ARQL ArQule Inc

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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ArQule, Inc.

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LETTER TO STOCKHOLDERS

Introduction

As I commence on my tenth year as Chief Executive Officer of ArQule, I can say that I have never been more excited about the Company’s prospects. We continue to dedicate our energy and resources to deliver on our mission of successfully developing new drugs that dramatically extend and improve the lives of our patients. In 2017, we took important steps in that direction.

Today, ArQule has five product candidates in clinical development, all of which are being tested in biomarker-defined patient populations to maximize the potential for efficacy and greatest clinical benefit. Our business is challenging, but through the continued hard work, energy and dedication of our employees, academic partners and business collaborators, we are moving closer to attaining our goals.

We progressed our entire proprietary pipeline in 2017 in both oncology and rare overgrowth diseases. These accomplishments included establishing proof of concept and obtaining rare pediatric disease designation from the FDA in the rare overgrowth disease, Proteus syndrome. We also initiated clinical work with our BTK inhibitor and launched a registrational trial with our FGFR inhibitor. These and other highlights of the past year follow below.

Proprietary Pipeline

We began 2017 with the filing of an IND for our BTK inhibitor, ARQ 531, in Q1 and launching a Phase 1a/b trial in patients with refractory B-cell malignancies in Q3. ARQ 531 is a potent and reversible inhibitor of both wild type and mutant-C481S BTK with activity against the Src and TRK family of kinases. ARQ 531 presents the opportunity not only to address the issue of resistance to approved therapies like ibrutinib and acalabrutinib, but also to expand into other indications.

Our lead AKT inhibitor, miransertib (formerly ARQ 092), showed proof of concept in the rare overgrowth disease Proteus syndrome, in a Phase 1 study conducted by our collaborators at the NIH. In that trial, miransertib demonstrated biological activity in five out of six patients treated, where the protocol defined decrease in AKT signaling of greater than 50% was observed at a dose of only 10 mg. With in vitro and in vivo proof of concept with miransertib achieved in this disease, we are excited about moving forward in 2018 with a registrational program while continuing our collaboration with the NIH.

We have also been collaborating with Memorial Sloan Kettering studying miransertib in oncology, specifically in advanced endometrial cancer patients in combination with the aromatase inhibitor, anastrozole. There is a growing body of data to suggest that AKT inhibitors in combination with hormonal therapy could be important drugs in gynecological tumors as well as in breast and prostate cancers. We anticipate that these data from the Phase 1b trial, to be presented at the upcoming AACR meeting in April, will provide the foundation for a path forward to later-stage clinical development.

In addition, in Q4 2017, we launched a registrational trial with our FGFR inhibitor, derazantinib (formerly ARQ 087), for the treatment of intrahepatic cholangiocarcinoma (iCCA). This trial seeks to enroll approximately 100 patients in a single arm study and will measure, as a primary endpoint, overall response rate. We are encouraged by the rate of recruitment to date.

We also partnered the rights to derazantinib in the Greater China region with a subsidiary of Roivant Sciences Ltd. in the early part of 2018 and look forward to advancing the collaboration in this critical region where iCCA is so prevalent.

Our next generation AKT inhibitor, ARQ 751, continues to progress through its Phase 1 trial in patients with AKT1 and PIK3CA mutations. Our successful advancement of ARQ 751 could lead to important future options for ArQule in our overall AKT development strategy in both oncology and rare diseases.

Looking Forward

We believe that 2018 could be a pivotal year for the development of our proprietary pipeline of product candidates through the achievement of the following goals:

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ARQ 531—Complete the Phase 1a trial in refractory B-cell malignancies and launch Phase 1b expansion studies in several cohorts of patients, including CLL with C481S mutations and other B-cell malignancies.

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Miransertib (rare disease)—Initiate a registrational program in Proteus syndrome with the NIH and continue to advance our Phase 1/2 study in PIK3CA related overgrowth syndrome (PROS).

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Miransertib (oncology)—Present data from the Phase 1b study of miransertib with the aromatase inhibitor, anastrozole, in advanced endometrial patients at AACR and work with KOLs to define the path forward for later-stage clinical development.

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Derazantinib—Complete dosing of patients needed to conduct an interim assessment in the registrational trial in second line iCCA patients with FGFR2 fusions and explore additional tumor types.

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ARQ 751—Complete the Phase 1 trial with ARQ 751 in patients with AKT1 and PIK3CA mutations.

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Finance

With significant opportunities from our proprietary pipeline, it was critical that we solidify our financial position during 2017. We achieved this goal by raising approximately $30 million through two financings and other activities. As a result, we ended 2017 with approximately $48 million in cash and marketable securities, an amount that we believe is sufficient to fund the Company well into 2019.

Early in 2018, we also negotiated the extension of our loan agreement with Oxford Finance that pushes out principal payments and the maturity date of the loan by one year, thus deferring principal payments of approximately $5 million by twelve months. In addition, we received a $3 million upfront payment from Roivant in connection with our collaboration in Greater China for derazantinib and will receive an additional $2.5 million development milestone payment during the first year of the contract.

Although we have faced challenges at ArQule in recent years, we have continued the work necessary to build on the great promise of our proprietary pipeline, and we are now beginning to see the benefits of these efforts and perseverance. On behalf of all ArQule employees and the Board, I want to thank you for your commitment to our journey. We look forward to delivering life changing therapies to our patients in the very near future.

Sincerely,

Paolo Pucci
Chief Executive Officer

ARQULE, INC.
 
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
 
TO BE HELD MAY 8, 2018

To Our Stockholders,

Our 2018 Annual Meeting of Stockholders will be held at the Boston Burlington Marriott, One Mall Road, Burlington, Massachusetts 01803 at 10:00 a.m. Eastern Daylight Savings Time on May 8, 2018 for the following purposes:

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To elect Timothy C. Barabe, Ran Nussbaum and Paolo Pucci as directors to hold office for a term of three years and until their respective successors are elected and qualified;

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To approve an amendment to our Restated Certificate of Incorporation to increase the number of authorized shares of our Common Stock, $0.01 par value per share, from 100,000,000 to 200,000,000;

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To approve our new 2018 Employee Stock Purchase Plan and the authorization of 500,000 shares of our Common Stock to be available for issuance under the plan;

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To approve an amendment to our 2014 Equity Incentives Plan to increase the number of shares of our Common Stock available for issuance pursuant to future awards made under the plan by 3,750,000;

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To ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year ending December 31, 2018;

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To approve, by non-binding vote, the compensation of our named executive officers; and

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To transact any other business that may properly come before the meeting or any adjournment of the meeting.

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Only stockholders of record at the close of business on March 16, 2018 will be entitled to vote at the meeting or any continuation of the meeting following an adjournment. A list of these stockholders will be available during ordinary business hours at the offices of ArQule, Inc. for a period beginning ten days before the meeting. Any stockholder may examine the list for any purpose germane to the meeting.

We look forward to seeing you at the meeting.

IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE YOUR PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. YOU MAY ALSO SUBMIT YOUR PROXY ELECTRONICALLY OR BY TELEPHONE, ACCORDING TO THE INSTRUCTIONS ON THE ENCLOSED PROXY CARD. IF YOU ATTEND THE MEETING AND WISH TO VOTE IN PERSON, YOUR PROXY WILL NOT BE USED. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.

By order of our Board of Directors,

Peter S. Lawrence
President and Chief Operating Officer

Burlington, Massachusetts

Dated: March 29, 2018

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ARQULE, INC.
 
One Wall Street
Burlington, Massachusetts 01803
Telephone: (781) 994-0300

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To approve an amendment to our 2014 Equity Incentives Plan to increase the number of shares of our Common Stock available for issuance pursuant to future awards made under the plan by 3,750,000;

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To ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year ending December 31, 2018;

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To approve, by non-binding vote, the compensation of our named executive officers; and

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To transact any other business that may properly come before the meeting or any adjournment of the meeting.

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We will also consider any other business as may properly come before the Annual Meeting or any adjournment thereof. See “What happens if additional matters are presented at the Annual Meeting?” below.

What are my voting choices for each of the proposals to be voted on at the Annual Meeting?

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For Proposal 1, subject to our Majority Voting Policy described below, the affirmative vote of a plurality of shares of Common Stock cast by stockholders present at the Annual Meeting, in person or by proxy, is required to elect each of the nominees. Proposal 2 must receive an affirmative vote of  (i) a majority of the issued and outstanding shares of Common Stock and Preferred Stock (as defined below), voting together as a single class, and (ii) a majority of the issued and outstanding shares of Common Stock, voting without the Preferred Stock. Each of the other proposals will require the affirmative vote of a majority of shares cast by stockholders voting in person or by proxy at the Annual Meeting.

As an advisory vote, Proposal 6, the proposal to approve executive compensation, is not binding on the Company. However, the Compensation, Nominating and Governance Committee of the Board (the “Compensation Committee”), which is responsible for designing and administering our executive compensation program, values the opinions expressed by stockholders and will consider the outcome of the vote when making future compensation decisions.

What is the Majority Voting Policy?

Our Board of Directors has adopted a policy that provides that in an uncontested election of directors, any nominee that is elected but receives a greater number of votes withheld from his or her election than votes in favor of election is expected to tender his or her resignation promptly following the date of the stockholders’ meeting at which the vote occurs. As described below, the Compensation Committee will consider the resignation and recommend to the Board whether to accept it in accordance with the terms of our Majority Voting Policy.

Why is the Company seeking to increase the number of authorized shares of Common Stock?

We have 100,000,000 authorized shares of Common Stock. As of March 16, 2018, over 99,500,000 of these shares were issued and outstanding or reserved for issuance under outstanding securities, including stock options and warrants. The Board believes that it is prudent to increase the authorized number of shares of Common Stock in order to maintain a reserve of shares available for immediate issuance to meet business needs, such as equity offerings, equity awards and strategic acquisition opportunities promptly as they arise. In addition, the Board agreed to seek stockholder approval of an amendment to the Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock to facilitate a conversion of the Company’s outstanding Convertible Preferred Stock, Series A, par value $.01 per share (the “Preferred Stock”).

If the stockholders approve this proposal, when would the Company implement the increase in the number of authorized shares?

We currently expect that the increase in the number of authorized shares will be implemented as soon as practicable after the receipt of the requisite stockholder approval.

What shares can I vote?

Each holder of Common Stock is entitled to one vote for each share held as of the record date on each matter to be voted on at the Annual Meeting. March 16, 2018 is the record date for our Annual Meeting. On that date, we had outstanding 87,110,202 shares of Common Stock. In addition, we have issued and outstanding 8,370 shares of Preferred Stock. Each share of Preferred Stock is entitled to 1,000 votes per share and votes together with the Common Stock as a single class.

How many shares must be present or represented to conduct business at the Annual Meeting?

The presence at the Annual Meeting, in person or by proxy, of the holders of a majority in interest of all stock issued and outstanding and entitled to vote at the Annual Meeting constitutes a quorum for the transaction of business. For purposes of determining whether a quorum exists, proxies received but marked “ABSTAIN” and so-called “broker non-votes” (described below) will be counted as present.

What if I am a beneficial owner and do not give voting instructions to my bank, broker or other nominee?

As a beneficial owner, in order to ensure that your shares of Common Stock are voted in the way you would like, you must provide voting instructions to your bank, broker or other nominee by the deadline

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What different methods can I use to vote?

Your vote is very important. Whether or not you plan to attend the Annual Meeting, we urge you to either:

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complete, sign, date and return the accompanying proxy card;

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vote on the Internet pursuant to the instructions provided in the proxy card; or

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vote by telephone (toll-free) in the United States or Canada, in accordance with the instructions on the proxy card.

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What if I am a stockholder of record and do not specify a choice for a matter when returning a proxy?

Stockholders should specify their choice for each matter on the Proxy Card. If you submit a valid proxy without directions as to votes on the matters to be considered at the Annual Meeting, the proxy will be voted “FOR” the election of the nominees listed herein and “FOR” Proposals 2,3,4,5 and 6.

Can I change my vote after I have already voted?

Stockholders may revoke the authority granted by an executed proxy at any time before its exercise by voting in person at the Annual Meeting or by filing with our President and Chief Operating Officer a written revocation or a duly executed proxy with a later date. If your shares are held in “street name,” you should contact your broker for instructions on changing your vote.

Who will bear the cost of soliciting votes for the Annual Meeting?

We will bear the cost of solicitation of proxies, including charges and expenses of brokerage firms and others for forwarding solicitation material by mail to beneficial owners of stock. We have engaged The Proxy Advisory Group, LLC ® , to assist in the solicitation of proxies and provide related advice and informational support for a services fee and the reimbursement of customary disbursements in an amount that is not expected to exceed $15,000 in the aggregate. In addition, our officers, employees and other representatives may solicit proxies in person or by telephone.

What happens if additional matters are presented at the Annual Meeting?

Other than the items of business described in this Proxy Statement, we are not aware of any other business to be acted upon at the Annual Meeting. If you grant a proxy, the persons named as proxy holders will have discretion to vote your shares on any additional matters properly presented for a vote at the Annual Meeting. If for any reason any of our nominees is not available as a candidate for director, the person named as proxy holder will vote your proxy for such other candidates as may be nominated by the Board.

When will the Company announce the voting results?

We will announce the preliminary voting results at the Annual Meeting. The Company will report the final results in a Current Report on Form 8-K filed with the SEC which can be accessed on the SEC’s website at www.sec.gov or on our website at www.arqule.com .

Can I access the Notice of Annual Meeting, Proxy Statement and Annual Report on Form 10-K on the Internet?

The Notice of Annual Meeting, Proxy Statement and Annual Report are available at www.proxyvote.com . In addition, stockholders are able to view these documents by accessing the “Investors and Media” Section of our website at www.arqule.com and clicking on the heading “Financial Information”.

Instead of receiving future copies of our Notice of Annual Meeting, Proxy Statement and Form 10-K by mail, stockholders can elect to receive an e-mail that will provide electronic links to these documents. Opting to receive your proxy materials online will save us the cost of producing and mailing your documents to your home or business, and also will give you an electronic link to the proxy voting site.

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Stockholders of Record.    If you vote on the Internet at www.proxyvote.com , simply follow the prompts for enrolling in the electronic proxy delivery service. You also may enroll in the electronic proxy delivery service at any time in the future by going directly to www.proxyvote.com and following the enrollment instructions.

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Beneficial Owners.    If you hold your shares of Common Stock in a bank or brokerage account, you also may have the opportunity to receive copies of these documents electronically. Please check the information provided in your proxy material provided to you by your bank or broker regarding the availability of this service.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Proxy Statement, including the accompanying letter to stockholders, as well as other written reports and oral statements that we make from time to time, include statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can generally be identified by use of forward-looking terminology such as “believes”, “expects”, “intends”, “may”, “will”, “plans”, “should”, “anticipates,” “potential,” “goal” or similar terminology. Forward-looking statements are not guarantees that the future results, plans, intentions or expectations, expressed or implied, will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date hereof, such expectations are based on certain assumptions regarding the progress of product development efforts including clinical trials and pre-clinical activities conducted by ourselves and third parties, the prosecution of existing and efforts to execute new collaborative agreements, receipt of potential milestones and royalties under our collaborative agreements, government regulations, reliance on third parties to conduct clinical trials and perform research and analysis services, adequate financial resources, changes in economic and business conditions, and other factors relating to our growth. Such expectations may not materialize if product development efforts, including any necessary trials of our potential drug candidates, are delayed or suspended, if our compounds fail to demonstrate safety and efficiency, if positive early results are not repeated in later studies or in humans, if the therapeutic value of our compounds is not realized, if negotiations with potential collaborators are delayed or unsuccessful, if we are unsuccessful at integrating acquired assets or technologies, or if other assumptions prove incorrect. We describe additional risks and uncertainties that could cause actual results and events to differ materially from these forward looking statements in the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2017 and other public filings with the SEC.

Any forward-looking statements contained herein represent our judgment as of the date hereof and you are cautioned not to place undue reliance on these forward looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

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an oral multiple kinase inhibitor used to treat liver and kidney cancers. These activities included clinical development, regulatory review, corporate alliance management, product launch and marketing. Mr. Pucci joined Bayer as head of its Italian Pharmaceutical operations in 2001. Prior to Bayer, Mr. Pucci held positions of increasing responsibility with Eli Lilly, culminating with his appointment as Managing Director, Eli Lilly Sweden AB. At Lilly, his responsibilities included operations, sales, marketing and strategic planning. In November 2011, Mr. Pucci was appointed to the Board of Directors of Dyax Corp where he served as an independent director, member of the audit committee and chairman of the governance and nomination committee until the acquisition of Dyax by Shire in January 2016. In April 2013, he was appointed to the Board of Directors of Algeta ASA, an oncology company based in Oslo, Norway, where he served as an independent director and member of the audit committee until the acquisition of Algeta by Bayer A.G. He has also been a Director of NewLink Genetics Corp., since November 2015. During September 2016, Mr. Pucci was elected to the Board of Directors of West Pharmaceutical Services, Inc., an international manufacturer of packaging components and delivery systems for injectable drugs and healthcare products. Mr. Pucci holds an M.B.A from the University of Chicago and is a graduate of the Università Degli Studi Di Napoli in Naples, Italy.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF THE NOMINEES LISTED ABOVE.

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Directors with Term Expiring at the 2019 Annual Meeting

Susan L. Kelley, M.D. (Age: 63) Dr. Kelley has been a director since April 2011. Dr. Kelley served as Chief Medical Officer of the Multiple Myeloma Research Consortium and its sister organization, the Multiple Myeloma Research Foundation from 2008 to 2011. Previously, Dr. Kelley held positions of increasing responsibility at Bayer Healthcare Pharmaceuticals and Bayer-Schering Pharma including Vice President, Global Clinical Development and Therapeutic Area Head – Oncology. Prior to joining Bayer, she worked at Bristol-Myers Squibb in Oncology and Immunology drug development where she held positions of increasing responsibility, ultimately serving as Executive Director, Oncology Clinical Research, at the Bristol-Myers Squibb Pharmaceutical Research Institute. She was a Fellow in Medical Oncology and Clinical Fellow in Medicine at Dana-Farber Cancer Institute, Harvard Medical School, and a Fellow in Medical Oncology and Pharmacology at Yale University School of Medicine, where she also served as a Clinical Assistant Professor of Medicine. Dr. Kelley also serves on the board of directors of Daré Bioscience (formerly Cerulean Pharma, Inc.), Immune Design Corp. and Vascular Biogenics Ltd. She formerly served as a Director of Alchemia, Ltd. Dr. Kelley received her M.D. from Duke University School of Medicine.

Michael D. Loberg, Ph.D. (Age: 70) Dr. Loberg has been a director since January 2007. Previously, he served as Chief Executive Officer and a member of the Board of Directors of NitroMed, Inc., a pharmaceutical company, from September 1997 to March 2006 and as its President from September 2003 to March 2006. From 1979 to 1997, Dr. Loberg held a number of senior management positions at Bristol-Myers Squibb, including President of Bristol-Myers Squibb’s Oncology and Immunology, U.S. Primary Care, Northern Europe, Specialty Pharmaceuticals and Squibb Diagnostics. Dr. Loberg is a Director of IGM Biosciences, a developer of immunotherapeutics. He holds a B.S. in Chemistry from Trinity College and a Ph.D. in Chemistry from Washington University.

Directors with Term Expiring at the 2020 Annual Meeting

Ronald M. Lindsay, Ph.D. (Age: 70) Dr. Lindsay has been a director since June 2005. He is currently Chairman and CEO of Zebra Biologics Inc., a privately held biopharmaceutical company. He was formerly EVP R&D and a director at Sequenom, Inc., and is currently a director of two privately-held companies, NeurocentRx Pharmaceuticals Ltd, Edinburgh and Depixus SAS, Paris. Dr. Lindsay was previously Chief Scientific Officer and Vice President, Research and Development, at diaDexus, Inc., and held a number of senior management positions at Millennium Pharmaceuticals, Inc., including SVP, Biotherapeutics. At Regeneron Pharmaceuticals, he was a founding scientist and led pre-clinical R&D from 1988-1998. Dr. Lindsay also worked at the Sandoz Institute for Medical Research, London. Dr. Lindsay completed post-doctoral work at the Friedrich Miescher Institute, Basel, and he holds a B.Sc. (Hons) in Chemistry from the University of Glasgow and a Ph.D. in Biochemistry from the University of Calgary. He is the author of over 150 peer reviewed publications in the field of neuroscience.

William G. Messenger, D. Min. (Age: 57) Dr. Messenger has been a director since January 2005. He has been the owner and managing director of the Lexington Sycamore Group, consultants in the fields of business strategy, organization and leadership, since 1994. He also serves as Executive Editor of the Theology of Work Project, a small international organization conducting research and publication in the field of business ethics. From 1999 to 2008, Dr. Messenger served as Director of the Mockler Center for Faith and Ethics in the Workplace at Gordon-Conwell Theological Seminary. Dr. Messenger received a B.S. in Physics with highest honors from Case Western Reserve University, an M.B.A. with high distinction from Harvard Business School, a Master of Divinity degree, summa cum laude, from Boston University School of Theology, and a Doctor of Ministry from Gordon-Conwell Theological Seminary

Patrick J. Zenner (Age: 71) Mr. Zenner was named Chairman of the Board in May 2004 and has been a director since 2002. Mr. Zenner retired in 2001 from the position of President and Chief Executive Officer of Hoffmann-La Roche Inc., North America, based in Nutley, N.J. Mr. Zenner held various executive positions during his 32-year career with the company. Mr. Zenner is currently a member of the Board of Trustees of Creighton University and is Chairman of the Board of Trustees of Fairleigh Dickinson University. In addition, Mr. Zenner is Chairman of the Board of Directors of West Pharmaceutical

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Services, Inc. and a director at Selecta Bioscience, Inc. Until its sale in 2012, Mr. Zenner was a director of Par Pharmaceuticals, Inc. In 2010, he resigned from the boards of Geron Corporation, Xoma Ltd. and Exact Sciences, Inc. He has a B.S./B.A. from Creighton University and an M.B.A. from Fairleigh Dickinson University.

Corporate Governance Guidelines and Code of Conduct

At ArQule, we value honesty, integrity, and fairness in our dealings with our fellow employees, our stockholders, our collaborators and our communities. In addition to meeting both the letter and the spirit of regulations and rules adopted by the SEC, other federal and state laws and regulations and the standards of the Nasdaq Global Market (“Nasdaq”), our directors have mandated that our business dealings comply with the highest ethical and corporate governance standards.

We have adopted general corporate governance principles, the ArQule Corporate Code of Conduct (“Code of Conduct”) and related policies to provide guidance to our directors and management in their efforts to provide effective and appropriate corporate governance. As is the case with our other policies and practices, the tenets reflected in our governance principles, Code of Conduct and policies are intended to align the interests of our directors, management and other employees with those of our stockholders. We will review and, if necessary in our judgment, modify the guidelines from time to time.

The Code of Conduct applies to our directors, employees and officers, including our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer and Treasurer (our principal executive officer, principal financial officer and principal accounting officer, respectively), and our Chief Medical Officer. The Code of Conduct addresses: the standards of conduct expected of each director, officer and employee; conflicts of interest; corporate disclosure processes; compliance with laws, rules and regulations (including insider trading laws); corporate opportunities; confidentiality; fair dealing; and protection and proper use of Company assets. It also strongly encourages the reporting of any illegal or unethical behavior. Waivers of the requirements of the Code of Conduct or associated policies with respect to members of the Board and executive officers are subject to the approval of the full Board or a committee of the Board to which resolution of the matter is delegated and will be disclosed on our website. The governance principles, Code of Conduct, and certain related policies are available on our website at http://www.arqule.com in the “Investors and Media” Section under the heading “Corporate Governance.”

Director Qualifications and Nomination Process

Director Qualifications

Our Compensation Committee identifies nominees for director from various sources including referrals from current Board members and industry contacts. In the past, the Compensation Committee has also used third party consultants to assist in identifying, evaluating, and recruiting potential nominees; however, no third party consultant was used for this purpose during 2017. The directors have not set formal criteria or qualifications for individuals to be nominated or re-nominated as candidates for Board membership. Instead, the Compensation Committee has developed a general profile for candidates reflecting the personal and professional characteristics that our directors believe a suitable individual should possess. Such characteristics include integrity, business acumen and educational background, relevant industry experience, understanding of interpersonal relationships, no conflict of interest, a high degree of commitment to the functioning of the Board and its committees, and the ability to meet the independence and financial literacy requirements defined by applicable Nasdaq and SEC rules. Additionally, the Compensation Committee carefully considers issues of diversity among its members in identifying and considering potential nominees and attempts, where appropriate, to achieve a diversity of professional experiences, business cultures, perspectives, genders, ages and ethnicities, among other characteristics, in the membership of the Board and its committees. The Company does not require members of the Board (or our executive officers) to purchase or hold a minimum number of shares of our Common Stock.

Our Company is a clinical-stage biotechnology company engaged in the research and development of innovative therapeutics to treat cancers and rare diseases. In light of the Company’s current needs and business priorities, the Compensation Committee believes that the Board’s membership should include directors with a high level of scientific and relevant business experience. Our business requires an

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understanding of the science behind our pre-clinical and clinical product candidates, as well as the clinical development and commercialization processes. Accordingly, the Compensation Committee has determined that scientific, drug development and commercialization experience should be represented on the Board. In addition, as a public company, our Board should include individuals who are financially literate to serve as members of the audit and other committees. We also believe that members should have a firm grounding in corporate governance and business ethics. Lastly, our business is dynamic and rapidly evolving and benefits from having a Board that includes individuals from a variety of backgrounds and professional experiences who contribute to the Board’s overall ability to identify and ask difficult questions and to think innovatively.

The following table summarizes how the qualifications, attributes, skills and experience described above relate to each individual director’s contributions to the Board and its Committees. An “X” in the chart below indicates a specific competency for which the director has been nominated to serve on the Company’s Board and its Committees.

The lack of an “X” for a particular qualification does not mean that the director does not possess that qualification or skill. Rather, an “X” indicates a primary area of focus or expertise of a director on which the Board currently relies.

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Member of Audit Committee

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Member of Compensation Committee

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Member of Science Committee

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Stockholder Nominations

The Compensation Committee has not established any special procedures for stockholder submissions of nominees for election to the Board. Our By-laws permit any stockholder entitled to vote for the election of directors to nominate one or more directors. We believe that this long-standing mechanism, in place since incorporation of the Company, provides the appropriate means for stockholder nominations. Pursuant to our By-laws, a stockholder wishing to nominate a director candidate must deliver or mail written notice of such nomination to the Chairman of the Board, the President, or the Secretary of the Company at our principal executive office. If a stockholder is nominating a director candidate for election at the annual meeting of stockholders, notice must be received at least 75 days before the anniversary date of the prior year’s meeting, assuming there was an annual meeting in the prior year and the date of the current year’s annual meeting is within 30 days of the anniversary date of the prior year’s meeting. Otherwise, notice must be received at least 45 days before the date of the current year’s annual meeting or a special meeting, if at least 60 days’ notice or prior public disclosure of the date of the current year’s annual meeting or the special meeting is provided. If neither of the previous two sentences applies, notice must be

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received no later than 15 days after the date on which notice of the date of the current year’s annual meeting or the special meeting was mailed or public disclosure was made of such meeting date. The notice must include the stockholder’s name and address, the class and number of shares of securities beneficially owned by such stockholder, and each nominee’s:

(i)

name, age, business address, and home address;

​

(ii)

principal occupation or employment;

​

(iii)

beneficial ownership of Company securities, including the class and number of shares of stock; and

​

(iv)

any other information relating to the nominee that is required to be disclosed in solicitations for proxies for election of directors by Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

​

The Compensation Committee will consider all nominees submitted by stockholders in the manner described above and will evaluate all potential nominees using the same criteria.

Majority Voting Policy

On March 18, 2014, our Board adopted the “Majority Voting Policy with Respect to the Election of Directors”. The Majority Voting Policy provides that in an uncontested election of directors of the Company, any nominee for election as a director who receives a greater number of votes “withheld” from his or her election than votes “for” such election (a “Majority Withheld Vote”) shall, promptly following the date of the stockholders’ meeting at which the election occurred, tender his or her resignation to the Chairman of the Board for consideration by the Compensation Committee. For purposes of the Majority Voting Policy, an “uncontested election” means an election in which the number of nominees for election as director is equal to the number of directors to be elected.

The Compensation Committee will consider the resignation and, promptly following the stockholders’ meeting at which the election occurred, will recommend to the Board whether or not to accept it. The Compensation Committee will be expected to accept the resignation except in situations where circumstances would warrant the applicable director continuing to serve on the Board.

In its deliberations about the proper recommendation, the Compensation Committee will consider a range of possible alternatives concerning the director’s tendered resignation as it deems appropriate including, without limitation, acceptance of the resignation, rejection of the resignation, or rejection of the resignation coupled with a commitment to seek to address and cure the underlying reasons reasonably believed by the Compensation Committee to have substantially resulted in the “withheld” votes.

The Board will act on the Compensation Committee’s recommendation within 90 days of the date of the stockholders’ meeting at which the election occurred. The Board will consider the information, factors and alternatives evaluated by the Compensation Committee in arriving at its recommendation and such additional information, factors and alternatives that the Board may consider to be relevant.

Following the Board’s decision on the Compensation Committee’s recommendation, the Company will promptly disclose the decision regarding whether or not to accept the nominee’s resignation (or the reasons for rejecting the resignation, if applicable), as well as a summary of the factors considered, in a Form 8-K furnished to the SEC.

The Board’s Role in Risk Oversight

Our Board retains ultimate responsibility for risk oversight and our management retains the responsibility for risk management. The role of our Board in our Company’s risk oversight process includes receiving regular reports that include areas of material long- and short-term internal and external risks to our Company, including clinical, regulatory, manufacturing, financial, information technology, intellectual property, legal, compensation, strategic and reputational risks. The full Board (or the appropriate committee in the case of risks that are under the purview of a particular committee) receives these reports from the member of management responsible for the function from which the risk arises so that it can understand and assess our ongoing risk identification, risk management and risk mitigation strategies. Our

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Board also administers its risk oversight function through the required approval by the Board (or a committee of the Board) of significant transactions and other material decisions, and regular periodic reports from our company’s independent registered public accounting firm and other outside consultants regarding various areas of potential risk, including, among others, those relating to our internal controls and financial reporting. As part of its charter, the Audit Committee discusses with management and our independent registered public accounting firm significant financial risks and exposures and the steps management has taken to minimize those risks.

Communications with Directors

We do not have a formal process for communication by stockholders with our directors. However, stockholders and others who wish to communicate may write to the Board as a whole, or to individual director’s c/o:

ArQule, Inc.
One Wall Street
Burlington, Massachusetts 01803-4757
Attn. Rob Weiskopf
Chief Financial Officer and Treasurer

Such communications will be forwarded directly to the addressee.

Director Independence

For a director to be designated as independent, as defined by the Nasdaq listing standards set forth below, our Board must determine that he or she has no “material relationship” with ArQule other than that of a director. When assessing the materiality of a director’s relationship with ArQule, the Board considers:

•

all relevant facts and circumstances, including not only a director’s relationship with the Company, but also all relevant affiliations;

​

•

the frequency and regularity of any services the director performed for the Company outside of the scope of duties as a director;

​

•

whether the director carried out those services at arm’s length in the ordinary course of business; and

​

•

whether the director provided those services on substantially the same terms as those prevailing at the time for unrelated parties in comparable transactions.

​

For a Nasdaq-listed company, a director is not considered independent if any of the following circumstances exist:

•

the director is currently, or was at any time during the preceding three years, employed by the listed company, its parent or subsidiaries, or if any of the director’s family members is, or was, an executive officer of the listed company, its parent or subsidiaries, at any time during the preceding three years;

​

•

the director has accepted, or has a family member who has accepted, from the listed company, its parent or subsidiaries, any payment in excess of $120,000 during any twelve-month period within the preceding three years, other than (a) compensation for board or board committee services, (b) compensation paid to a family member who is a non-executive employee of the listed company, its parent or any subsidiary; or (c) benefits under a tax-qualified retirement plan or non-discretionary compensation;

​

•

the director is, or has a family member who is, employed as an executive officer of any other entity where at any time during the preceding three years any of the executive officers of the company served on the compensation committee of such other entity;

​

•

the director is, or has a family member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to which the listed company made, or from which the company received, payments (other than payments arising solely from investments in the listed

​

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company’s securities or payments under non-discretionary charitable contribution matching programs) that exceed the greater of   $200,000 or 5% of the recipient’s consolidated gross revenues during the current or any of the past three fiscal years;

•

the director is, or has a family member who is, a current partner of the listed company’s outside auditors, or was a partner or employee of the listed company’s outside auditor who worked on the listed company’s audit at any time during the past three years; or

​

•

the director otherwise has a relationship that, in the opinion of the listed company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

​

On January 16, 2018, our Board determined that all of our directors, other than our Chief Executive Officer, are “independent directors” as defined in the listing standards of the Nasdaq Marketplace Rules, and these independent directors constitute a majority of the members of the Board and each of its committees.

Compensation Committee Interlocks and Insider Participation

No member of the Compensation Committee during 2017 was an officer, former officer, or employee of the Company or had a relationship disclosable under our policies or SEC regulations. Further, during 2017, no executive officer of the Company served as:

•

a member of the compensation committee (or equivalent) of any other entity, one of whose executive officers served as one of our directors or was an immediate family member of a director, or served on our Compensation Committee; or

​

•

a director of any other entity, one of whose executive officers or their immediate family member served on our Compensation Committee.

​

BOARD COMMITTEES AND MEETINGS

During 2017, the Board held nine meetings in person or by telephone. Each director attended at least 75% of the aggregate number of meetings of the Board and the committees of the Board on which he or she served.

We do not have a policy regarding attendance of directors at our annual meeting of stockholders. In May 2017, all of our directors attended our 2017 Annual Meeting. We also do not have a formal policy regarding the separation of our Board Chairman and Chief Executive Officer positions. At this time, the positions are separate because the Board believes that this structure is in the best current interest of the Company and our stockholders.

Committees of the Board

Our Board has a standing audit committee (the “Audit Committee”), compensation, nominating, and governance committee (the “Compensation Committee”), and science committee (the “Science Committee”). Independent directors chair and make up the entire membership of each of these committees. The Board has adopted written charters for each of our standing committees, which may be viewed by accessing the “Investors and Media” Section of our website at www.arqule.com and clicking on the heading “Corporate Governance”.

Audit Committee

In 2017, the members of the Audit Committee were Mr. Barabe (Chairman), Dr. Messenger and Mr. Zenner. The Audit Committee met five times in 2017. Each member of the Audit Committee meets the independence and financial literacy requirements as defined by applicable Nasdaq and SEC rules. The Board has determined that Mr. Barabe is an “audit committee financial expert” as defined by the rules and regulations of the SEC.

The duties and principal purposes of the Audit Committee include:

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•

generally, oversight of the integrity of the Company’s financial reporting process;

​

•

in particular, monitoring of:

​

•

the integrity of the Company’s financial statements;

​

•

the Company’s compliance with legal and regulatory requirements; and

​

•

the qualifications, independence and performance of the Company’s independent registered public accountants and, as necessary and appropriate, of its internal audit function;

​

•

pre-approval of all audit and non-audit services;

​

•

review and approval of the audit committee report that is required to be included in the proxy statement for our annual meeting of stockholders;

​

•

assessment of significant financial risks and exposures and the adequacy of the Company’s overall risk assessment and risk management policies and procedures to mitigate such risks and exposures;

​

•

evaluation of whether risks presented by the Company’s financial policies and practices are likely to have a material adverse effect on the Company; and

​

•

assessment of the steps management has taken to control such risks to the Company.

​

The Company’s independent registered public accounting firm (currently, PricewaterhouseCoopers LLP) is ultimately accountable to the Audit Committee in its capacity as a committee of the Board. The Audit Committee has sole authority and responsibility to select, hire, oversee, evaluate, approve the compensation of, and, where appropriate, replace our independent registered public accounting firm.

A more detailed description of the duties of the Audit Committee is set forth in the committee’s charter.

Compensation Committee

In 2017, the members of the Compensation Committee were Dr. Messenger (Chairman), Dr. Loberg and Mr. Zenner. The Compensation Committee met five times in 2017.

The duties and purposes of the Compensation Committee include:

•

advising the Board concerning the Company’s compensation philosophy and policies, in general, and, in particular, to determine, or recommend to the Board for determination, the compensation of the Company’s Chief Executive Officer and all other executive officers and directors;

​

•

advising the Board regarding succession planning for the Company’s Chief Executive Officer;

​

•

identifying individuals qualified to become members of the Board;

​

•

recommending candidates to the Board to fill vacancies on the Board;

​

•

recommending to the Board the directors to be appointed to its committees;

​

•

assessing, or ensuring that the Board assesses, the performance of individual members of the Board and the Board as a whole;

​

•

administering our stock option, stock purchase, and other stock compensation plans;

​

•

reviewing and approving or rejecting proposed related party transactions;

​

•

reviewing with management the annual compensation discussion and analysis (“CD&A”) prepared by management and recommending to the Board whether the CD&A should be included in the Company’s filings with the SEC;

​

•

overseeing the Company’s efforts to meet its corporate governance, legal, and regulatory obligations and identifying, reviewing, and resolving issues relating to such matters; and

​

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•

reviewing and discussing with management any risks created by the Company’s compensation practices and determining the adequacy of the Company’s risk assessment and risk management policies and procedures to mitigate such risks and exposures.

​

A more detailed description of the duties of the Compensation Committee is set forth in the committee’s charter.

Science Committee

In 2017, the members of the Science Committee were Dr. Lindsay (Chairman), Dr. Loberg and Dr. Kelley. The Science Committee met five times in 2017.

The Science Committee is responsible for:

•

reviewing the scientific direction of the Company;

​

•

playing a role in assessing the manner by which the Company will continue to enhance its capabilities as a drug discovery and development organization (whether by acquisition, merger, in-licensing, internal growth, or a combination of those methods);

​

•

evaluating the scientific opportunities under consideration by management; and

​

•

regularly reviewing data relating to pre-clinical and clinical testing and analysis being conducted by the Company.

​

A more detailed description of the duties of the Science Committee is set forth in the committee’s charter.

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Also, at each annual meeting of stockholders, each eligible director (other than the Chairman) serving as a member of the Board prior to and immediately after such annual meeting is automatically granted an option to purchase 20,000 shares of Common Stock (whether or not the director is a nominee for election at such annual meeting). This annual option becomes exercisable as to all shares one year from the date of grant.

Upon the initial election of a non-employee director as Chairman of the Board, the non-employee director will be automatically granted an option to purchase 25,000 shares of Common Stock (in addition to the initial option awarded to directors). This initial option becomes exercisable as to 8,334 shares on the date of the Company’s next annual meeting following the date of grant and as to 8,333 shares on the date of each of the next two annual meetings.

In addition, at each annual meeting of stockholders, the eligible director serving as Chairman of the Board prior to and immediately after such annual meeting is automatically granted an option to purchase 25,000 shares of Common Stock (whether or not the Chairman is a nominee for election at such annual meeting). This annual option becomes exercisable as to all shares one year from the date of grant.

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COMPENSATION DISCUSSION AND ANALYSIS

The Compensation Committee is responsible for determining the recommended compensation of our named executive officers, including our Chief Executive Officer.

Compensation Philosophy

Guiding Principles:

Our executive compensation program is designed to be closely linked to corporate performance and returns to stockholders. To this end, we have developed an overall compensation strategy and a specific compensation plan that establish competitive base salaries and tie a significant portion of executive compensation to the Company’s success in meeting specified and measurable Company-wide performance goals. By using stock options and other stock-based awards, we ensure that part of each executive’s compensation is closely tied to the performance of our stock. We believe that a significant part of overall compensation for senior executives should be “at risk,” i.e., contingent upon successful implementation of the Company’s strategy and achievement of its goals. Individuals with the greatest influence on company-wide performance should have the largest amount of cash benefits and stock-based awards at risk. In our view, a balanced approach to compensation decisions motivates management’s efforts to drive positive outcomes in both current and future environments and mitigates the risk that any one incentive could lead executive officers to take actions that are not in our best interests. In addition, the tying of compensation to performance goals that must be achieved in a heavily regulated business environment such as ours adds an additional layer of scrutiny to the Company’s actions and lessens greatly the opportunities for individuals to take inappropriate actions without discovery and sanctions.

Objectives:

•

To attract and retain the best executive talent available;

​

•

To motivate our executives to achieve the goals inherent in our business strategy;

​

•

To link executive and stockholder interests through equity-based compensation; and

​

•

To provide a compensation package that recognizes corporate performance and individual contributions.

​

Key compensation elements:

•

Base salary;

​

•

Annual performance-based cash bonuses;

​

•

Stock-based incentive awards; and

​

•

Employee benefits.

​

Each of these elements is described in more detail below.

The Role of the Compensation Committee

The members of the Compensation Committee are currently Michael D. Loberg, William G. Messenger (Chairman), and Patrick J. Zenner. Each of the current members is an “independent director” under Nasdaq listing standard and a “Non-Employee Director” within the meaning of Section 16 of the Exchange Act.

The Compensation Committee advises our Board concerning the Company’s compensation philosophy and policies, in general, and, in particular, determines, or recommends to the Board for determination, the compensation of our Chief Executive Officer and other named executive officers and of members of the Board. Recommendations and decisions made by the Compensation Committee are reported to the full Board for approval, endorsement or ratification, as appropriate. As part of our Board’s risk oversight responsibilities, our Compensation Committee reviews the Company’s compensation policies and practices as generally applicable to our employees and discusses with management risks created by such policies and

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practices. Based on that review and discussions with management, and taking into consideration ArQule’s risk assessment and risk management policies and procedures, we believe that our compensation policies and procedures do not encourage excessive or unnecessary risk-taking and that the level of risk that they do encourage is appropriate.

The Compensation Committee’s Process

General

Our Compensation Committee sets the mix of elements of executive compensation to be recommended to the Board for approval including base salary, annual performance-based cash bonuses and stock-based awards for our named executive officers. While the Compensation Committee considers the elements of compensation described below separately, it takes into account the full compensation package afforded to each executive officer in making its recommendations. The Compensation Committee also makes recommendations concerning the appropriate linkage of executive compensation to corporate and individual performance and financial returns to stockholders.

Independent Compensation Consultant

Under its charter, SEC regulations and Nasdaq rules, the Compensation Committee has access to extensive resources and broad discretionary authority to engage compensation consultants and other advisors to assist it in its deliberations. From time to time and on an ad hoc basis, as needed, the Compensation Committee an independent compensation consultant to provide executive compensation advice. In making it selection the Compensation Committee assesses the consultants independence independence to determine whether a conflict of interest exists that would prevent the consultant from exercising independent judgment when advising the Compensation Committee. The Compensation Committee did not engage a compensation consultant during 2017.

The Compensation Committee considers the views of our Chief Executive Officer regarding achievement of individual and departmental objectives of those executives reporting directly to him. Approximately every two years the Compensation Committee reviews peer group compensation data and additional selected compensation data produced by Radford, an Aon Hewitt Company (“Radford”). Our peer group of companies, which we evaluate in conjunction with our review of peer compensation data, is comprised principally of non-commercial, life sciences companies with products in phase 2 or phase 3 clinical trials that Radford has deemed to be most comparable to us in market capitalization and head count. Since we did not conduct a review of peer group compensation data and additional selected compensation data in 2017, we did not compile a list of peer group companies for 2017.

Benchmarking

In general terms on a periodic basis, the Compensation Committee benchmarks total compensation for all of our employees to the median compensation (i.e. 50 th  percentile) of employees performing similar job functions at biotechnology companies nationally, adjusted for differences in company size, stage of development, location, and performance as a basis for its compensation recommendations. However, we strongly believe in retaining the best talent among our executive management team. Therefore, we have recommended, and may recommend in the future, total compensation packages for executive management that vary substantially from the median based on factors such as industry experience, scope of responsibility, knowledge, and unique qualifications.

Say-on-Pay

In May 2017 our stockholders cast an advisory vote on the compensation of our named executive officers. The compensation disclosure and analysis and compensation tables in our 2017 proxy statement provided our stockholders with then current information identical in scope with the discussion and analysis and tables in this section.

In the 2017 proxy statement, we stated our belief that our compensation policies and procedures support our business strategy by rewarding successful achievement of specific financial and operational goals and providing performance-based incentives to maximize stockholder value. We also expressed our belief that these policies and procedures are closely aligned with the long-term interests of our stockholders.

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Our stockholders endorsed our compensation philosophy with 96% of stockholders’ votes cast to approve our named executive officers’ compensation. Consequently, our current intention is to continue implementing our existing programs and policies.

Elements of Compensation

Base Salary

Salary levels are considered annually as part of our performance review process, but also in cases including promotion or other change in the job responsibilities of an executive officer. For named executive officers, initial base salaries generally are established in connection with negotiation of an offer of employment and employment agreement. Increases in base salary have several elements. In addition to promotion and increased responsibilities, merit and company-wide general increases are also factored in. Salaries of our named executive officers for 2017 and certain prior years are also reported in the Summary Compensation Table.

The following table shows changes in the annualized base salaries of our named executive officers from 2016 to 2017:

Performance-Based Bonuses

Cash bonuses represent a percentage of each named executive officer’s salary. In determining the target award opportunity for the bonus of a particular executive, we consider compensation data and level of strategic contribution to the Company’s performance. This determination is made at the time an executive officer is hired and generally is one of the negotiated terms of his or her employment agreement. Adjustments to bonus targets are also considered, subject to the requirements of those employment agreements, as part of the annual review process.

At the beginning of each fiscal year, we set corporate goals at minimum, planned, and maximum levels of performance and weight the goals according to their importance to our corporate strategy. Levels of performance for these goals are expressed as percentages which, when determined by our Compensation Committee and Board following conclusion of the fiscal year, are aggregated to arrive at an overall level of performance for the Company. In determining individual bonus amounts for our named executive officers, our directors take into consideration the Company’s overall performance, the named executive officer’s achievement of specific individual goals, and the amount of the named executive officer’s target bonus.

The following is a summary description of the primary corporate goals for 2017 used to determine performance-based bonuses:

Tivantinib Program

•

complete the planned final analysis of the Phase 3 METIV-HCC trial and, if positive, file an NDA by a specified date;

​

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Pipeline Programs

Derazantinib (ARQ 87)

•

dose first patient in pivotal trial in intrahepatic cholangiocarcinoma by a specified date;

​

ARQ 092

•

dose first patient in ArQule-run Phase 1/2 trial in Overgrowth Diseases by a specified date;

​

•

achieve rare pediatric disease voucher designation;

​

ARQ 751

•

complete Phase 1 trial in oncology in patients with AKT1 and PI3K mutations

​

Finance

•

end 2017 with a specified amount of cash and marketable securities while meeting all key budget parameters.

​

Business Development

•

conclude one or more business development transactions generating a specified amount of upfront payments.

​

Following the recommendations of the Compensation Committee, our Board determined that, on a weighted basis, our overall level of performance warranted payment of bonuses at 83% of the bonus target. This determination reflected results with respect to development and finance goals that were at planned performance levels and other development and business development goals that were below planned performance levels. The following table shows percentages of target and actual bonuses paid to our named executive officers.

The following table shows percentages of target and actual bonuses paid to our named executive officers.

The amounts of cash bonus awards made to our named executive officers are also reported in the Summary Compensation Table.

Stock-based Awards

Primarily, we have granted stock options and/or shares of restricted stock to our named executive officers under our stockholder-approved plans. Stock options and/or shares of restricted stock must be issued with an exercise price or share valuation equal to the closing price of our Common Stock as reported

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by Nasdaq on the date of grant. Options vest over various periods of time, generally four years. Restricted stock awards have restrictions which lapse over various periods of time, also generally four years. We have also awarded performance-based stock units (PSUs), each of which represents a contingent right to receive one share of Common Stock. Under the terms of our plans and subject to the restrictions contained in those plans, the Compensation Committee has the flexibility to rebalance the vesting terms and performance conditions of these awards as it deems necessary or advisable, e.g., to take into account unforeseen adverse events or clinical developments.

Stock option grants, and awards of restricted stock and stock units, are designed to encourage the creation of stockholder value over the long term since the full benefits of the options and awards cannot be realized unless stock price appreciation is achieved, and, once achieved, is maintained and increased. Accordingly, awards of options, restricted stock and stock units align the interests of executive officers and employees with those of stockholders.

In general, we establish ranges for these grants and awards to our named executive officers based on a number of factors, including published third-party data, the executive’s job level, promotions, responsibilities he or she may assume in the upcoming year, responsibilities undertaken in prior years and other considerations deemed appropriate by the Compensation Committee. In determining an executive’s annual grant, we apply the results of the Company’s annual performance and the executive’s individual performance to the applicable range, and then take into consideration any other factors that the Compensation Committee deems relevant.

After consideration of all of these factors, as well as corporate and individual performance, in January 2018 for performance in 2017, we awarded Mr. Pucci an option to purchase 249,000 shares of our Common Stock; Mr. Lawrence, an option to purchase 124,500 shares of our Common Stock, Dr. Schwartz, an option to purchase 107,900 shares of our Common Stock and Mr. Weiskopf, an option to purchase 62,250 shares of our Common Stock. All of these options vest ratably over a four-year period commencing from the date awarded and are conditioned on stockholder approval of the proposed amendment to our restated certificate of incorporation.

The Compensation Committee comes to a recommendation regarding annual stock option awards at a meeting in December prior to the first meeting of the Board in the following calendar year. The effective date for such awards is the date of such meeting of the full Board. At its January meeting, the Board acted upon the recommendations of the Compensation Committee.

Performance-Based Option Awards

On April 4, 2017, the Compensation Committee approved a new stock-based incentive and retention program for certain senior executives. This new program replaces a program previously established by the Committee related to tivantinib performance goals that expired in March of 2017.

Under the new program, the Compensation Committee granted participating executives performance-based options (the “Performance-based Options”) at an exercise price of  $0.95 per share. Mr. Pucci, Mr. Lawrence, Dr. Schwartz and Mr. Weiskopf have the opportunity to earn options covering up to 600,000, 300,000, 260,000 and 160,000 shares, respectively, under this plan, and another executive has the opportunity to earn options covering up to a total of 110,000 shares. In addition to time-based vesting, the options will vest and become exercisable only if specified performance conditions are satisfied. All of the Performance-based Options have vesting conditions linked to our product candidate development pipeline, with the percentage of vesting ranging from 25% to 100% depending upon the level of our clinical success. In addition, the option grants to Messrs. Pucci and Lawrence are subject to an additional condition tied to our stock price. If the applicable performance conditions are not satisfied within 36 months, the options will terminate.

Other Factors

Each year, prior to arriving at final compensation for the Company’s named executive officers, the Compensation Committee typically considers all other factors that it deems relevant in addition to those listed above. These factors may include the performance of the Company’s stock relative to its peer group as well as other considerations and circumstances. As a result, even in cases where progress against corporate

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performance goals has been positive and an individual’s performance has been judged as strong, the individual’s compensation may be impacted. For example, until 2017 our Chief Executive Officer’s realizable pay (base salary and bonus) had been effectively unchanged for five years since its adjustment in January 2012 despite relatively strong performance against corporate performance goals and high levels of individual performance during that period. The Compensation Committee will continue to exercise this type of discretion in situations where it is deemed appropriate.

Employment Agreements

ArQule generally enters into employment agreements with its named executive officers. Typically, these agreements are offered in connection with recruiting executive officers when ArQule deems it necessary or appropriate to attract, incentivize and retain new hires. Agreements of this type exist to establish initial salary and bonuses, benefits, initial option grants, reporting lines, and change of control and related severance provisions, among other things. Mr. Pucci, Mr. Lawrence and Dr. Schwartz have such agreements.

Other Elements of Compensation and Perquisites

We provide our named executive officers with certain benefits and perquisites. In general, we provide these benefits on the same terms as those applicable to all of our other employees. Any non-recurring benefit or program such as housing allowance or relocation costs, will be reported as “All Other Compensation” in the Summary Compensation Table. The primary benefits are:

•

health (medical, dental and vision) insurance for which the Company pays a portion of the premiums;

​

•

a life insurance benefit equivalent to two times base salary up to a maximum of  $400,000 for which the Company pays the premiums;

​

•

long-term disability insurance equal to 60% of base salary up to $15,000 per month, the premiums for which are paid by the Company with the amount of the premiums being included in the taxable compensation of employees;

​

•

if necessary in given circumstances to attract management talent, housing allowances and relocation costs;

​

•

a retirement plan (401(k) Plan) under which an employee can choose to contribute up to 60% (subject to Tax Code limits) of compensation on a pre-tax basis with a matching contribution from the Company of   $0.50 for each $1.00 contributed up to the first 6% of compensation;

​

•

a tax-qualified stock purchase plan which permits participants to acquire shares of Common Stock at a price that is 85% of the stock price on either the first day or last day of the designated offering period (generally six months), whichever is lower; and

​

•

tuition reimbursement up to $3,000 per year for undergraduate courses and $6,000 for graduate courses.

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Currently, the Company does not have a nonqualified deferred compensation plan, a pension plan, or other defined benefit plan. In addition, the Company does not have a policy on adjustments to, or recovery of, awards if the performance measures on which they were based are adjusted or restated.

Potential Payments to Named Executive Officers upon Termination or Change of Control

The employment agreements of Mr. Pucci, Mr. Lawrence and Dr. Schwartz provide for certain payments to be made to them in the event that their employment with the Company is, or is deemed to be (as provided in the employment agreements), terminated without “cause.” Severance benefits are an important tool in attracting and retaining key employees, and provide a degree of financial security to such employees where their employment is terminated through no fault of their own. Each of the agreements also provides for acceleration of vesting of the executive’s stock-based awards in certain circumstances following the occurrence of a change of control of the Company. We believe that it is generally appropriate to vest stock-based awards to key employees in a change of control transaction, as such a transaction may often result in the elimination or reduction of the employee’s ability to realize value from his or her options.

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For information regarding the severance and change of control benefits provided to Mr. Pucci, Mr. Lawrence and Dr. Schwartz under their employment agreements, see “Payments upon Termination or Change of Control”.

Tax Considerations

If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A of the Internal Revenue Code of 1986, as amended (“Tax Code”), and such benefits do not comply with Section 409A, the executive would be subject to adverse tax treatment, including accelerated income recognition (in the first year that benefits are no longer subject to a substantial risk of forfeiture) and an additional income tax of 20% of the amount so recognized. The employment agreements of our named executive officers described herein contain provisions intended to limit or eliminate adverse tax consequences through timing of payments.

Section 162(m) of the Tax Code generally denies a deduction to any publicly held corporation for compensation paid to its named executive officers to the extent that any such individual’s compensation exceeds $1 million, subject to certain exceptions, including one for “performance-based compensation.” Historically, the Compensation Committee seeks to maximize executive compensation deductions for federal income tax purposes. However, on December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act, which substantially modifies the Tax Code and, among other things, eliminates the performance-based compensation exception under Section 162(m). As a result, the Compensation Committee currently expects that, in respect of fiscal 2018 and beyond, compensation, if any, in amounts over $1 million paid to any named executive officer will no longer be deductible.

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EMPLOYMENT AGREEMENTS

The Company is party to employment agreements with several of its named executive officers. A summary of the material terms of these agreements follows below. For information regarding the post-employment and change of control benefits provided by these agreements, see “Payments upon Termination or Change of Control”.

Employment Agreement with Paolo Pucci

Mr. Pucci’s employment agreement, as amended, provides that the Company will employ Mr. Pucci as its Chief Executive Officer at a base salary of  $475,000. The base salary is subject to annual review and upward adjustment by the Company. Mr. Pucci is also eligible to receive a discretionary annual cash bonus based on a current target amount of 60% of his base salary. The award of a bonus is in the discretion of the Board based on Company and individual performance.

Employment Agreement with Peter S. Lawrence

Mr. Lawrence’s employment agreement, as amended, provides that the Company will employ Mr. Lawrence as President and Chief Operating Officer at an initial base salary of  $375,000 per year. The base salary is subject to annual review and upward adjustment by the Company. Mr. Lawrence is also eligible to receive a discretionary annual cash bonus based on a current target amount of 45% of his base salary. The award of a bonus is in the discretion of the Company’s Board based on Company and individual performance.

Employment Agreement with Brian Schwartz

Dr. Schwartz’s employment agreement, as amended, provides that the Company will employ Dr. Schwartz as its Chief Medical Officer at an initial base salary of  $325,000. The base salary is subject to annual review and upward or downward adjustment by the Company. Dr. Schwartz is also eligible to receive a discretionary annual cash bonus based on a current target amount of 40% of base salary. The award of a bonus is in the discretion of the Company’s Board based on Company and individual performance.

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(1)

The threshold amount under the cash bonus program is zero. The target amount is based on the individual’s current salary. The target represents 60%, 45%, 40% and 40% of the base salaries of Mr. Pucci, Mr. Lawrence, Dr. Schwartz and Mr. Weiskopf, respectively. The maximum amount is 150% of the target amount.

​

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(1)

Except as otherwise noted, each option award vests at the rate of one-fourth of the underlying shares annually beginning on the anniversary of the date of grant.

​

(2)

Market value is calculated as the number of shares of unvested stock awarded times the market price on the date of award.

​

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(1)

On January 14, 2013, Mr. Lawrence, Dr. Schwartz and Mr. Weiskopf were awarded 25,000, 30,000 and 12,799 shares of restricted stock, respectively, the restrictions on 25% of which lapsed on each of the next four anniversaries of the award date. The fair market value of the Company’s Common Stock was $1.58 on January 14, 2017.

​

CEO Pay Ratio—8.3:1

We believe our executive compensation program must be consistent and internally equitable to motivate our employees to perform in ways that enhance shareholder value. We are committed to internal pay equity, and the Compensation Committee monitors the relationship between the pay of our executive officers and the pay of our non-executive employees. The Compensation Committee reviewed a comparison of our CEO’s annual total compensation in fiscal year 2017 to that of all other Company employees for the same period. The calculation of annual total compensation of all employees was determined in the same manner as the “Total Compensation” shown for our CEO in the “Summary Compensation Table” in this proxy. Pay elements that were included in the annual total compensation for each employee are:

—

salary received in fiscal year 2017

​

—

annual bonus payment received in fiscal year 2017

​

—

grant date fair value of annual stock option awards granted in 2017

​

—

grant date fair value of performance stock option awards granted in fiscal year 2017

​

—

Company-paid 401(k) Plan match made during fiscal year 2017

​

—

Company-paid life insurance premiums during fiscal year 2017

​

Our calculation includes all employees as of December 31, 2017.

We determined the compensation of our median employee by: (i) calculating the annual total compensation described above for each of our employees, (ii) ranking the annual total compensation of all employees except for the CEO from lowest to highest (a list of 30 employees), and (iii) since we have an even number of employees when not including the CEO, determining the average of the annual total compensation of the two employees ranked fifteen and sixteen on the list (“Median Employee”).

The annual total compensation for fiscal year 2017 for our CEO was $1,391,498, and for the Median Employee was $166,959. The resulting ratio of our CEO’s pay to the pay of our Median Employee for fiscal year 2017 is 8.3 to 1.

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PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

The Company has employment agreements with Mr. Pucci, Mr. Lawrence and Dr. Schwartz. Each of these employment agreements provides for the payment of severance and change of control benefits. The following discussion and table provide information about the severance and change of control provisions of these employment agreements, and are qualified by reference to the full text of the agreements, as amended, each of which is on file with the SEC.

The following terms are used in the discussion below:

•

“Change of Control” means any of the following:

​

•

the acquisition by any person or entity of our Common Stock so that such person or entity holds or controls 50% or more of our outstanding Common Stock;

​

•

the merger or consolidation of the Company with or into any other entity in circumstances where the holders of the Company’s outstanding shares of capital stock before the transaction do not retain stock representing a majority of the voting power of the surviving entity;

​

•

a sale of all or substantially all of the assets of the Company to a third party;

​

•

within any 24-month period, the election by the Company’s stockholders of 20% or more of the Company’s directors other than pursuant to nomination by management; or

​

•

the execution of an agreement approved by the Board providing for any of the above.

​

•

“Cause” means any of the following:

​

•

arbitrary, unreasonable, or willful failure of the executive to follow the reasonable instructions of the Chief Executive Officer (or, in the case of the Chief Executive Officer, the Board), or otherwise perform his or her duties;

​

•

willful misconduct by the executive that is materially injurious to the Company;

​

•

willful commission by the executive of an act constituting fraud with respect to the Company;

​

•

conviction of the executive for a felony under state or federal law; or

​

•

material breach by the executive of his or her obligations to the Company regarding confidentiality of information or rights in intellectual property.

​

•

Termination “without Cause” means any of the following occurrences:

​

•

the Company terminates the executive’s employment without Cause; or

​

•

the executive terminates his employment upon the occurrence of any of the following: (a) the Company substantially reduces or diminishes the executive’s responsibilities or title without cause; (b) the Company reduces the executive’s base salary or bonus target (other than in connection with a Company-wide decrease in salary or bonus, respectively); (c) the Company materially breaches any of its obligations to the executive under his or her employment agreement, and fails to cure such breach; (d) the Company relocates the executive’s place of employment without his or her consent by a distance of more than fifty (50) miles; or (e) a successor in interest to the Company fails to assume the obligations of the employment agreement.

​

•

In the case of Mr. Pucci, Termination without Cause shall also occur if, following a Change of Control, the executive terminates his employment:

​

•

because the executive is unable to have direct responsibility for the Company’s fully-integrated profit and loss statement (whether as a stand-alone entity or as a division or other business unit of some other acquiring entity); or

​

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•

because of the exclusion from, or failure to appoint the executive to, the board of directors, or the executive committee, management committee or equivalent corporate managerial body of senior executives, of the acquiring company.

​

Employment Agreement with Paolo Pucci

Mr. Pucci’s agreement, as amended, provides for continued employment until April 4, 2020. If Mr. Pucci is terminated without Cause, the Company will be required to pay Mr. Pucci an amount equal to twenty-four months of his base salary in effect at the time of termination, plus an amount equal to the total of bonuses paid to him with respect to the two years preceding the year in which he is terminated. These amounts will be paid in substantially equal installments according to the Company’s normal payroll schedule during the twenty-four month period following termination. In addition, the Company will, at its expense, continue to provide Mr. Pucci with certain employee benefits for a period of twenty-four months from the date of termination. Finally, all of Mr. Pucci’s unvested stock options and restricted stock that would have become exercisable or vested within one year from the termination date will immediately become exercisable or vested free of restrictions without regard to the original vesting schedule. The employment agreement further provides that, if the Company terminates (or is deemed to terminate) Mr. Pucci’s employment with the Company without Cause within one year following a Change of Control of the Company, in addition to the severance benefits described above, any then unvested stock options will become immediately exercisable without regard to the original vesting schedule and any shares of restricted stock previously granted shall immediately be free and clear of any restrictions.

Employment Agreement with Peter S. Lawrence

Mr. Lawrence’s employment agreement, as amended, provides for continued employment until April 4, 2020. If Mr. Lawrence is terminated without Cause, he is entitled, subject to the execution of a general release of claims, to a lump sum severance payment equal to twelve months’ base salary as of the date of termination, plus the average of the annual performance bonuses that he received in the preceding two years. In addition, 50% of any then unvested options that were granted at the time that the employment agreement was originally executed will become immediately exercisable on the termination date, and the Company will pay, for the twelve-month period following the date of termination, the cost of continuing the health and other employee benefits that Mr. Lawrence is entitled to receive under his employment agreement at the level in effect as of the termination date. The employment agreement further provides that, if the Company terminates (or is deemed to terminate) Mr. Lawrence’s employment with the Company without Cause within one year following a Change of Control of the Company, in addition to the severance benefits described above, any then unvested options held by Mr. Lawrence will become immediately exercisable and any shares of restricted stock previously granted shall immediately be free and clear of any restrictions.

Employment Agreement with Brian Schwartz

Dr. Schwartz’s employment agreement provides for continued employment until April 4, 2020. If Dr. Schwartz is terminated without Cause, he is entitled, subject to the execution of a general release of claims, to a severance payment equal to twelve months’ base salary as of the date of termination, plus the average of the annual performance bonuses that he received in the preceding two years. This amount will be paid in substantially equal installments according to the Company’s normal payroll schedule during the twelve-month period following termination. In addition, the Company will pay, for the 12-month period following the date of termination, the cost of continuing the benefits that Dr. Schwartz is entitled to receive under his employment agreement at the level in effect as of the termination date. The employment agreement further provides that, if the Company terminates (or is deemed to terminate) Dr. Schwartz’s employment with the Company without Cause within one year following a Change of Control of the Company, in addition to the severance benefits described above, any then unvested stock options will become immediately exercisable without regard to the original vesting schedule and any shares of restricted stock previously granted shall immediately be free and clear of any restrictions.

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The following table sets forth information with respect to compensation that would have been payable to Mr. Pucci, Mr. Lawrence and Dr. Schwartz if the named executive officer’s employment had been terminated without Cause as of December 31, 2017 immediately following a Change of Control of the Company:

(1)

For Mr. Pucci, the cash payment is calculated as the sum of an amount equal to two times his annual salary as of December 31, 2017, plus a bonus payment equal to the sum of the 2016 and 2017 bonuses. For each of Mr. Lawrence and Dr. Schwartz, the cash payment is calculated as the sum of the executive’s annual salary as of December 31, 2017, plus a bonus payment equal to 45% and 40%, respectively, of annual salary.

​

(2)

For Mr. Pucci, reflects the premiums for twenty-four months for group medical, dental, life and disability programs. For each of Mr. Lawrence and Dr. Schwartz, reflects the premiums for twelve months for group medical, dental, life and disability programs. Amounts are based on the premiums in effect at December 31, 2017.

​

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Prior to conversion, the Preferred Stock will vote together as a single class with the shares of Common Stock on each matter submitted to a vote of the stockholders. Each share is entitled to 1,000 votes.

In determining the size of the proposed authorized share increase, the Board considered a number of factors, including the advice of its external advisors, industry norms, shares issued in connection with the conversion of the Preferred Stock and Warrants, future issuance under its equity plans and the long-term need for additional shares in connection with potential future equity financing, acquisitions and other transactions.

Other than issuances pursuant to the conversion of the Preferred Stock and Warrants, equity incentive plans and currently outstanding warrants, as of the date of this Proxy Statement, we have no current plans, arrangements or understandings regarding the issuance of any additional shares of Common Stock that would be authorized pursuant to this proposal and there are no negotiations pending with respect to the issuance thereof for any purpose. The Board of Directors does not intend to issue any Common Stock except on terms which the Board deems to be in the best interests of the Company and its then existing stockholders.

Potential Effects of the Amendment

The proposed increase in the number of authorized shares of Common Stock will not have any immediate effect on the rights of our existing stockholders. The Board will have the authority to issue the additional shares of Common Stock without requiring future stockholder approval of such issuances, except as may be required by applicable law or rules of any stock exchange on which our securities may be listed. The issuance of additional shares of Common Stock will decrease the relative percentage of equity ownership of our existing stockholders, thereby diluting the voting power of their Common Stock, and, depending on the price at which additional shares may be issued, could also be dilutive to the earnings per share of our Common Stock.

It is possible that a subsequent issuance of these shares could have the effect of delaying or preventing a change in control of the Company. Shares of authorized and unissued Common Stock could, within the limits imposed by applicable law, be issued in one or more transactions that would make a change in control of the Company more difficult, and therefore, less likely. Issuances of additional shares of our stock could dilute the earnings per share and book value per share of our outstanding Common Stock and dilute the stock ownership or voting rights of a person seeking to obtain control of the Company. While it may be deemed to have potential anti-takeover effects, the proposal to increase the authorized Common Stock is not prompted by any specific effort of which we are aware to accumulate shares of our Common Stock or obtain control of the Company.

The additional authorized shares of Common Stock, if and when issued, would be part of the existing class of Common Stock and would have the same rights and privileges as the shares of Common Stock currently outstanding. Stockholders do not have preemptive rights with respect to our Common Stock. Therefore, should the Board determine to issue additional shares of Common Stock, existing stockholders would not have any preferential rights to purchase such shares in order to maintain their proportionate ownership thereof.

Effectiveness of the Amendment

If the Amendment is approved by our stockholders, it will become effective upon the filing of an amendment to our Restated Certificate of Incorporation, which filing is expected to occur promptly after stockholder approval of this proposal.

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Vote Required

The affirmative votes of  (i) a majority of the issued and outstanding shares of Common Stock and Preferred Stock, voting together as a single class, and (ii) a majority of the issued and outstanding shares of Common Stock, voting without the Preferred Stock, are required to approve the Amendment. Abstentions and “broker non-votes” will not be counted as having been voted on the proposal and, therefore, will have the same effect as negative votes.

OUR BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE “FOR” THE AMENDMENT.

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Contributions; Payroll Deductions

The purchase price for shares under the Plan is the participant’s accumulated payroll deductions and lump sum contributions during each offering period.

Grant and Exercise of Purchase Right

In general, the maximum number of shares subject to purchase by a participant for any offering period is that number determined by dividing the Participant’s total accumulated contributions as of the exercise date for the offering period by the option price for the offering period. However, the maximum number of shares a participant may purchase on any exercise date is equal to 15% of the participant’s annual rate of compensation as of the date the participant elected to participate in the Plan for the offering period, divided by the option price for the offering period. Unless a participant withdraws from the Employee Stock Purchase Plan, the participant’s right to purchase shares is exercised automatically on each exercise date for the maximum number of whole shares that may be purchased at the applicable option price.

No employee will be permitted to subscribe for shares under the Employee Stock Purchase Plan if, immediately after the grant of a purchase right, the employee would own stock and/or hold purchase rights covering 5% or more of the voting securities of the Company. Further, no employee may be granted a purchase right which would permit the employee to accrue a right to purchase more than $25,000 worth of stock (determined by the fair market value of the shares at the time the purchase right is granted) for each calendar year in which the purchase right is outstanding at any time.

As soon as practicable following each exercise date, an account established for the benefit of each participant at a bank, brokerage firm or otherwise will be credited, in book entry form, with the number of shares purchased by the participant on such exercise date.

Withdrawal; Termination of Employment

A participant may withdraw all, but not less than all, accumulated contributions credited to the participant’s account, but not yet used to exercise a purchase right under the Plan, at any time prior to the exercise date of an offering period with such advance notice as the Compensation Committee may prescribe.

If a participant’s employment is terminated for any reason, his or her participation in the Plan will terminate immediately and the balance, if any, in his or her contribution account will be returned in cash, without interest.

Transferability

No rights or accumulated contributions of a participant under the Employee Stock Purchase Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or pursuant to the Employee Stock Purchase Plan) and any attempt to so assign or transfer will be treated by the Compensation Committee as an election to withdraw from the Employee Stock Purchase Plan.

Adjustments upon Changes in Capitalization

In the event any change is made in the Company’s capitalization pursuant to a stock split or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company, proportionate adjustments may be made by the Compensation Committee to the number of shares authorized for issuance under the Employee Stock Purchase Plan, the maximum number of shares of our Common Stock that may be purchased on any exercise date, the number of shares subject to each outstanding purchase right, and in the option price per share.

Amendment or Termination

The Board may at any time and for any reason amend or terminate the Employee Stock Purchase Plan, except that (other than in limited circumstances set forth in the Employee Stock Purchase Plan) no amendment may make any change in any purchase right previously granted that adversely affects a

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participant’s rights. Stockholder approval must be obtained for any amendment to the extent necessary to comply with applicable law. Under its current terms, the Employee Stock Purchase Plan will expire when all reserved shares of Common Stock have been issued, unless stockholders have approved an increase in the number of reserved shares.

Federal Tax Information

The Employee Stock Purchase Plan is designed to qualify as an employee stock purchase plan under Section 423 of the Tax Code. A general summary of the federal income tax consequences regarding the Employee Stock Purchase Plan is stated below. The tax consequences of participating in the Employee Stock Purchase Plan may vary with respect to individual situations.

Neither the grant nor the exercise of options under the Employee Stock Purchase Plan will have a tax impact on the participant or on us. If a participant disposes of the Common Stock acquired upon the exercise of his options after at least two years from the date of grant and one year from the date of exercise, then the participant must treat as ordinary income the amount by which the lesser of  (i) the fair market value of the Common Stock at the time of disposition, or (ii) the fair market value of the Common Stock at the date of grant, exceeds the purchase price. Any gain in addition to this amount will be treated as a capital gain. If a participant holds Common Stock at the time of his or her death, the holding period requirements are automatically deemed to have been satisfied and he or she will realize ordinary income in the amount by which the lesser of  (i) the fair market value of the Common Stock at the time of death, or (ii) the fair market value of the Common Stock at the date of grant, exceeds the purchase price. We will not be allowed a deduction if the holding period requirements are satisfied. If a participant disposes of Common Stock before expiration of two years from the date of grant and one year from the date of exercise, then the participant must treat as ordinary income the excess of the fair market value of the Common Stock on the date of exercise of the option over the purchase price. Any additional gain will be treated as long-term or short-term capital gain or loss, as the case may be. We will be allowed a deduction equal to the amount of ordinary income recognized by the participant.

Vote Required

The affirmative vote of a majority of the total votes cast by the stockholders present at the meeting, in person or by proxy, is necessary for approval of the amendment to the Purchase Plan. If you submit a proxy without direction as to a vote on this matter, the proxy will be voted “FOR” the proposal. Abstentions and broker non-votes will not be treated as votes cast and will have no effect on the outcome of the vote on this proposal.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THIS PROPOSAL.

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Under the 2014 Plan, the number of shares of Common Stock available for grants and awards is calculated as follows:

•

To the extent that any award is forfeited, or any stock option or stock appreciation right terminates, expires or lapses without being exercised, the shares subject to those awards not delivered are again available for awards under the 2014 Plan.

​

•

Shares tendered or withheld to pay the exercise price of a stock option or to pay tax withholding for restricted stock will count against shares authorized but unissued under the 2014 Plan and will not be added back to the shares available under the 2014 Plan. When a stock appreciation right is exercised and settled for shares, the number of shares subject to the grant will be counted against the number of shares available for issuance under the 2014 Plan regardless of the number of shares used to settle the stock appreciation right upon exercise.

​

•

For any two (2) shares of Common Stock issued in connection with a full value award, i.e., performance shares, restricted stock, stock units or other stock-based awards, three (3) fewer shares of Common Stock will be available for issuance in connection with options and future stock awards under the 2014 Plan.

​

Administration and Eligibility

The selection of persons who will receive awards under the 2014 Plan and the sizes and types of awards will be generally determined by the Compensation Committee. All of the Company’s directors and employees are eligible to participate in the 2014 Plan. As of January 18, 2018, the Company had 32 employees. Consultants of the Company or any affiliate, who are capable of contributing significantly to the successful performance of the Company, are also eligible to participate in the 2014 Plan, but only for awards other than incentive stock options.

Awards under the 2014 Plan will be either granted at the discretion of the Compensation Committee, with ratification of the Compensation Committee’s actions by the Board or recommended by the Compensation Committee for approval by the Board. The Compensation Committee determines the recipients and, within the limits of the 2014 Plan, establishes the terms and conditions of each award. In the case of stock options, the terms and conditions include the exercise price, the form of payment of the exercise price, the number of shares subject to the option, and the dates at which the option becomes exercisable. However, the exercise price of any incentive stock option granted under the 2014 Plan may not be less than the fair market value of the Common Stock on the date of grant and the term of any such option cannot be greater than 10 years. The Compensation Committee determines the exercise price of any non-statutory stock option. In the case of restricted stock, the terms and conditions include the restrictions on ownership and the dates upon which the restrictions lapse.

The exercise price of any stock option (non-statutory and incentive) granted under the 2014 Plan will not be less than 100% of the fair market value of the Common Stock on the date of grant and the term of any such option or stock appreciation right will not be greater than 10 years.

Subject to certain limitations, the Compensation Committee or the Board may delegate to one or more of our executive officers the power to make awards to participants who are not subject to Section 16 of the Exchange Act. The Board has granted such authority to Mr. Pucci and Mr. Lawrence.

Adjustments to Reflect Certain Events and Transactions

If the outstanding Common Stock of the Company changes as a result of a stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, split-up, spin-off, combination, exchange of shares, or the like, the 2014 Plan permits the Compensation Committee to substitute or adjust: (a) the number and class of securities subject to outstanding awards or the type of consideration to be received upon exercise or payment of an award, (b) the exercise price of options, (c) the aggregate number and class of securities for which awards may be granted under the 2014 Plan, and/or (d) the maximum number of securities with respect to which an employee may be granted awards during any calendar year. In the event of a merger or consolidation to which the Company is a party or other specified transactions, the 2014 Plan

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authorizes the Compensation Committee to make such changes and adjustments to outstanding awards as it deems equitable including causing any award to become vested in whole or in part, be assumed by a successor or acquirer, or be cancelled in consideration of a cash payment equal to the fair value of the cancelled award.

Withholding

The Company is generally required to withhold tax on the amount of income recognized by a participant with respect to an award. Withholding requirements may be satisfied, as provided in the agreement evidencing the award, by (a) tender of a cash payment to the Company, (b) withholding of shares of Common Stock otherwise issuable, or (c) delivery to the Company by the participant of unencumbered shares of Common Stock.

Termination and Amendment; Term of Plan

Unless sooner terminated by the Board in accordance with its terms, the 2014 Plan will terminate on May 12, 2024. Once the 2014 Plan is terminated, no further awards may be granted or awarded under the 2014 Plan. Termination of the 2014 Plan will not affect the validity of any awards outstanding on the date of termination.

New Plan Benefits

The following table sets forth all stock options that have been granted to our named executive officers, our current executive officers, our non-executive officer employees and our non-employee directors that are subject to stockholder approval of Proposal 2.

The Compensation Committee awarded the options identified above on January 16, 2018, subject to stockholder approval. The exercise price of these options is $1.75 per share, the closing price of our Common Stock as reported by Nasdaq on the date of grant.

Federal Income Tax Considerations

The following discussion briefly summarizes certain federal income tax consequences of awards under the 2014 Plan and does not attempt to describe all possible federal or any foreign, state, local, or other tax consequences related to awards or tax consequences based upon particular circumstances.

Incentive Stock Options .   In general, no taxable income is realized by a participant upon the grant of an Incentive Stock Option (“ISO”). If stock is issued to the participant pursuant to the exercise of an ISO, and if no disqualifying disposition of such shares is made by the participant within two years after the date of grant or within one year after the transfer of such shares to such him or her, then upon the sale of such shares, any amount realized in excess of the option price will be taxed to the participant as a long-term capital gain and any loss sustained will be a long-term capital loss. However, if the participant disposes of the shares acquired on exercise before the later of the second anniversary of the date of grant or one year after the receipt of the shares by the participant (a “Disqualifying Disposition”), the participant generally

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would include in ordinary income in the year of the Disqualifying Disposition an amount equal to the excess of the fair market value of the shares at the time of exercise (or, if less, the amount realized on the disposition of the shares), over the exercise price paid for the shares. Subject to certain exceptions, an ISO generally will not be treated as an ISO if it is exercised more than three months following termination of employment. If an ISO is exercised at a time when it no longer qualifies as an ISO, it will be treated for tax purposes as a non-statutory stock option as discussed below.

Non-statutory Stock Options .   A participant generally is not required to recognize income on the grant of a non-statutory stock option. Generally, ordinary income is instead required to be recognized on the date the non-statutory stock option is exercised. In general, the amount of ordinary income required to be recognized is the excess, if any, of the fair market value of the shares of Common Stock on the date of exercise over the exercise price.

Restricted Stock .   A participant who is granted restricted stock under the 2014 Plan is not required to recognize income with respect to the shares until the shares vest, unless the participant makes a special tax election to recognize income upon award of the shares. In either case, the amount of income the participant recognizes equals the fair market value of the shares of Common Stock at the time income is recognized.

Stock Appreciation Rights, Performance Shares, Stock Units and Other Stock Based Awards .   A participant generally is not required to recognize income on the grant of a stock appreciation right, an award of performance shares, an award of stock units, or any other stock based award. Generally, ordinary income is instead required to be recognized upon the issuance of shares and/or cash pursuant to the terms of the award. In general, the amount of ordinary income required to be recognized is the excess, if any, of the amount of cash and the fair market value of any shares received, over the amount, if any, paid for the award.

Deductibility by Company .   The Company generally is not allowed a deduction in connection with the grant or exercise of an incentive stock option. However, if a participant is required to recognize ordinary income as a result of a Disqualifying Disposition, the Company generally will be entitled to a deduction equal to the amount of ordinary income so recognized. In general, for a non-statutory stock option (including an incentive stock option that is treated as a non-statutory stock option, as described above), a restricted stock award, a stock appreciation right, a performance shares award, a stock units award, or any other stock-based award, the Company will be allowed to deduct the amount of ordinary income recognized by the participant, provided certain income tax reporting requirements are satisfied.

Performance-Based Compensation .   Subject to certain exceptions, Section 162(m) of the Tax Code disallows federal income tax deductions for compensation paid by a publicly-held corporation to certain executives to the extent the amount paid to an executive exceeds $1 million for the taxable year. Historically, compensation that qualified as “performance-based compensation” under Section 162(m) could be excluded from this $1 million limit, but this exception has now been repealed, effective for taxable years beginning after December 31, 2017, unless transition relief for certain compensation arrangements in place as of November 2, 2017 is available.

Tax Rules Affecting Nonqualified Deferred Compensation Plans .   Section 409A of the Tax Code imposes tax rules that apply to “nonqualified deferred compensation plans.” Failure to comply with, or to qualify for an exemption from, the rules with respect to an award could result in significant adverse tax results to the award recipient including immediate taxation upon vesting, an additional income tax of 20 percent of the amount of income so recognized, plus a tax in the nature of interest. The 2014 Plan is intended to comply with, or qualify for an exemption from, Section 409A of the Tax Code to the extent applicable.

Parachute Payments .   Where payments to certain persons that are contingent on a change of control exceed limits specified in the Tax Code, the person generally is liable for a 20 percent excise tax on, and the corporation or other entity making the payment generally is not entitled to any deduction for, a specified portion of such payments. Any award under which vesting is accelerated by a change of control of the Company, would be relevant in determining whether the excise tax and deduction disallowance rules would be triggered.

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Vote Required

The affirmative vote of a majority of the total votes cast by the stockholders present at the Annual Meeting, in person or by proxy, is needed to approve the increase in the number of shares that may be issued under the 2014 Plan. If you submit a proxy without direction as to a vote on this matter, your proxy will be treated as a vote “FOR” this proposal. Broker non-votes and abstentions will not be treated as votes cast and will have no effect on the outcome of the vote on this proposal.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THIS PROPOSAL.

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PROPOSAL 6—ADVISORY VOTE ON APPROVAL OF THE COMPENSATION OF
THE COMPANY’S NAMED EXECUTIVE OFFICERS

The SEC’s proxy rules permit our stockholders to cast an advisory vote on the compensation of our named executive officers as described in this proxy statement. Furthermore, our Board recognizes that stockholders have a legitimate interest in executive compensation matters and a growing interest in voicing their approval on our policies with respect to such matters.

Accordingly, this proposal gives you, as a stockholder, the opportunity to endorse or not endorse our overall compensation programs and policies relating to our named executive officers, as described in detail in the Compensation Discussion and Analysis, the Summary Compensation Table and related compensation tables (and accompanying narrative disclosures) contained in this proxy statement, by voting for or against the compensation of our named executive officers. The affirmative vote of a majority of the total votes cast by the stockholders present at the Annual Meeting, in person or by proxy, is necessary to approve this proposal.

Your vote will not directly affect or otherwise limit any compensation or award arrangements that have already been granted to any of our named executive officers. Because your vote is advisory, it will not be binding on the Board. However, our Compensation Committee will take into account the outcome of the vote when considering future executive compensation arrangements.

We believe that our compensation policies and procedures support our business strategy by rewarding successful achievement of specific business goals, as well as our operating and financial results. Furthermore, we believe that our compensation policies and procedures, which provide performance-based incentives to maximize stockholder value, are strongly aligned with the long-term interests of our stockholders.

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THIS PROPOSAL.

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(3)

These shares are beneficially owned by BVF Partners, LP and persons associated with it based on the Schedule 13G Amendment it filed with the SEC on October 20, 2017. The percentage of ownership is calculated as of March 16, 2018. According to the Schedule 13G Amendment, BVF Partners, LP and persons associated with it have shared voting power and shared dispositive power over all of the shares.

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The following table and footnotes set forth certain information regarding the beneficial ownership of the Company’s Common Stock as of March 16, 2018 by (i) our directors, (ii) our named executive officers, and (iii) all directors and executive officers as a group. Shares of Common Stock underlying options include shares for which options are currently exercisable or will become exercisable within 60 days after March 16, 2018. Those options are deemed to be outstanding for computing the percentage of the person or group holding such options, but are not deemed outstanding for computing the percentage of any other person or group.