UNITED STATES
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, 20182019

Commission File No. 000-21429

ArQule, Inc.

(Exact Name of Registrant as Specified in its Charter)

One Wall Street, Burlington, Massachusetts 01803

(Address of Principal Executive Offices)

(781) 994-0300

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

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 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¨

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Indicate If an emerging growth company, indicate by check by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ Nox

Number of shares outstanding of the registrant’s Common Stock as of July 19, 2018:24, 2019:

Common Stock, par value $.01  108,816,985120,260,385 shares outstanding

ARQULE, INC.

QUARTER ENDED JUNE 30, 20182019

TABLE OF CONTENTS

ARQULE, INC.

CONDENSED BALANCE SHEETS (Unaudited)

The accompanying notes are an integral part of these condensed interim unaudited financial statements.

ARQULE, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSINCOME (LOSS) (Unaudited)

 The accompanying notes are an integral part of these interim unaudited financial statements.

ARQULE, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying notes are an integral part of these condensed interim unaudited financial statements.

ARQULE, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these condensed interim unaudited financial statements.

Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees, facility and facility-related costs for our offices and laboratories, fees paid in connection with preclinical and clinical studies, laboratory supplies and materials, and professional fees. The sources of our cash flow from operating activities have historically consisted primarily of upfront and other payments received from our collaborators for services performed or upfront payments forin connection with license agreements or future services.agreements. In the six months ended June 30, 2018, our net use of cash was primarily driven by the difference between cash received from our collaborations2019 and payments for operating expenses which resulted in net cash outflows of $2.0 million. In the six months ended 2017,2018, our net use of cash was primarily driven by payments for operating expenses which resulted in net cash outflows of $14.8 million.$15.0 million and $2.0 million, respectively.

Our cash requirements may vary materially from those now planned depending uponon the results of our drug discovery and development strategies, our ability to enter into additional corporate collaborations and the terms of such collaborations, results of research and development, unanticipated required capital expenditures, competitive and technological advances, acquisitions and other factors. We cannot guarantee that we will be able to develop any of our drugproduct candidates into a commercial product.

In January 2017, we entered into a loan and security agreement with Oxford Finance, LLC (the “Loan Agreement”) with a principal balance of $15 million and amended the Loan Agreement in February 2018 (see Note 8). The terms of the Loan Agreement, which was amended in February 2018, require payments of interest on a monthly basis through September 2018August 2019 and payments of principal and interest from October 2018September 2019 to August 2021 and with principal payments commencing on September 1, 2019.2022. The current maturity date of the loan is August 1, 2022.

In September 2017, we sold 2.0 million shares of common stock through an at-the-market (ATM) offering and raised net proceeds of $2.3 million. In October 2017, we entered into definitive stock purchase agreements with certain institutional investors. In conjunction with this stock offering we issued 13,938,651 shares of our common stock and warrants to purchase 3,123,674 shares of our common stock for aggregate net proceeds of $15.6 million. Each warrant is exercisable for $1.75 per share and expires in four years from the date of issuance. In November 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering the Companywe raised net proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants to purchase 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred together with the associated Warrant is priced at $1,135 and automatically converted into 1,000 shares of common stock upon the effectiveness on May 8, 2018 of an amendment to the Company’s restated certificate of incorporation to increase the number of authorized shares ofand each associated Warrant converted into 1,000 common stock thereunder.warrants in May 2018. The Warrants hadhave a pre-conversionpost-conversion exercise price of $1,750 per share of Series A Preferred (post-conversion price of $1.75 per share, of common stock), are exercisable immediately and expire approximately four yearsin May 2022.

In February 2018, we entered into a License Agreement with Sinovant pursuant to which we granted Sinovant an exclusive license to develop and commercialize derazantinib in Greater China. The agreement provided for an upfront payment to ArQule of $3 million and a $2.5 million development milestone that was paid in the first quarter of 2019. We are also eligible for up to an additional $12.0 million in regulatory milestone payments and $70.0 million in commercial milestone payments. Upon commercialization, we are entitled to receive double digit royalties in the low teens from Sinovant on net sales of derazantinib in Greater China. Sinovant will be responsible for all costs and expenses of development, manufacture and commercialization in Greater China. In the three and six months ended June 30, 2019, we recognized revenue of $0.3 million and $1.4 million, respectively, for providing certain manufacturing services to Sinovant. During the three and six months ended June 30, 2018, we recognized revenue of zero and $3.0 million, respectively, related to the transfer of the license to Sinovant.

In April 2018, we entered into a License Agreement with Basilea pursuant to which we granted Basilea an exclusive license to develop and commercialize derazantinib in the United States, European Union, Japan and the rest of the world, excluding Greater China. Under the terms of the agreement, we received an upfront payment of $10 million and are eligible for up to $63.0 million in development and regulatory milestone payments and up to $262.5 million in commercial milestone payments. Upon commercialization, we are entitled to receive tiered royalties on future net sales of derazantinib ranging from the datehigh-single digits to the mid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances, we may have the opportunity to promote derazantinib in the United States directly. In the three and six months ended June 30, 2019, we recognized revenue of $0.03 million and $0.2 million, respectively, for providing certain research and development services to Basilea, recognized as revenue on a “cost-to-cost method”. Revenue in each of the adoptionthree and six months ended June 30, 2018 totaled $13.7 million related to the transfer of the amendmentlicense to Basilea as well as the Company’s restated certificateprovision of incorporation.certain research and development services to Basilea.

In July 2018, we sold 12,650,000 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $64.6 million after commissions and other offering expenses.

In June 2019, we sold 10,637,500 shares of common stock at $9.75 per share for aggregate net proceeds of approximately $97.3 million after commissions and other offering expenses. 

We anticipate that our cash, cash equivalents and marketable securities on hand at June 30, 2018, and financial support from our licensing agreements2019 will be sufficient to finance our operations for at least 12 months from the issuance date of these financial statements. We expect that we will need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and market conditions, and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital when needed, or on terms favorable to us. If necessary funds are not available, we may have to delay, reduce the scope of, or eliminate some of our development programs, potentially delaying the time to market for any of our product candidates.

2. COLLABORATIONS AND ALLIANCES

Basilea Agreement

AdoptionIn April 2018, we entered into a License Agreement with Basilea (the “Basilea Agreement”) pursuant to which we granted Basilea an exclusive license to develop and Impactcommercialize derazantinib in the United States, European Union, Japan and the rest of the New Revenue Standardworld, excluding Greater China (the “Basilea Territory”). Under the terms of the Basilea Agreement, we received an upfront payment of $10.0 million. In addition, we are eligible to receive up to $63.0 million in development and regulatory milestone payments across multiple indications in the United States, European Union and Japan, none of which exceed $12.0 million on an individual basis, and up to $262.5 million in commercial milestone payments based upon the attainment of specified calendar year net sales levels for all indications in the Basilea Territory. Upon commercialization, we are entitled to receive tiered royalties on future net sales of derazantinib ranging from the high-single digits to the mid-teens on direct sales in the Basilea Territory and mid-single digits to low-double digits on indirect sales in the Basilea Territory. Basilea is responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances, we may have the opportunity to promote derazantinib in the United States directly.

The Company adopted Accounting Standards Codification Topic 606—Revenue from Contracts with Customers, or Topic 606, on January 1, 2018, resulting in a change to its accounting policy for revenue recognition. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a net increase to opening equity of $1.5 million as of January 1, 2018 due to the cumulative impact of adopting this new standard. Without applying the new revenue standard, the disclosed research and development revenue would have been $1.4 million higher than currently disclosed for the first six months of 2018. Contract receivables were $3.2 million at June 30, 2018. The adoption of the new revenue standard did not have a material impact on any other balances within the condensed financial statements as of and for the six-months ended June 30, 2018.

UnderWe evaluated the new revenue standards, we recognize revenues when our customer obtains control of promised goods or services,Basilea Agreement in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.accordance with ASC 606,Revenue from Contracts with Customers. We recognize revenues following the five step model prescribed under Topic 606: (i) identify contract(s) with a customer; (ii) identify theconcluded there were two performance obligations under the Basilea Agreement at contract inception: (1) the grant of the exclusive license (the “Basilea License”) to derazantinib in the contract; (iii) determineBasilea Territory and (2) the transaction price; (iv) allocate theprovision of specified research and development services to Basilea (the “R&D Services”).

The total transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfersBasilea Agreement at contract inception was determined to be $19.8 million, which was comprised of the customer.$10.0 million upfront payment and an estimated $9.8 million of variable consideration to be received for the R&D Services. As of June 30, 2019, the R&D Services performance obligation was substantially complete. At contract inception, the Company assesses the goods or services promised within each contract, and determines those that are performance obligations. Revenue is recognized when each distinct performance obligation is satisfied.

The Company has collaboration and license agreementsvariable consideration associated with drug development and pharmaceutical companies. The Company’s proprietary technology and intellectual property is the basis for many of these collaboration and license agreements and generally include contractual milestone events that coincide with the progression of development, regulatory and commercialization milestones. At the inception of each collaboration that includes developmental, regulatory or commercial milestone payments was excluded from the Company evaluates whether achievingtransaction price, and as of June 30, 2019 continued to be excluded from the transaction price, as achievement of the milestones is contingent upon future events and is not considered probablethe most-likely outcome. We update our estimates for development and estimatesregulatory milestone variable consideration at each reporting date and will recognize revenue associated with a particular milestone when achieving the amount to be included inmilestone is considered the transaction price using the most likely amount method. Ifmost-likely outcome and it is probable that a significant reversal of cumulative revenue reversal wouldunder the contract will not occur. The commercial milestone and royalty consideration were excluded from the transaction price because the Basilea License was determined to be the predominant item in the contract. As a result, we will recognize revenue associated with the commercial milestones and royalties at the later of when (i) the related sales occur or (ii) the valueperformance obligation to which some or all of the associatedapplicable commercial milestone is included inand/or royalty has been allocated has been satisfied (or partially satisfied). As of June 30, 2019, we have not recognized any commercial milestone or royalty revenue under the Basilea Agreement.

The total transaction price. Milestone payments that are not withinprice was allocated to the two performance obligations based on the relative standalone selling price of each performance obligation at contract inception. The standalone selling price for the Basilea License was determined on a discounted cash flow basis. At contract inception, $10.3 million of the total transaction price was allocated to the Basilea License and was recognized when control of the Company, such as approvals from regulators or where attainmentBasilea License was transferred and the license period began. The standalone selling price for the R&D Services was determined based upon a cost-plus margin approach. At contract inception, $9.5 million of the specified event is dependent ontransaction price was allocated to the development activities of a third-party, are not considered probable of being achieved until those approvals are received orR&D Services. Revenue related to the specified event occurs. RevenueR&D Services is recognized fromon a “cost-to-cost” percentage of completion basis as the satisfactionservices are performed.

For the three and six months ended June 30, 2019, we recognized revenue of performance obligations in$0.03 million and $0.2 million, respectively, under the amount billableBasilea Agreement related to R&D Services provided to Basilea. For the three and six months ended June 30, 2018, we recognized revenue of $13.7 million related to the customer.transfer of the Basilea License as well as providing R&D Services to Basilea.

2. COLLABORATIONS AND ALLIANCES

Roivant Sciences LicensingSinovant Agreement

In February 2018, we entered into a License Agreement (the “Agreement”) with Sinovant Sciences Ltd. (“Sinovant”(the “Sinovant Agreement”) and Roivant Sciences Ltd. (Roivant), the parent of Sinovant, pursuant to which ArQulewe granted Sinovant aan exclusive license to develop, manufacture and exclusively commercialize its FGFR inhibitor, derazantinib (ARQ 087), in Greater China. TheUnder the terms of the Sinovant Agreement, provides forwe have received an upfront payment to ArQule of $3$3.0 million and recognized a guaranteed $2.5 million developmentregulatory milestone withinpayment in the first year. ArQule isthird quarter of 2018. We are also eligible forto receive up to an additional $82$12.0 million in regulatory milestone payments across multiple indications in Greater China and $70.0 million in commercial milestone payments based upon the attainment of specified calendar year net sales milestones.levels for all indications in Greater China. Upon commercialization, ArQule iswe are entitled to receive double digit royalties in the low teens from Sinovant on net sales of derazantinib in the Greater China territory.China. Sinovant will be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Greater China.

We evaluated the Sinovant Agreement in accordance with ASC 606,Revenue from Contracts with Customers. We concluded that the only performance obligation under the Sinovant Agreement at contract inception was the grant of the exclusive license (the “Sinovant License”) to derazantinib in Greater China. The Sinovant Agreement also contemplated that we might provide certain manufacturing services (the “Manufacturing Services”), which we concluded was not a separate performance obligation at contract inception.

The total transaction price for the Sinovant Agreement at contract inception was determined to be $3.0 million, which was equal to the upfront payment under the Sinovant Agreement. The $3.0 million was fully allocable to the Sinovant License and was recognized as revenue when control was transferred and the license period began. Our right to receive regulatory milestone payments is considered variable consideration. At contract inception, the variable consideration associated with regulatory milestone payments was excluded from the transaction price as achievement of the milestones was contingent upon future events and achievement of the milestones is not considered the most-likely outcome. We update our estimates for regulatory milestones at each reporting date and will recognize revenue associated with a particular milestone when we determine that achieving the milestone is the most-likely outcome and it is probable that a significant reversal of cumulative revenue under the contract will not occur. Based on the above analysis, we recognized $2.5 million in revenue associated with a regulatory milestone in the third quarter of 2018. The commercial milestones and royalty consideration were excluded from the transaction price because the Sinovant License is the only performance obligation and therefore considered the predominant item under the contract. As a result, we recognize revenue associated with the commercial milestones and royalties at the later of when (i) the related sales occur or (ii) the performance obligation to which some or all of the applicable commercial milestone and/or royalty has been allocated has been satisfied (or partially satisfied). As of June 30, 2019, we have not recognized any commercial milestone or royalty revenue under the Sinovant Agreement.

In December 2018, we entered into a Supply Agreement with Sinovant where we agreed to provide the Manufacturing Services to Sinovant beyond the term contemplated for those services under the Sinovant Agreement. The Manufacturing Services are the only performance obligation under the Supply agreement and revenue related to the Supply Agreement is recognized on a “cost-to-cost” percentage of completion basis as the services are performed.

For the three months ended June 30, 2018 no revenue was recognized under this licensing agreement. For theand six months ended June 30, 2018,2019, we recognized $3.0 million for completing our performance obligation under this licensing agreement.

Basilea Licensing Agreement

In April 2018, we entered into a License Agreement (the “Basilea Agreement”) with Basilea Pharmaceutica Ltd. (“Basilea”) pursuant to which ArQule granted Basilea an exclusive license to develop, manufacture and commercialize its FGFR inhibitor, derazantinib (ARQ 087), in the United States, EU, Japan and the restrevenue of the world, excluding Greater China. Under the terms of the Basilea agreement, ArQule will receive an upfront payment of $10$0.3 million and is eligible for up to $326$1.4 million, in regulatory and commercial milestones. Upon commercialization, ArQule is entitled to receive staggered royalties on future net sales of derazantinib ranging fromrespectively, under the high-single digitsSinovant Agreement related to the mid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances, ArQule may have the opportunity to promote derazantinib in the US directly.

Revenue inManufacturing Services that we provided. For the three and six months ended June 30, 2018, totaled $13.7we recognized revenue of zero and $3.0 million, for providingrespectively, related to transfer of the technology license as well as certain research and development services to Basilea, recognized as revenue on a percentage of completion basis. The adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers on January 1, 2018 did not have a material effect on the amount of revenue recognized under this agreement.Sinovant License.

Other Licensing Agreements

In October 2017, we entered intogranted a third party a non-exclusive license agreement forto certain of our library compounds. The licensed compounds were delivered and are subject to qualitywere accepted by the third party in 2018. Accordingly, revenue for the three and acceptance testing. In 2017, we recorded deferred revenue of $1.5 million related to this licensing agreement whichsix months ended June 30, 2019 was recorded as an opening retained earnings adjustment upon the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers on January 1, 2018.zero. For the three and six months ended June 30, 2018, we recorded revenue of zero and $1.1 million, based upon the achievement of the quality and acceptance testing for the period.testing.

3. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

We generally classify our marketable securities as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. Since we generally intend to convert them into cash as necessary to meet our liquidity requirements our marketable securities are classified as cash equivalents if the original maturity, from the date of purchase, is ninety days or less and as short-term investments if the original maturity, from the date of purchase, is in excess of ninety days but less than one year. Our marketable securities are classified as long-term investments if the maturity date is in excess of one year of the balance sheet date.

We report available-for-sale investments at fair value as of each balance sheet date and include any unrealized gains and, to the extent deemed temporary, unrealized losses in stockholders’ equity. Realized gains and losses are determined using the specific identification method and are included in other income (expense) in the statement of operations and comprehensive loss.

We conduct quarterly reviews to determine the fair value of our investment portfolio and to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. In the event that the cost basis of a security exceeds its fair value, we evaluate, among other factors, the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of and business outlook for the issuer, including industry and sector performance, and operational and financing cash flow factors, overall market conditions and trends, our intent to sell the investment and if it is more likely than not that we would be required to sell the investment before its anticipated recovery. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded in accumulated other comprehensive income (loss).

For available-for-sale debt securities with unrealized losses, we perform an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell aan available-for-sale debt security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected in the statement of operations and comprehensive loss as an impairment loss.

Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.

We invest our available cash primarily in commercial paper, money market funds, and U.S. Treasury bill funds that have investment grade ratings.

The following is a summary of the fair value of available-for-sale marketable securities we held at June 30, 20182019 and December 31, 2017:2018 (in thousands):

None of our available-for-sale marketable securities were in a continuous unrealized loss position for more than 12 months at June 30, 20182019 or December 31, 2017.2018.

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. There were no transfers in or out of Level 1 or Level 2 measurements for the periods presented:presented (in thousands):

Due to the lack of market quotes relating to our preferred stock warrants, the fair value of the preferred stock warrants was determined at December 31, 2017 using the Black-Scholes model, which is based on Level 3 inputs. The inputs used in the Black-Scholes model are presented below. Based on the Black-Scholes model, the Company recorded a preferred stock warrant liability of $1,512 at December 31, 2017. Upon conversion of the Series A Preferred to common stock on May 8, 2018 the warrant liability of $3,064 was extinguished with an offsetting amount included as additional paid-in capital in stockholders’ equity.

The following are the Black-Scholes inputs to the warrant liability valuation for December 31, 2017:

4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses include the following at June 30, 20182019 and December 31, 2017:2018 (in thousands):

5. NET INCOME (LOSS)LOSS PER SHARE

Net income (loss)loss per share is computed using the weighted average number of common shares outstandingoutstanding. Basic and diluted net loss per share amounts are equivalent for the three and six months ended June 30, 2019 and the six months ended June 30, 2018 as the inclusion of potential common shares when applicable.in the number of shares used for the diluted computation would be anti-dilutive to loss per share. For the three months ended June 30, 2018 shares used for the basic computation of net income per share totaled 92,241,124 and shares used for the diluted computation included an additional 8,290,388 potential common shares. Basic and diluted net loss per share amountsPotential common shares, for the three and six months ended June 30, 2019, include 12,662,646 shares that would be issued upon the exercise of outstanding employee and Board of Director stock options, 93,168 shares that would be issued upon the exercise of the warrants from our February 2018 amendment to our loan agreement, 3,123,674 shares that would be issued upon the exercise of the warrants from our October 2017 common stock offering and six months ended June 30, 2018 are equivalent for the periods presented as the inclusion of potential2,259,000 common shares in the number of shares used for the diluted computationthat would be anti-dilutive to loss per share.issued upon the exercise of the warrants from our November 2017 preferred stock offering. Potential common shares, for the three and six months ended June 30, 2018, include 10,625,917 shares that would be issued upon the exercise of outstanding employee and Board of Director stock options, 93,168 shares that would be issued upon the exercise of the warrants from our February 2018 amendment to our loan agreement, 3,123,674 shares that would be issued upon the exercise of the warrants from our October 2017 common stock offering, 8,370,000 common shares that would behave been issued upon the conversion of the shares from our November 2017 preferred stock offering and 2,259,000 common shares that would be issued upon the exercise of the warrants from our November 2017 preferred stock offering. The preferred shares and warrants from our November 2017 preferred stock offering were converted on May 8, 2018 to common sharesstock and warrants. Potential common shares, for the three and six months ended June 30, 2017, include 10,773,443 shares that would be issued upon the exercise of outstanding employee and Board of Director stock options and 354,330 shares that would be issued upon the exercise of the warrants issued in conjunction with our January 6, 2017 loan agreement.May 2018.

6. STOCK-BASED COMPENSATION AND STOCK PLANS

Our stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite service period (generally the vesting period of the equity grant). We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of our stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the expected annual dividend yield. We believe that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted in the three and six months ended June 30, 20182019 and 2017.2018.

The following table presents stock-based compensation expense included in our Condensed Statementscondensed statement of Operationsoperations and Comprehensive Loss:comprehensive loss (in thousands):

In the six months ended June 30, 2019, we recorded stock-based compensation expense of $1.0 million related to the modification of awards to our former Chief Financial Officer in connection with his retirement in March 2019. In the three and six months ended June 30, 20182019 and 2017,2018, no stock-based compensation expense was capitalized and there were no recognized tax benefits associated with the stock-based compensation expense.

Option activity under our stock plans for the six months ended June 30, 20182019 was as follows:

The aggregate intrinsic value of options outstanding at June 30, 20182019 was $31,726 and $14,422$99.2 million, including $57.1 million related to exercisable options. The weighted average fair value of options granted in the six months ended June 30, 2019 and 2018 was $2.53 and 2017 was $1.28 and $0.72 per share, respectively. The intrinsic value of options exercised in the six months ended June 30, 20182019 was $1,653.$2.4 million.

The total compensation cost not yet recognized as of June 30, 20182019 related to non-vested option awards was $3.3$8.2 million, which will be recognized over a weighted-average period of 2.82.9 years. During the six months ended June 30, 2018, 344,5872019, 28,350 shares expired and 240,000119,713 shares were forfeited. The weighted average remaining contractual life for options exercisable at June 30, 20182019 was 4.64.45 years.

7. COMMON STOCK OFFERINGS

In June 2019, we sold 10,637,500 shares of common stock at $9.75 per share for aggregate net proceeds of approximately $97.3 million after commissions and other offering expenses. 

In July 2018, we sold 12,650,000 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $64.6 million after commissions and other estimated offering expenses.

In October 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering, we issued 13,938,651 shares of our common stock and warrants for 3,123,674 shares of our common stock for aggregate net proceeds of $15.6 million. Each warrant is exercisable for $1.75 per share and expires in four years from the date of issuance.

In September 2017, we sold 2.0 million shares of common stock through an at-the-market (“ATM”) offering and raised net proceeds of approximately $2.3 million.

In February 2016, we entered into definitive stock purchase agreements with certain institutional and accredited investors. In conjunction with this stock offering we issued 8,027,900 shares of our common stock and non-transferable options for 3,567,956 shares of our common stock for aggregate net proceeds of $15.2 million. Each option was exercisable for $2.50 per share and they all expired in March 2017.

8. LOAN AGREEMENT

In January 2017, we entered into a loan and security agreement (the “Loan Agreement”) with Oxford Finance LLC, as collateral agent and a lender (the “Lender”), and any additional lenders that may become parties thereto, entered into a loan and security agreement with us (the “Loan Agreement”).thereto.

Pursuant to the terms of the Loan Agreement, the Lender issued us a loan in the principal amount of $15.0 million. The loan bears interest at the rate equal to (a) the greater of (i) the 30 day U.S. LIBOR rate reported in the Wall Street Journal on the date occurring on the last business day of the month that immediately precedes the month in which the interest will accrue or (ii) 0.65% (b) plus 6.85%. The applicable interest rate on the loan at June 30, 20182019 was 8.85%9.28%. The Loan Agreement required interest-only payments for 18 months, followed by an amortization period of 36 months. The original maturity date of the loan was August 1, 2021 and in February 2018 we signed an amendment with the Lender which extended the maturity date by one year to August 1, 2022 with principal payments commencing on September 1, 2019.

The expected remaining repayment of the $15 million loan principal at June 30, 20182019 is as follows:follows (in thousands):

Upon prepayment of the earlier of prepaymentloan or on the maturity date, we will pay to the Lender a final payment of 6% of the full principal amount of the loan. We may elect to prepay all amounts owed prior to the maturity date, provided that a prepayment fee also is paid equal to (i) 3%1% of the outstanding principal balance if prepayment occurs in months 1-12 following the closing, (ii) 2.0% of the outstanding principal balance in months 13-24 following the closing, and (iii) 1% thereafter.balance.

Pursuant to the terms of the Loan Agreement, we are bound by certain affirmative covenants setting forth actions that are required during the term of the Loan Agreement, including, without limitation, certain information delivery requirements, obligations to maintain certain insurance, and certain notice requirements. Additionally, we are bound by certain negative covenants setting forth actions that are not permitted to be taken during the term of the Loan Agreement without consent, including, without limitation, incurring certain additional indebtedness, entering into certain mergers, acquisitions or other business combination transactions, or incurring any non-permitted lien or other encumbrance on our assets. We were in compliance with the loan covenants at June 30, 2018.2019.

Upon the occurrence of an event of default under the Loan Agreement (subject to cure periods for certain events of default), all amounts owed by us thereunder will begin to bear interest at a rate that is 5% higher than the rate that is otherwise applicable and may be declared immediately due and payable by the Lender. Events of default under the Loan Agreement include, among other things, the following: the occurrence of certain bankruptcy events; the failure to make payments under the Loan Agreement when due; the occurrence of a material adverse change in our business, operations or financial condition; the rendering of certain types of fines or judgments against us; any breach by us of any covenant (subject to cure for certain covenants only) made in the Loan Agreement; and the failure of any representation or warranty made by us in connection with the Loan Agreement to be correct in all material respects when made.

We have granted the Lender, a security interest in substantially all of our personal property, rights and assets, other than intellectual property, to secure the payment of all amounts owed to the Lender under the Loan Agreement. We have also agreed not to encumber any of our intellectual property without required lenders’the Lender’s prior written consent.

In February 2018, the Loan Agreement was amended requiring payments of interest on a monthly basis through August 2019 and payments of interest and principal from September 2019 to August 2022. In connection with entering into the amendment we issued to the Lender warrants to purchase an aggregate of 93,168 shares of our common stock. The warrants are exercisable immediately, have a per-share exercise price of $1.61 and have a term of ten years. The amendment was determined to be a modification of debt in accordance with ASC 470 Debt. We have recorded the relative fair value of the additional warrants as a discount to the carrying value of the notes payable with a corresponding increase to additional paid in capital.

9. PREFERRED STOCK AND WARRANT LIABILITY

Our amendedRestated Certificate of Incorporation, as amended, authorizes the issuance of up to 1 million shares of $0.01 par value preferred stock.

In November 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering the Companywe raised net proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants covering 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred together with the associated Warrant was priced at $1,135 and automatically converted into 1,000 shares of common stock upon the effectiveness on May 8, 2018, of an amendment to the Company’s restated certificate of incorporation to increase the number of authorized shares ofand each associated Warrant converted into 1,000 common stock thereunder. The amount reported aspreferred stock at June 30, 2018 is zero and at December 31, 2017 is $8.8 million.warrants in May 2018.

The terms of the Series A Preferred, specifically the terms of the liquidation preference, required the classification of the preferred stock as temporary equity, which is reflected in our balance sheet as of December 31, 2017. In addition, the terms of the Series A Preferred for which the warrants arewere exercisable requirerequired that the fair value allocated to the warrants at the date of issuance be recorded as a liability.liability on our balance sheet. The warrant liability was marked to market value through the income statement of operations and comprehensive loss as a non-cash gain or loss at each reporting period until the conversion of the preferred stockSeries A Preferred to common stock onin May 8, 2018. The Warrants had a pre-conversion exercise price of $1,750 per share of Series A Preferred (post-conversion price of $1.75 per share of common stock), were exercisable immediately with an expiration date approximately four years from the date of the adoption of the amendment to the Company’s restated certificate of incorporation. Upon conversion, of the Series A Preferred common on May 8, 2018, the warrant liability of $3,064 was extinguished with an offsetting amount included as additional paid-in capital in stockholders’ equity. Accordingly, at each of December 31, 2018 and June 30, 2019, the warrant liability was zero. In the three and six months ended June 30, 2018, we recognized a non-cash income of $0.7 million and non-cash expense of $1.5 million, respectively, recorded in other income (expense) on the statement of operations and comprehensive loss related to the change in the fair value of the warrant liability decreased by $718 and non-cash income was recorded in other income (expense). In the six months ended June 30, 2018 the fair value of the warrant liability increased by $1,552 and non-cash expense was recorded in other income (expense).

If declared by the board, the Series A Preferred were eligible for a dividend on an as-converted basis. If the Company’s restated certificate of incorporation had not been adopted by July 1, 2018, the Series A Preferred would have obtained a dividend in kind until such time as the restated certificate of incorporation was adopted. In the case of a liquidation event or deemed liquidation event defined by the definitive securities purchase agreements the holders of Series A Preferred Stock had a liquidation preference on the greater of the Series A Preferred Stock stated value or the consideration that would have been paid on such Series A Preferred Stock in the applicable liquidation event.liability.

10. RECENT ACCOUNTING PRONOUNCEMENTS

From time to time, new accounting pronouncements are issued byRecently Adopted Accounting Pronouncements

In February 2016 the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

In May 2017 the FASB issued Accounting Standard Update (“ASU”) No. 2017-09, Compensation—Stock Compensation2016-02, Leases (Topic 718): Scope of Modification Accounting.842). This new standard provides clarityestablished a right-of-use model that requires all lessees to recognize right-of-use assets and reduces both (1) diversity in practiceliabilities on their balance sheet that arise from leases with terms longer than 12 months as well as provide disclosures with respect to certain qualitative and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation,quantitative information related to a change to the terms or conditions of a share-based payment award.their leasing arrangements. This new standard became effective for us on January 1, 2018. 2019 (“the Effective Date”).

The FASB has subsequently issued the following amendments to ASU 2016-02, which also became effective on January 1, 2019, and which we collectively refer to as the new leasing standards:

We adopted the new lease accounting standard on January 1, 2019, using a modified retrospective transition approach of applying the new standard to all leases existing as of, or entered into after, the Effective Date and with remaining terms of 12 months or more.Our assessment included the lease of our headquarters in Burlington, MA which commenced in May 2015 and expires in July 2020 and our laboratory space in Woburn, MA which commenced in March 2019 and expires in April 2024.

The adoption of thisthe new standard on January 1, 2019 resulted in the recording of a right-of-use asset and lease liability of $0.7 million related to the lease of ourheadquarters in Burlington, MA that existed on the Effective Date. The lease liability is based on the present value of the remaining minimum lease payments, discounted using our secured incremental borrowing rate at the Effective Date. As permitted under ASC 842, we elected several practical expedients and therefore did not reassess at the Effective Date (1) whether any existing contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. We also elected the practical expedient to not separate lease and non-lease components. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability. In addition, we implemented internal controls to enable the preparation of financial information on adoption. The adoption did not have a material impact on our condensed financial position or resultsstatements related to the existing lease of operations.our headquarters in Burlington, MA for the three and six months ended June 30, 2019. As a result, there was no cumulative-effect adjustment.

In August 2016,For contracts entered into on or after the FASB issued ASU No. 2016-15, StatementEffective Date, at the inception of Cash Flows (Topic 230): Classificationa contract we assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of Certain Cash Receipts and Cash Payments. This new standard clarifies certain aspectsa distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the statementasset throughout the period, and (3) whether we have the right to direct the use of cash flows, including the classificationasset. At inception of debt prepaymenta lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

Leases are classified as either finance leases or debt extinguishmentoperating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset or (4) the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. Our leases are comprised of operating leases related to our headquarters in Burlington, MA and laboratory space in Woburn, MA.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.

The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs or other debt instruments with coupon interest rates thatincurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are insignificant in relation toreviewed for impairment. The lease liability is initially measured at the effectivepresent value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the secured incremental borrowing rate. For our operating leases, we use our secured incremental borrowing rate if the implicit lease rate cannot be determined.

Lease payments included in the measurement of the borrowing, contingent considerationlease liability comprise the following: the fixed noncancelable lease payments, made after a business combination, proceeds frompayments for optional renewal periods where it is reasonably certain the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. This new standard also clarifies that an entity should determine each separately identifiable source of use within the cash receiptsrenewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

Lease expense for operating leases consists of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Certain leases contain rent escalation clauses and variable lease payments that require additional rental payments in later years of the term, including payments based on an index or inflation rate. Payments based on the basischange in an index or inflation rate, or payments based on a change in our portion of the natureoperating expenses, including real estate taxes and insurance, are not included in the initial lease liability and are recorded as a period expense when incurred. Our operating leases may include an option to renew the lease term for various renewal periods and/or to terminate the leases early. As an option to exercise the renewal or early termination of our operating leases were either non-existent or not reasonably certain as of the underlying cash flows. In situationsASC 842 Effective Date for our headquarters in which cash receiptsBurlington, MA and paymentsthe lease commencement date our laboratory space in Woburn, MA, we have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. This new standard became effective for us on January 1, 2018. The adoption of this standard did not have a material impact onincluded such options in our statements of cash flows upon adoption.initial lease liability.

As of June 30, 2019, we recognized right-of-use assets related to our headquarters in Burlington, MA and laboratory space in Woburn, MA of $0.9 million and the related net lease liabilities of $0.9 million, which represents the net present value of the remaining lease payments of approximately $1.0 million, discounted using the Company’s incremental borrowing rate of 9.34%. We have included the right-of-use assets and lease liabilities in the condensed balance sheet as of June 30, 2019.

The following table summarizes future minimum lease payments for our non-cancelable operating leases as of June 30, 2019 (in thousands):

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, ASC 840,Leases, the total commitment for our non-cancelable operating lease was $0.8 million as of December 31, 2018 (in thousands):

Recently Issued Accounting Pronouncements

In February 2016,August 2018, the FASB issued ASU No. 2016-02, Leases2018-13, Fair Value Measurement (Topic 842)820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”). The new standard requires that all lessees recognize the assetsremoves certain disclosures, modifies certain disclosures and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements.adds additional disclosures related to fair value measurement. The new standard will be effective for us onbeginning January 1, 2019. The company2020 and early adoption is permitted. We are currently assessingevaluating the impact that the adoption of this standardASU 2018-13 will have on our consolidated financial statements.

In May 2014August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting Standards Update (ASU) No. 2014-09, Revenue from Contractsfor Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, (“ASU 2018-15”). The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with Customers (Topic 606), which supersedes all existing revenue recognitionthe requirements including most industry specific guidance. Thisfor capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The new standard requires a companywill be effective beginning January 1, 2020 and early adoption is permitted. The amendments in this update should be applied either retrospectively or prospectively to recognize revenue when it transfers goods or services to customers in an amount that reflectsall implementation costs incurred after the considerationdate of adoption. We are currently evaluating the impact that the company expects to receive for those goods or services. The FASB subsequently issued amendments to ASU No. 2014-09 that have the same effective date and transition date. These new standards became effective for us on January 1, 2018, and we adopted them using the modified retrospective method through a $1.5 million cumulative-effect adjustment directly to retained earnings as of that date. The adoption of these new standards may result in a change in the timing of revenue recognition related to certain ofASU 2018-15 will have on our licensing activities.consolidated financial statements.

11. INCOME TAXES

As of December 31, 2017,2018, we had federal NOL,net operating losses (“NOL”), state NOL, and research and development credit carryforwards of approximately $409,409, $228,565$422,045, $240,916 and $28,253$28,378 respectively, which expire at various dates through 2037. We recorded a deferred tax asset for previously unrecognized excess tax benefit, offset by valuation allowance upon the adoption in 2017 of ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”

As of June 30, 20182019, and December 31, 20172018 we had no unrecognized tax benefits. We do not expect that the total amount of unrecognized tax benefits will significantly increase in the next twelve months. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 20182019, and December 31, 2017,2018, we had no accrued interest or penalties related to uncertain tax positions. Our U.S. federal tax returns for the tax years 20132015 through 20172018 and our state tax returns for the tax years 20132015 through 20172018 remain open to examination. Prior tax years remain open to the extent of net operating lossNOL and tax credit carryforwards.

Utilization of NOL and research and development credit carryforwards may be subject to a substantial annual limitation in the event of an ownership change that has occurred previously or could occur in the future pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. An ownership change may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income, and may, in turn, result in the expiration of a portion of those carryforwards before utilization. In general, an ownership change, as defined by Section 382, results from transactions that increase the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. We undertook a detailed study of our NOL and research and development credit carryforwards through January 31, 2018,2019, to determine whether such amounts are likely to be limited by Sections 382 or 383. As a result of this analysis, we currently do not believe any Sections 382 or 383 limitations will significantly impact our ability to offset income with available NOL and research and development credit carryforwards. However, future ownership changes under Section 382 may limit our ability to fully utilize these tax benefits.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed financial statements and accompanying notes contained in this quarterly report on Form 10-Q and our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.

We are a biopharmaceutical company engaged in the research and development of innovative therapeutics to treat cancers and rare diseases. Our mission is to discover, develop and commercialize novel small molecule drugs in areas of high unmet need that will dramatically extend and improve the lives of our patients. These product candidates target biological pathways implicated in a wide range of cancers and certain non-oncology indications. Our discovery and development efforts are guided, when possible, by an understanding of the role of biomarkers, which are indicators of a particular biological condition or process and may predict the clinical benefit of our compounds in defined patient populations. Our clinical-stage pipeline consists of fivefour product candidates, all of which are in targeted patient populations, making ArQule a leader among companies our size in precision medicine.

ArQule has a long history of kinase drug discovery and development, having discovered and introduced ten kinase inhibitors into clinical trials. Our drug discovery efforts have been informed by our historical expertise in chemistry, our work in rational drug design and by our insight into kinase binding and regulation. We have applied this knowledge to produce significant chemical matter for a number of kinase targets and to build an extensive library of proprietary compounds with the potential to target multiple kinases in oncology and other therapeutic areas, such as rare diseases. We may bring further preclinical programs forward and interrogate our library against new targets beyond kinases either directly or with collaborators.

Our pipeline of orally bioavailable product candidates is directed toward molecular targets and biological processes with demonstrated roles in the development of both human cancers and rare, non-oncology diseases. All of these programs are being developed in targeted, biomarker-defined patient populations. By seeking out subgroups of patients that are most likely to respond to our drugs,product candidates, we intendseek to identify small, often orphan, indications that allow for focused and efficient development. At the same time, in addition to pursuing these potentially fast-to-market strategies, we also pursue development in other indications that could allow us to expand the utility of the drugsproduct candidates if approved. TheOur clinical pipeline includes the following compounds all of which are wholly-owned, except derazantinib, which is partnered with Basilea Pharmaceutic Ltd. in all parts of the world except the People’s Republic of China, Hong Kong, Macau and Taiwan (“Greater China”), where it is partnered with Sinovant Sciences Ltd., a subsidiary of Roivant Sciences Ltd.:product candidates:

In February 2018, we entered into a License Agreement (the “Agreement”) with Sinovant Sciences Ltd. (“Sinovant”) and Roivant Sciences Ltd., the parent of Sinovant, pursuantFGFR2 fusions. Derazantinib was exclusively licensed to which ArQule granted Sinovant a license to develop, manufacture and exclusively commercialize its FGFR inhibitor, derazantinib (ARQ 087), in Greater China. The Agreement provides for an upfront payment to ArQule of $3 million and a guaranteed $2.5 million development milestone within the first year. ArQule is also eligible for an additional $82 million in regulatory and sales milestones. Upon commercialization, ArQule is entitled to receive double digit royalties in the low teens from Sinovant on net sales of derazantinib in the Greater China territory. Sinovant will be responsible for all costs and expenses of development, manufacture and commercialization in its territory. For the three months ended June 30, 2018 no revenue was recognized under this licensing agreement. For the six months ended June 30, 2018, we recognized revenue of $3.0 for completing our performance obligation under this licensing agreement.

In April 2018, we entered into a License Agreement (the “Basilea Agreement”) with Basilea Pharmaceutica Ltd. (“Basilea”) pursuant to which ArQule granted Basilea an exclusive license to develop, manufacture and commercialize its FGFR inhibitor, derazantinib (ARQ 087),Limited (Basilea) in April 2018 in the United States, EU,European Union, Japan and the rest of the world, excluding the People’s Republic of China, Hong Kong, Macau, and Taiwan (collectively, Greater China. Under the termsChina) where derazantinib was exclusively licensed to Sinovant Sciences Ltd., a subsidiary of the Basilea agreement, ArQule will receive an upfront payment of $10 million and is eligible for up to $326 millionRoivant Sciences Ltd. (Sinovant) in regulatory and commercial milestones. Upon commercialization, ArQule is entitled to receive staggered royalties on future net sales of derazantinib ranging from the high-single digits to the mid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances, ArQule may have the opportunity to promote derazantinib in the US directly. For the three and six months ended June 30, 2018, we recognized revenue of $13.7 million for completing our performance obligations for the period under this licensing agreement.

Tivantinib (ARQ 197), an orally administered, small molecule inhibitor of the c-Met receptor tyrosine kinase and its biological pathway is no longer being developed. We licensed commercial rights to tivantinib for human cancer indications to Daiichi Sankyo Co., Ltd. (“Daiichi Sankyo”) in the U.S., Europe, South America and the rest of the world, excluding Japan and certain other Asian countries, where we licensed commercial rights to Kyowa Hakko Kirin Co., Ltd. (“Kyowa Hakko Kirin”).

We have incurred a cumulative deficit of approximately $534$567 million from inception through June 30, 2018.2019. We recorded a net loss for 2016 and 20172018 and expect a net loss for 2018.2019.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operating activities. Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees, facility and facility-related costs for our offices and laboratories, fees paid in connection with preclinical and clinical studies, laboratory supplies and materials and professional fees. The sources of our cash flow from operating activities have consisted primarily of upfront and other payments received from our collaborators for services performed or upfront payments forin connection with license agreements or future services.agreements. In the six months ended June 30, 2019 and 2018, our net use of cash was primarily driven by the difference between cash received from our collaborations and payments for operating expenses which resulted in net cash outflows of $15.0 million and $2.0 million. In the six months ended June 30, 2017, our net use of cash was primarily driven by payments for operating expenses which resulted in net cash outflows of $14.8 million.million, respectively.

Cash flow from investing activities. Our net cash provided by investing activities of $5.6 million for the six months ended June 30, 2019 was comprised of net maturities of marketable securities. Our net cash used by investing activities of $1.5 million for six months ended June 30, 2018 was comprised of net purchases of marketable securities. Our net cash provided by investing activities of $1.8 million for the six months ended June 30, 2017, was comprised of net maturities of marketable securities.. The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of our constant evaluation of conditions in financial markets, the maturity of specific investments, and our near termnear-term liquidity needs.

Our cash equivalents and marketable securities typically include commercial paper, money market funds, and U.S. Treasury bill funds, which have investment grade ratings. Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

Cash flow from financing activities. Our net cash provided by financing activities of $98.9 million for the six months ended June 30, 2019, was primarily comprised of $97.5 million in net proceeds from our June 2019 stock offering and $1.5 million from stock option exercises.  Our net cash provided by financing activities of $0.1 million for thesix months ended June 30,, 2018was principally comprised of proceeds from employee stock option exercises. Our net cash provided by financing activities of $14.6 million for the six months ended June 30, 2017, was principally comprised of the net proceeds from the loan and security agreement that we entered into on January 6, 2017.

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 additional corporate collaborations and the terms of such collaborations, results of research and development, unanticipated required capital expenditures, competitive and technological advances, acquisitions and other factors. We cannot guarantee that we will be able to develop any of our drug candidates into a commercial product. In January 2017, we entered into Loan Agreement with a principal balance of $15 million (see Note 8). The terms of the Loan Agreement required payments of interest on a monthly basis through September 2018 and payments of interest and principal from October 2018 to August 2021. In February 2018, the Loan Agreement was amended requiringrequire payments of interest on a monthly basis through August 2019 and payments of interest and principal from September 2019 to August 2022.

In February 2016, we entered into definitive stock purchase agreements with certain institutional and accredited investors. In conjunction with this stock offering we issued 8,027,900 shares of our common stock and non-transferable options for 3,567,956 shares of our common stock for aggregate net proceeds of $15.2 million. Each option was exercisable for $2.50 per share and they all expired on March 22, 2017.

In September 2017, we sold 2.0 million shares of common stock through an at-the-market (ATM) offering and raised net proceeds of $2.3 million. In October 2017, we entered into definitive stock purchase agreements with certain institutional investors. In conjunction with this stock offering we issued 13,938,651 shares of our common stock and warrants to purchase 3,123,674 shares of our common stock for aggregate net proceeds of $15.6 million. Each warrant is exercisable for $1.75 per share and expires in four years from the date of issuance. In November 2017, we entered into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering, the Companywe raised net proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants to purchase 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred together with the associated Warrant is priced at $1,135 and automatically converted into 1,000 shares of common stock upon the adoption on May 8, 2018, of an amendment to the Company’s restated certificate of incorporation to increase the number of authorized shares ofand each associated Warrant converted into 1,000 common stock thereunder.warrants in May 2018. The Warrants hadhave a pre-conversionpost-conversion exercise price of $1,750 per share of Series A Preferred (post-conversion price of $1.75 per share, of common stock), are exercisable immediately and expire approximately four years from the date of the adoption of the amendment to the Company’s restated certificate of incorporation.in May 2022.

In February 2018, we entered into a License Agreement (the “Agreement”) with Sinovant Sciences Ltd. (“Sinovant”) and Roivant Sciences Ltd., the parent of Sinovant pursuant to which ArQulewe granted Sinovant aan exclusive license to develop manufacture and exclusively commercialize its FGFR inhibitor, derazantinib (ARQ 087), in Greater China. The Agreement providesagreement provided for an upfront payment to ArQule of $3 million and a guaranteed $2.5 million development milestone withinthat was paid in the first year. ArQule isquarter of 2019. We are also eligible for up to an additional $82$12.0 million in regulatory milestone payments and sales milestones.$70.0 million in commercial milestone payments. Upon commercialization, ArQule iswe are entitled to receive double digit royalties in the low teens from Sinovant on net sales of derazantinib in the Greater China territory.China. Sinovant will be responsible for all costs and expenses of development, manufacture and commercialization in its territory.Greater China. For the three and six months ended June 30, 2019, we recognized revenue of$0.3 million and $1.4 million,respectively, for providing certain manufacturing services to Sinovant. For the three and six months ended June 30, 2018, we recognized revenue of zero and $3.0 million, for completing our performance obligation under this licensing agreement.respectively, related to the transfer of the license to Sinovant.

In April 2018, we entered into a License Agreement (the “Basilea Agreement”) with Basilea Pharmaceutica Ltd. (“Basilea”) pursuant to which ArQulewe granted Basilea an exclusive license to develop manufacture and commercialize its FGFR inhibitor, derazantinib (ARQ 087), in the United States, EU,European Union, Japan and the rest of the world, excluding Greater China. Under the terms of the Basilea Agreement, ArQule will receiveagreement, we received an upfront payment of $10 million and isare eligible for up to $326$63.0 million in development and regulatory milestone payments and up to $262.50 million in commercial milestones.milestone payments. Upon commercialization, ArQule iswe are entitled to receive staggeredtiered royalties on future net sales of derazantinib ranging from the high-single digits to the mid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances, ArQulewe may have the opportunity to promote derazantinib in the USUnited States directly. For the three and six months ended June 30, 2019, we recognized revenue of$0.03 million and $0.2 million,respectively, for providing certain research and development services to Basilea, recognized as revenue on a “cost-to-cost” method.Revenue in each of the three and six months ended June 30, 2018 totaled $13.7 million for providingrelated to the technologytransfer of the license to Basilea as well as the provision of certain research and development services to Basilea, recognized as revenue on a percentage of completion basis.Basilea.

In July 2018, we sold 12,650,000 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $64.5$64.6 million after commissions and other estimatedoffering expenses.

In June 2019, we sold 10,637,500 shares of common stock at $9.75 per share for aggregate net proceeds of approximately $97.3 million after commissions and other offering expenses.

We anticipate that our cash, cash equivalents and marketable securities on hand at June 30, 2018,2019 and the financial support from our licensing agreements the one year extension of our Loan Agreement and the net proceeds of approximately $64.5 million from our July 2018 common stock offering will be sufficient to finance our operations into 20212022 which is in excess of at least 12 months from the issuance date of these financial statements.

We expect that we maywill need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and market conditions, and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital when needed, or on terms favorable to us. If necessary funds are not available, we may have to delay, reduce the scope of, or eliminate some of our development programs, potentially delaying the time to market for any of our product candidates.

Our contractual obligations were comprised of the following as of June 30, 20182019 (in thousands):

In January 2015, we entered into a lease agreement for our headquarters facility.facility in Burlington, MA. The lease commenced on May 1, 2015 for a term of five years and three months with an average annual rental rate of $455 thousand. In January 2019, we entered into a lease agreement for our laboratory space in Woburn, MA. The lease commenced on March 6, 2019 for a term of five years and one month. The lease agreement for the laboratory space includes a rent escalation clause, and accordingly, rent expense is being recognized on a straight-line basis over the lease term. The obligations for this facilityour operating leases are included in the table above.

Purchase obligations are comprised primarily of outsourced preclinical and clinical trial expenses and payments to license certain intellectual property to support our research efforts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A “critical accounting policy” is one which is both important to the portrayal of our financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For additional information, please see the discussion of our significant accounting policies in Note 2 to the Financial Statements included in our Annual Report for the fiscal year ended December 31, 20172018 on Form 10-K filed with the SECSecurities and Exchange Commission (“SEC”) on March 5, 2018.7, 2019.

The Company adopted Accounting Standards Codification Topic 606—Revenue from Contracts with Customers, or Topic 606, on January 1, 2018, resulting in a change to its accounting policy for revenue recognition. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a net increase to opening equity of $1.5 million as of January 1, 2018 due to the cumulative impact of adopting this new standard. The adoption of the new revenue standard did not have a material impact on any other balances within the condensed financial statements as of and for the six-months ended June 30, 2018.

RESULTS OF OPERATIONS

The following are the results of operations for the three and six months ended June 30, 20182019 and 2017:2018:

Revenue

Research and development revenue in the three months ended June 30, 2019 consisted of $0.3 million from our Sinovant licensing and supply agreements. Research and development revenue in the three months ended June 30, 2018 consisted of $13.7 million from our April 2018 Basilea licensing agreement.

Research and development revenue in the six months ended June 30, 2019 consisted of $1.4 million from our Sinovant licensing and supply agreements and $0.2 million from our Basilea licensing agreement. Research and development revenue in the six months ended June 30, 2018 consisted of $13.7 million from our April 2018 Basilea licensing agreement, $3$3.0 million from our February 2018 RoivantSinovant licensing agreement and $1.1 million from a non-exclusive license agreement for certain of our library compounds.

Research and development

Research and development expense in the three months ended June 30, 2018 increased2019 decreased by $1.8$0.5 million as compared to the three months ended June 30, 2018, primarily due to higherlower outsourced preclinical, clinical and product development costs.

Research and development expense in the six months ended June 30, 20182019 increased by $2.4$1.2 million as compared to the six months ended June 30, 2018, primarily due to higher outsourced preclinical, clinical and product developmentlabor related costs.

At June 30, 20182019 we had 1824 employees dedicated to our research and development program compared to 1918 employees at June 30, 2017.2018.

Overview

Our research and development expense consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees paid to professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with pre-clinicalpreclinical animal studies, costs of materials used in research and development, consulting, license, and sponsored research fees paid to third parties and depreciation of associated laboratory equipment. We expect that our research and development expense willto remain significant, yet consistent, as we continue to develop our portfolio of oncology and rare disease programs.

We have not accumulated and tracked our internal historical research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and infrastructure resources are allocated across several projects, and many of our costs are directed to broadly applicable research endeavors. As a result, we cannot state the costs incurred for each of our oncology programs on a program-by-program basis.

Our future research and development expenses in support of our current and future oncology programs will be subject to numerous uncertainties in timing and cost to completion. We test potential products in numerous preclinical studies for safety, toxicology, and efficacy. We may conduct multiple clinical trials for each product. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products. Completion of clinical trials may take several years or more, and the length of time and cost of development generally varies substantially according to the type, complexity, novelty, and intended use of a product. It is not unusual for the preclinical and clinical development of each of these types of products to take nine years or more, and for total development costs to exceed $500 million for each product.

We estimate that clinical trials of the type generally needed to secure new drug approval are typically completed over the following timelines:

The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the following:

An element of our business strategy is to pursue the research and development of a broad pipeline of products. This is intended to allow us to diversify the risks associated with our research and development expenditures. As a result, we believe our future capital requirements and future financial success do not substantially depend on any one product. To the extent we are unable to build and maintain a broad pipeline of products, our dependence on the success of one or a few products increases.

Our strategy includes entering into alliance arrangements with third parties to participate in the development and commercialization of our products, such as our collaboration agreements with RoivantBasilea and Basilea.Sinovant. In the event that third parties have control over the clinical trial process for a product, the estimated completion date would be under control of that third party rather than under our control. We cannot forecast with any degree of certainty whether our products will be subject to future collaborative arrangements or how such arrangements would affect our development plans or capital requirements.

As a result of the uncertainties discussed above, we make significant estimates in determining the duration and completion costs of our oncology programs or when and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our oncology programs in a timely manner or our failure to enter into appropriate collaborative agreements could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time-to-time in order to continue with our product development strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

General and administrative