UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-28402
ARADIGM CORPORATION
(Exact name of registrant as specified in its charter)
California 94-3133088
(State or other (I.R.S. Employer Identification No.)
jurisdiction of
incorporation or
organization)
26219 Eden Landing Road, Hayward, CA 94545
(Address of principal executive offices including zip code)
(510) 783-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
Common Stock, no par value 10,205,245 shares
(Class) Outstanding at July 31, 1997)
ARADIGM CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page No.
Statements of Operations (Unaudited)
Three months ended June 30, 1997 and 1996 3
Six months ended June 30, 1997 and 1996 and period
from January 30, 1991 (inception) through June 30,
1997 4
Balance Sheets
June 30, 1997 (Unaudited) and
December 31, 1996 5
Statements of Cash Flows (Unaudited)
Six months ended June 30, 1997 and 1996 and period
from January 30, 1991 (inception) through June 30,
1997 6
Notes to Unaudited Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
Signatures 15
Exhibits 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARADIGM CORPORATION
(A development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
June 30,
1997 1996
Contract revenues $ 169,540 $ 86,250
Expenses:
Research and 3,273,692 1,549,732
development
General and 1,527,162 788,616
administrative
Total expenses 4,800,854 2,338,348
Loss from operations (4,631,314) (2,252,098)
Interest income 341,574 142,013
Interest expense (21,549) (12,035)
Net loss $(4,311,289) $(2,122,120)
Net loss per share $ (0.42) $ (0.44)
Shares used in
computation
of net loss per
share 10,201,495 4,833,993
See accompanying notes.
ARADIGM CORPORATION
(A development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
Period from
January 30,
1991
(inception)
Six months ended through
June 30, June 30,
1997 1996 1997
Contract revenues $ 739,557 $ 172,500 $ 1,749,557
Expenses:
Research and
development 5,798,351 2,788,908 21,082,296
General and
administrative 2,441,850 1,379,768 10,630,990
Total expenses 8,240,201 4,168,676 31,713,286
Loss from
operations (7,500,644) (3,996,176) (29,963,729)
Interest income 723,684 289,226 2,167,295
Interest expense (35,836) (22,918) (167,056)
Net loss $(6,812,796) $(3,729,868) $(27,963,490)
Net loss per share $ (0.67) $ (0.80)
Shares used in
computation of
net loss per
share 10,205,370 4,634,227
See accompanying notes.
ARADIGM CORPORATION
(A development stage company)
BALANCE SHEETS
June 30, December 31,
1997 1996
Assets (unaudited)
Current assets:
Cash and cash equivalents $13,255,743 $18,553,831
Short-term investments 6,935,060 6,977,331
Other current assets 813,305 451,220
Total current assets 21,004,108 25,982,382
Investments - 3,002,445
Property and equipment, net 2,722,033 1,452,968
Notes receivable from
officers 242,029 219,739
Other assets 78,808 75,657
Total assets $24,046,978 $30,733,191
Liabilities and shareholders'
equity
Current liabilities:
Accounts payable $1,144,736 $ 601,230
Accrued clinical and other
studies - 898,635
Accrued compensation 898,140 279,985
Other accrued liabilities 104,206 278,985
Deferred revenue 40,032 169,500
Current portion of capital
lease obligations 290,356 268,514
Total current
liabilities 2,477,470 2,496,849
Noncurrent portion of capital
lease obligations 323,118 350,171
Commitments
Shareholders' equity:
Preferred stock, no par
value; 5,000,000 shares
authorized; none issued
or outstanding - -
Common stock, no par
value, 40,000,000 shares
authorized; issued and
outstanding shares:
June 30, 1997 -
10,205,245; December 31,
1996 - 10,214,054 49,841,759 49,821,157
Notes receivable from
shareholders (421,699) (482,805)
Deferred compensation (205,803) (308,239)
Deficit accumulated during
development stage (27,967,867) (21,143,942)
Total shareholders'
equity 21,246,390 27,886,171
Total liabilities and
shareholders' equity $ 24,046,978 $ 30,733,191
See accompanying notes.
ARADIGM CORPORATION
(A development stage company)
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(Unaudited)
Period from
January 30,
1991
Six months ended (inception)
June 30, through
1997 1996 June 30, 1997
Cash flows from
operating activities
Net loss $(6,812,796) $(3,729,866) $(27,963,490)
Adjustments to
reconcile net loss to
net cash flow used in
operating activities
Depreciation and
amortization 280,045 165,729 999,504
Amortization of
deferred
compensation 102,436 84,218 289,090
Accrued interest on
note exchanged for
preferred stock - - 32,622
Loss on disposal of
property and
equipment - - 37,666
Loss on sale-
leaseback
transaction - - 95,294
Changes in assets and
liabilities
Contract receivable - 260,000 -
Other current
assets (362,085) (112,569) (813,305)
Other assets (3,151) (6,964) (78,808)
Accounts payable 543,506 907,402 1,144,736
Accrued liabilities (455,259) 289,018 1,002,346
Deferred revenue (129,468) (172,500) 40,032
Net cash used in
operating activities (6,836,772) (2,315,532) (25,214,313)
Cash flows from
investing activities
Capital expenditures (1,398,943) (4,830) (3,094,687)
Purchases of
investments (17,986,617) - (208,653,264)
Proceeds from maturities
of investments
21,020,204 - 201,713,827
Net cash (used in)
provided by investing
activities 1,634,644 (4,830) (10,034,124)
Cash flows from
financing activities
Proceeds from issuance
of notes payable to
shareholders - - 2,111,395
Repayment of notes
payable to
shareholders - - (298,972)
Proceeds from issuance
of preferred stock,
net - - 22,274,014
Proceeds from issuance
of common stock, net 29,982 24,796,878 24,740,955
Repurchase of common
stock - - (6,574)
Proceeds from
repayment of
shareholder notes 51,726 - 51,726
Proceeds from sale of
equipment in sale-
leaseback
transaction - - 389,621
Notes receivable from
officers (22,290) (14,818) (242,029)
Payments on lease
obligations (155,378) (128,920) (515,956)
Net cash (used in)
provided by financing
activities (95,960) 24,653,140 48,504,180
Net (decrease) increase
in cash and cash
equivalents (5,298,088) 22,332,778 13,255,743
Cash and cash
equivalents at
beginning of period 18,553,831 12,117,355 -
Cash and cash
equivalents at end of
period $13,255,743 $34,450,133 $13,255,743
Supplemental investing
and financing
activities
Common stock issued in
exchange for
equipment $ - $ - $ 20,000
Common stock issued in
exchange for notes
receivable $ - $ 286,581 $ 513,385
Common stock canceled
upon cancellation of
notes receivable $ 9,380 $ - $ 9,380
Preferred stock issued
in exchange for debt $ - $ - $1,812,423
Acquisition of
equipment under
capital leases $ 150,167 $ 143,071 $1,129,430
See accompanying notes.
ARADIGM CORPORATION
(A development stage company)
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
June 30, 1997
1. Summary of Significant Accounting Policies
Organization and Description of Business
Aradigm Corporation (the "Company") was incorporated in the
State of California on January 30, 1991. Since inception,
the Company has been engaged in the development of non-
invasive pulmonary drug delivery products. The Company's
principal activities to date have been conducting research
and development, recruiting personnel, focusing on business
development, raising capital and acquiring assets.
Accordingly, the Company is considered a development stage
company.
Basis of Presentation
The financial information at June 30, 1997 and for the three-
and six-month periods ended June 30, 1997 and 1996 is
unaudited but includes all adjustments (consisting only of
normal recurring adjustments) that the Company considers
necessary for fair presentation of the financial position at
such date and the operating results and cash flows for those
periods. Results for the interim periods are not
necessarily indicative of the results for the entire year.
The accompanying financial statements should be read in
conjunction with the Company's audited financial statements
for the year ended December 31, 1996, included in the
Company's Form 10-K filed with the SEC on March 28, 1997.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash Equivalents and Investments
The Company considers all highly liquid investments
purchased with an original maturity of three months or less
to be cash equivalents. The Company places its cash and
cash equivalents in money market funds, commercial paper and
corporate master notes. The Company's short-term
investments consist of corporate notes with maturities
ranging from 3 to 12 months. Other investments consist of
corporate notes with maturities greater than 12 months.
The Company classifies its investments as available-for-
sale. Available-for-sale investments are recorded at fair
value with unrealized gains and losses reported in the
statement of shareholders' equity. Fair values of
investments are based on quoted market prices, where
available. Realized gains and losses, which have been
immaterial to date, are included in interest and other
income and are derived using the specific identification
method for determining the cost of investments sold.
Dividend and interest income is recognized when earned.
Net Loss Per Share
Net loss per share is computed using the weighted average
number of shares of common stock outstanding. Common
equivalent shares from stock options and warrants are
excluded from the computation as their effect is
antidilutive, except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued at prices below the
Company's June 20, 1996 initial public offering price during
the 12-month period prior to the offering have been included
in the calculation as if they were outstanding for all
periods through the offering (using the treasury stock
method and the initial public offering price).
As described above, the antidilutive effect of certain stock
options is included in the calculation of loss per share for
all periods through June 20, 1996, but is excluded from the
calculation after that date. Pro forma per share data is
provided to show the calculation on a consistent basis for
1997 and 1996. It has been computed as described above, but
includes the retroactive effect from the date of issuance of
the conversion of convertible preferred stock to common
shares upon the closing of the Company's initial public
offering.
Pro forma per share information calculated
on the above basis is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Pro forma net loss
per share $(0.42) $(0.25) $(0.67) $(0.46)
Shares used in
computation of pro
forma net loss per
share 10,201,495 8,337,461 10,205,370 8,137,695
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share", which is
required to be adopted on December 31, 1997. At that time,
the Company will be required to change the method currently
used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options
will be excluded. The impact is not expected to result in a
change in net loss per share for the periods ended June 30,
1997 and June 30, 1996 as the Company incurred net losses in
those periods and, accordingly, the calculation of earnings
per share for those periods excluded stock options as their
effect was antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and
results of operations of the Company should be read in
conjunction with the Financial Statements and the related
Notes thereto included in this Form 10-Q. Except for
historical information contained herein, the discussion in
this section contains forward-looking statements, including,
without limitation, statements regarding timing and results
of clinical trials, the establishment of corporate
partnering arrangements, the anticipated commercial
introduction of the Company's products and the timing of the
Company's cash requirements. The Company's actual results
could differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including, but not limited to, those discussed in this
section, as well as in the section entitled "Risk Factors"
and elsewhere in the Company's Form 10-K filed with the SEC
on March 28, 1997.
The Company's business is subject to significant risks
including, but not limited to, the success of its research
and development efforts, its dependence on corporate
partners for marketing and distribution resources, obtaining
and enforcing patents important to the Company's business,
clearing the lengthy and expensive regulatory process and
possible competition from other products. Even if the
Company's products appear promising at various stages of
development they may not reach the market or may not be
commercially successful for a number of reasons. Such
reasons include, but are not limited to, the possibilities
that the potential products will be found to be ineffective
during clinical trials, fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, be
uneconomical to market, be precluded from commercialization
by proprietary rights of third parties or may not gain
acceptance from health care professionals and patients.
Overview
Since its inception in 1991, Aradigm has been a
development stage company engaged in the development and
marketing of pulmonary drug delivery systems. As of June
30, 1997 the Company had an accumulated deficit of $28.0
million. The Company has been unprofitable each year and
expects to incur further significant and increasing
operating losses over the next several years primarily due
to the expansion of research efforts and to the
establishment of manufacturing capabilities to support
clinical trials and, if any of its products are successfully
developed and receive necessary regulatory approvals,
commercialization of such products. To date, Aradigm has
not sold any products and, while the Company does expect to
launch its first product in 1997, it does not anticipate
receiving any significant revenue from products or product
royalties in the current year. The Company has not declared
or paid any cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future.
The Company anticipates that its results of operations
may fluctuate for the foreseeable future due to several
factors, including the timing of research and development
expenses (including clinical trial-related expenditures),
actions related to regulatory and third-party reimbursement
matters, the Company's ability to manufacture its products,
if any, efficiently, the timing of new product
introductions, if any, and competition. In addition, the
Company's results of operations will be affected by its
ability to enter into corporate collaborations.
Results of Operations
Three and Six Months Ended June 30, 1997 and 1996
Contract Revenue. Contract revenue for the three-month
period ended June 30, 1997 increased to $170,000 from
$86,000 for the same period in 1996. Contract revenue for
the six-month period ended June 30, 1997 increased to
$740,000 from $173,000 for the same period in 1996. These
increases resulted from revenue recognized on additional
feasibility research contracts that were entered into late
in the fourth quarter of 1996 and the first quarter of 1997.
Research and Development Expenses. Research and
development expenses for the three-month period ended June
30, 1997 increased to $3.3 million from $1.5 million for the
same period in 1996. Research and development expenses for
the six-month period ended June 30, 1997 increased to $5.8
million from $2.8 million for the same period in 1996.
These increases were primarily due to increased staffing and
costs associated with the expansion of research and
development efforts on the AERx system and the expansion of
the SmartMist system program. The Company expects research
and development spending to increase significantly over the
next few years as the Company expands its development
efforts.
General and Administrative Expenses. General and
administrative expenses for the three-month period ended
June 30, 1997 increased to $1.5 million from $789,000 for
the same period in 1996. General and administrative expenses
for the six-month period ended June 30, 1997 increased to
$2.4 million from $1.4 million for the same period in 1996.
These increases were primarily due to increases in staffing,
administrative and facilities expenses related to general
corporate activities. The Company expects to incur greater
general and administrative expenses in the future as it
expands its operations, increases its efforts to develop
collaborative relationships with corporate partners and
meets its obligations as a public company.
Interest Income. Interest income for the three-month
period ended June 30, 1997 increased to $342,000 from
$142,000 for the same period in 1996. Interest income for
the six-month period ended June 30, 1997 increased to
$724,000 from $289,000 for the same period in 1996. These
increases resulted from interest income earned on the
proceeds received from the sale of common shares in the
initial public offering in June 1996.
Interest Expense. Interest expense for the three-month
period ended June 30, 1997 increased to $22,000 from $12,000
for the same period in 1996. Interest expense for the six-
month period ended June 30, 1997 increased to $36,000 from
$23,000 for the same period in 1996. These increases
resulted from higher outstanding capital lease balances
under the Company's equipment line of credit.
Liquidity and Capital Resources
The Company has financed its operations since inception
primarily through public and private placements of its
capital stock, proceeds from the financing of equipment
acquisitions, contract revenue and interest earned on
investments. As of June 30, 1997, the Company had realized
approximately $48.8 million in net proceeds from the
issuance of its capital stock. The Company is currently
concluding negotiations for a $5 million equipment line of
credit to replace the expired availability of credit under
its existing $1.75 million equipment line of credit. As of
June 30, 1997, the Company had cash, cash equivalents and
investments of approximately $20.2 million.
Net cash used in operating activities in the six months
ending June 30, 1997, was $6.8 million compared to $2.3
million in 1996. The increase resulted primarily from the
increase in the net loss of $3.1 million, net decreases in
accrued liabilities and increases in current assets.
Net cash provided by investing activities in the six
months ending June 30, 1997, was $1.6 million compared to
$5,000 used in 1996. The increase resulted primarily from
the Company's net receipt of investment maturities less
expenditures made for capital equipment.
Net cash used in financing activities in the six months
ending June 30, 1997, of $96,000 resulted primarily from
increased payments on capital lease obligations less
receipts from repayment of shareholder notes. Net cash
provided by financing activities in the six months ending
June 30, 1996 of $24.7 million was primarily due to the
receipt of proceeds from the Company's initial public
offering.
The Company expects that its cash requirements will
increase as a result of expected increases in expenses
related to research and development activities, the scale up
of manufacturing processes and increases in general and
administrative costs. The Company's cash requirements will
also be affected by the extent and duration of the foreign
and domestic regulatory approval processes for its potential
products. Although there can be no assurance that the
Company will receive regulatory approval for any of its
products, if the Company does so, its cash requirements may
increase due to the significant expenses associated with
initial commercial production and marketing efforts. These
expenses include, but are not limited to, increases in
personnel and related costs, capital expenditures, product
prototype development expenses and the costs of facilities
expansion.
The Company expects that its existing capital
resources, existing contract research and development
revenue, interest income and equipment financing capability
will enable the Company to maintain current and planned
operations through the first half of 1998. The Company's
cash requirements, however, may vary materially from those
now planned because of results of research and development
efforts, including capital expenditures and the funding of
preclinical and clinical trials, manufacturing process
development in connection with the commercialization of the
SmartMist system, and manufacturing capacity for
preclinical, clinical and full scale manufacturing
requirements of the AERx system. The Company may seek
additional funding through collaborations or through public
or private equity or debt financing. The Company has not yet
established any corporate development collaborations and
there can be no assurance that it will be able to do so on
reasonable terms, or at all. Nor can there be any assurance
that additional financing can be obtained on acceptable
terms, or at all. If additional funds are raised by issuing
equity securities, dilution to shareholders may result. If
adequate funds are not available, the Company may be
required to delay, to reduce the scope of, or to eliminate
one or more of its research and development programs, or to
obtain funds through arrangements with collaborative
partners or other sources that may require the Company to
relinquish rights to certain of its technologies or products
that the Company would not otherwise relinquish.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
(a) The Annual Meeting of Shareholders of Aradigm
Corporation was held on May 20, 1997.
(b) Richard P. Thompson, Lester John Lloyd, Reid M.
Rubsamen, Jared A. Anderson, Ross A. Jaffe, Burton J.
McMurtry, Gordon W. Russell, Fred E. Silverstein and Virgil
D. Thompson were elected to the Board of Directors to hold
office until the next Annual Meeting of Shareholders and
until their successors are elected and qualified.
(c) The matters voted upon at the meeting and the voting of
the shareholders with respect thereto were as follows:
(i) The election of Richard P. Thompson as a Director to
hold office until the next Annual Meeting of Shareholders
and until his successor is elected and qualified:
For: 8,136,030 Withheld: 29
(ii) The election of Lester John Lloyd as a Director to
hold office until the next Annual Meeting of Shareholders
and until his successor is elected and qualified:
For: 8,135,980 Withheld: 79
(iii) The election of Reid M. Rubsamen as a Director to
hold office until the next Annual Meeting of Shareholders
and until his successor is elected and qualified:
For: 8,136,030 Withheld: 29
(iv) The election of Jared A. Anderson as a Director to
hold office until the next Annual Meeting of Shareholders
and until his successor is elected and qualified:
For: 8,136,030 Withheld: 29
(v) The election of Ross A. Jaffe as a Director to hold
office until the next Annual Meeting of Shareholders and
until his successor is elected and qualified:
For: 8,136,030 Withheld: 29
(vi) The election of Burton J. McMurtry as a Director
to hold office until the next Annual Meeting of Shareholders
and until his successor is elected and qualified:
For: 8,136,030 Withheld: 29
(vii) The election of Gordon W. Russell as a Director to
hold office until the next Annual Meeting of Shareholders
and until his successor is elected and qualified:
For: 8,136,030 Withheld: 29
(viii) The election of Fred E. Silverstein as a Director
to hold office until the next Annual Meeting of Shareholders
and until his successor is elected and qualified:
For: 8,136,030 Withheld: 29
(ix) The election of Virgil D. Thompson as a Director
to hold office until the next Annual Meeting of Shareholders
and until his successor is elected and qualified:
For: 8,116,230 Withheld: 19,829
(x) Ratification of the selection of Ernst & Young LLP as
independent auditors of the Company for its fiscal year
ending December 31, 1997:
For: 7,982,759 Withheld: 2,800
Abstain: 150,500
Broker Non-Votes: 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11.1 Statement Regarding Computation of Net Loss Per
Share
27.1 Financial Data Schedule
(b) Reports on Forms 8-K.
The Company filed no reports on Form 8-K
during the quarter ended June 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Dated: August 12, 1997
ARADIGM CORPORATION
(Registrant)
/s/Mark A. Olbert
Mark A. Olbert
Vice President, Finance and
Administration and Chief
Financial Officer
ARADIGM CORPORATION
FORM 10-Q
INDEX TO EXHIBITS
Exhibit Number Description
11.1 Statement Regarding Computation of Net
Loss Per Share
27.1 Financial Data Schedule
EXHIBIT 11.1
ARADIGM CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Net loss $(4,311,289) $(2,122,120) $(6,812,796) $(3,729,868)
Shares used in
computation of
net loss per
share:
Weighted
average Common
shares
outstanding 10,201,495 2,146,038 10,205,370 1,946,272
Shares
related to SAB
Nos. 55, 64,
and 83 - 2,687,955 - 2,687,955
Shares used in
computing net
loss per share 10,201,495 4,833,993 10,205,370 4,634,227
Net loss per
share $ (.42) $ (.44) $ (.67) $ (.80)
Shares used in
computation of
pro forma net
loss per share:
Shares used in
computing net
loss per share 10,201,495 4,833,993 10,205,370 4,634,227
Adjustment to
reflect effect
of assumed
conversion
of preferred
stock from
date of
issuance - 3,503,468 - 3,503,468
Shares used in
computing pro
forma net loss
per share 10,201,495 8,337,461 10,205,370 8,137,695
Pro forma net
loss per share $ (.42) $ (.25) $ (.67) $ (.46)