, Inc. and Pharmacia Corporation dated June 30, 2000.(1) 10.3 Technology Transfer and License Agreement between ArQule, Inc. and Amersham Pharmacia Biotech A.B. dated July 10, 2000.(1) 11.1 Statement Re: Computation of Unaudited Net Income (Loss) Per Share. 27 Financial Data Schedule.
--------------- (1) Certain confidential material contained in this exhibit has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Item 6(b) -- None 11 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: August 4, 2000 12 13 ARQULE, INC. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.1 Array Delivery and Testing Agreement between ArQule, Inc. and G.D. Searle & Co. dated June 20, 2000.(1) 10.2 Termination Agreement between ArQule, Inc. and Pharmacia Corporation dated June 30, 2000.(1) 10.3 Technology Transfer and License Agreement between ArQule, Inc. and Amersham Pharmacia Biotech A.B. dated July 10, 2000.(1) 11.1 Statement Re: Computation of Unaudited Net Income (Loss) Per Share. 27 Financial Data Schedule.
--------------- (1) Certain confidential material contained in this exhibit has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 13