18
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, 1996
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)
(State or other jurisdiction of incorporation or
organization) California
(I.R.S. Employer Identification No.) 94-3133088
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)
(Former name, former address and former fiscal year, if changed since
last report)
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.
(1) Yes X No
(2) Yes No X
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 10,216,820 shareS
(Class) (Outstanding at July 31, 1996)
ARADIGM CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page No.
Statements of Operations (Unaudited)
Three months ended June 30, 1995 and 1996
and period from January 30, 1991 (inception)
through June 30, 1996 3
Six months ended June 30, 1995 and 1996 4
Balance Sheets (Unaudited)
December 31, 1995 and June 30, 1996 5
Statements of Cash Flows (Unaudited)
Six months ended June 30, 1995 and 1996
and period from January 30, 1991 (inception)
through June 30, 1996 6
Notes to Unaudited Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 13
SECURITY
HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
Signatures 15
Exhibits 16
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
ARADIGM CORPORATION
(A development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three months ended
June 30,
1995 1996
<S> <C> <C>
Contract revenues $ - $ 86,250
Expenses:
Research and development 650,281 1,549,732
General and administrative 483,644 788,616
Total expenses 1,133,925 2,338,348
Loss from operations (1,133,925) (2,252,098)
Interest income 55,843 142,013
Interest expense 0 (12,035)
Net loss $ (1,078,082) $( 2,122,120)
Net loss per share $ (0.30) $ (0.27)
Shares used in computing net loss
per share 3,624,635 7,757,948
See notes to the unaudited financial statements.
</TABLE>
<TABLE>
ARADIGM CORPORATION
(A development stage company)
STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Period from
January 30,
1991
Six months ended (inception)
June 30, through
1995 1996 June 30,
<S> <C> <C> <C>
1996
Contract revenues $ 125,000 $ 172,500 $
452,500
Expenses:
Research and development 1,384,401 2,788,908 10,091,443
General and administrative 1,068,129 1,379,768 6,611,432
Total expenses 2,452,530 4,168,676 16,702,875
Loss from operations (2,327,530) (3,996,176) (16,250,375)
Interest income 129,732 289,226 554,037
Interest expense - (22,918) (102,063)
Net loss $(2,197,798) $(3,729,868) $(15,798,401)
Net loss per share $ (0.61) $ (0.78)
Shares used in computing net
loss per share 3,624,635 4,752,227
See notes to the unaudited financial statements
</TABLE>
<TABLE>
ARADIGM CORPORATION
(A development stage company)
BALANCE SHEETS
<CAPTION>
December 31, June 30,
1995 1996
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 12,117,355 $ 34,450,133
Contract receivable 260,000 -
Other current assets 74,127 186,696
Total current assets 12,451,482 34,636,829
Property and equipment, net 636,351 812,223
Notes receivable from officers 150,444 165,262
Other assets 68,099 75,063
Total assets $ 13,306,376 $ 35,689,377
Liabilities and shareholder's equity
Current liabilities:
Accounts payable $ 243,302 $ 1,150,704
Accrued compensation 217,643 506,661
Deferred revenue 230,000 57,500
Current portion of capital lease 167,003 261,277
obligations
Total current liabilities 857,948 1,976,142
Noncurrent portion of capital lease 327,407 440,984
obligations
Commitments
Shareholders' equity:
Preferred stock, no par value,
issuable in series; shares authorized:
10,000,000 at December 31, 1995 and
5,000,000 at June 30, 1996; issued and
outstanding shares, all of which are
convertible: at December 31, 1995 -
5,611,910; at June 30, 1996 - none;
aggregate liquidation preference of
$25,284,342 at December 31, 1995 24,119,060 -
Common stock, no par value, shares
authorized: 20,000,000 at December 31,
1995 and 40,000,000 at June 30, 1996;
issued and outstanding shares: 1995 -
1,327,025; 1996 - 10,209, 267,158 49,964,570
Notes receivable from shareholders (196,664) (483,245)
Deferred compensation - (410,675)
Deficit accumulated during (12,068,533) (15,798,399)
development stage
Total shareholders' equity 12,121,021 33,272,251
Total liabilities and
shareholders' equity $ 13,306,376 $ 35,689,377
See notes to the unaudited financial statements
</TABLE>
<TABLE>
ARADIGM CORPORATION
(A development stage company)
STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
January 30,
1991
Six months ended (inception)
June 30, through
<CAPTION>
1995 1996 June 30, 1996
<S> <C> <C> <C>
Cash flows used in operating
activities:
Net loss $(2,197,798) $(3,729,866) $(15,798,399)
Adjustments to reconcile net loss
to net cash flow used in
operating activities:
Depreciation and amortization 131,837 165,729 495,485
Amortization of deferred - 84,218 84,218
compensation
Accrued interest on note
exchanged for preferred stock - - 32,622
Loss on disposal of property - - 37,666
and equipment
Loss on sale-leaseback - - 95,294
transaction
Changes in operating assets
and liabilities:
Contract receivable (53,618) 260,000 -
Other current assets (28,825) (112,569) (186,696)
Other assets (3,600) (6,964) (75,063)
Accounts payable (152,048) 907,402 1,150,704
Accrued compensation (24,335) 289,018 506,661
Deferred revenue - (172,500) 57,500
Net cash used in operating (2,328,387) (2,315,532) (13,600,008)
activities
Cash flows used in investing
activities:
Capital expenditures (587,733) (4,830) (888,991)
Cash flows provided by financing
activities:
Proceeds from issuance of notes
payable to shareholders - - 2,111,395
Repayment of notes payable to - - (298,972)
shareholders
Proceeds from issuance of - - 22,274,014
preferred stock
Proceeds from issuance of common - 24,796,878 24,853,946
stock
Repurchase of common stock - - (6,574)
Proceeds from sale of equipment in
sale-leaseback transaction - - 389,621
Notes receivable from officers - (14,818) (165,262)
Payments on lease obligations - (128,920) (219,036)
Net cash provided by financing - 24,653,140 48,939,132
activities
Net increase(decrease) in cash and
cash equivalents (2,916,120) 22,332,778 34,450,133
Cash and cash equivalents at
beginning of period 6,086,912 12,117,355 -
Cash and cash equivalents at end
of period $ 3,170,792 $ 34,450,133 $ 34,450,133
</TABLE>
See notes to the unaudited financial statements
ARADIGM CORPORATION
(A development stage company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(Information at June 30, 1996 and for the three and six
month periods ended
June 30, 1995 and 1996 is unaudited)
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, 1996 and for the
three-and six-month periods ended June 30, 1995 and 1996 is
unaudited but includes all adjustments (consisting only of
normal recurring adjustments) which the Company considers
necessary for a 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.
Although the Company believes that the disclosures in these
financial statements are adequate to make the information
presented not misleading, certain information and footnote
information normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange
Commission (SEC). The accompanying financial statements
should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1995
included in the Company's registration statement no. 333-
4236 on Form S-1, filed with the SEC on April 30, 1996, as
subsequently amended.
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 and Cash Equivalents
The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be
cash equivalents. The Company maintains its cash and cash
equivalents in depository and money market accounts with a
single financial institution. The recorded amounts
approximate fair value. In July, 1996, the Company invested
certain of its excess cash and the net proceeds of its
initial public offering in cash equivalents and short term
investments. Short term investments consist of federal and
municipal government securities, repurchase agreements or
corporate paper and debt instruments with A1/P1 ratings with
maturities at date of purchase of greater than 90 days and
less than 18 months. The Company limits its concentration
of risk by diversifying its investments among a variety of
industries and issuers.
Net Loss Per Share
Net loss per share is computed using the weighted
average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent
shares consist of the incremental common shares issuable
upon conversion of the convertible preferred stock (using
the if-converted method) and shares issuable upon the
exercise of stock options and warrants (using the treasury
stock method) when their effect is dilutive. In addition,
pursuant to SEC Staff Accounting Bulletins and Staff policy,
such computations include the effect of all dilutive and
antidilutive common and common equivalent shares issued
within 12 months of the proposed public offerings date as if
they were outstanding for all periods presented determined
using the treasury stock method and the estimated per share
public offering price.
2. Initial Public Offering - Common Stock
In June 1996, the Company completed an initial public
offering of 2,500,000 shares of common stock resulting in
net proceeds to the Company of approximately $24,700,000.
In connection with and immediately prior to the closing of
the initial public offering (i) 3,741,283 shares of
preferred stock were converted to an equal number of shares
of common stock, (ii) 5,068,308 shares of common stock,
including the shares of common stock issued in the
conversion of the preferred stock, were exchanged for
7,594,064 shares of common stock, respectively, in a three
for two stock split, (iii) warrants to purchase 115,256
shares of common stock (on a post-split basis) were
exercised, and (iv) the Board of Directors was authorized to
issue 5,000,000 shares of preferred stock and 40,000,000
shares of common stock.
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. This discussion
contains forward-looking statements which involve risks and
uncertainties, except for historical information contained
herein. The Company's actual results could differ
materially from those anticipated in the 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
registration statement no. 333-4236 on Form S-1 filed with
the SEC on April 30, 1996, as subsequently amended.
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 advancement of
pulmonary drug delivery systems. As of June 30, 1996 the
Company had an accumulated deficit of $15.8 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 does not
anticipate receiving any 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, 1996 and 1995
Contract Revenue. Contract revenue for the three- and
six- month periods ended June 30, 1996 increased to $86,250
and $172,500, respectively, from none and $125,000 for the
same periods in 1995, respectively. These increases
resulted from a new feasibility research contract that was
initiated in the fourth quarter of 1995 and the conclusion
of a feasibility research contract in the first quarter of
1995.
Research and Development Expenses. Research and
development expenses for the three-and six-month periods
ended June 30, 1996 increased to $1.5 million and $2.8
million, respectively, from $650,000 and $1.4 million for
the same periods in 1995, respectively. These increases
were primarily due to the expansion of a research and
development project which began preliminary clinical testing
during 1996 and additional clinical testing. 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- and six-month periods
ended June 30, 1996 increased to $789,000 and $1.4 million,
respectively, from $483,644 and $1.1 million for the same
periods in 1995, respectively. These increases were
primarily due to compensation expense associated with stock
options recorded in the first and second quarters of 1996,
the expansion of the Company's facilities and an increase in
the number of employees. The Company expects to incur
significantly greater general and administrative expenses in
the future as it expands its operations and meets its
obligations as a public company.
Interest Income. Interest income for the three- and
six-month periods ended June 30, 1996 increased to $142,013
and $289,226, respectively, from $55,843 and $129,732 for
the same periods in 1995, respectively. These increases
were due to interest income earned on the proceeds received
from the sale of Series E preferred stock in the fourth
quarter of 1995 and from the sale of common shares in the
initial public offering in June 1996.
As of December 31, 1995, the Company had federal net
operating loss tax carry forwards of approximately $11.5
million. These carry forwards will expire beginning in the
year 2006. Utilization of net operating loss carry forwards
may be subject to substantial annual limitation due to the
ownership change limitation provided for by the Internal
Revenue Code of 1986. The annual limitation may result in
the expiration of net operating loss carry forwards before
utilization.
Liquidity and Capital Resources
The Company has financed its operations since inception
primarily through private placement of its capital stock,
proceeds from financing of equipment acquisitions, contract
revenue and interest earned on investments. In June 1996,
the Company completed an initial public offering resulting
in net proceeds of approximately $24.7 million. As of June
30, 1996, the Company had realized approximately $48.9
million in net proceeds from sales of its capital stock
since inception. The Company also has a secured line of
credit of $l.8 million for equipment purchases, of which
approximately $900,000 remained available at June 30, 1996.
The draw down period under the line of credit terminates in
June, 1997. At June 30, 1996, the Company had cash and cash
equivalents of approximately $34.5 million.
Net cash used in operating activities in the six months
ended June 30, 1996, of $2.3 million approximately equaled
that in the comparable period of 1995 due to the increase in
the net loss of approximately $1.5 million, being offset by
the increases in accounts payable, accrued compensation and
the collection of the contract receivable. The increase in
accounts payable was primarily as a result of the costs
incurred during the initial public offering. From inception
through June 30, 1996 the Company's cash utilized for
operating activities totaled approximately $13.6 million.
Net cash used in investing activities for both the six
months ended June 30, 1996 and the six months ended June 30,
1995, relates solely to capital expenditures by the Company.
Net cash provided by financing activities for the six
months ended June 30, 1996 of $24.7 million was primarily
due to the proceeds from the initial public offering.
The Company expects that its cash requirements will
increase due to expected increases in expenses related in
research and development activities, the scale up of
manufacturing processes and increases in general and
administrative costs. The Company's cash requirements will
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
and the proceeds from the initial public offering will
enable the Company to maintain current and planned
operations through 1997. 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 funding preclinical and clinical
trials, and for manufacturing process development in
connection with the commercialization of the SmartMist
Asthma Management System and to provide manufacturing
capacity for preclinical, clinical and full scale
manufacturing requirements of the AERx Pain Management
System. The Company may need to raise substantial
additional capital to fund its operations before the end of
1997. The Company expects that it will seek such 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 others 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
As of June 5, 1996, prior to the completion of the
Company's initial public offering, the shareholders of the
company approved the following:
(i) the amendment and restatement of the
Company's Articles of Incorporation effecting a 3-for-2
stock split of the Company's outstanding capital stock and
adopting certain shareholder protection measures;
(ii) the amendment and restatement of the
Company's Articles of Incorporation effective upon the
closing of the initial public offering, eliminating the
provisions designating the rights and preferences of the
Company's Preferred Stock, increasing the number of
authorized shares of the Company's Common Stock and
decreasing the authorized number of shares of the Company's
Preferred Stock;
(iii) the amendment and restatement of the
Company's Bylaws adopting certain other shareholder
protection measures;
(iv) the adoption of the Employee Stock Purchase
Plan;
(v) the amendment and restatement of the 1992
Stock Option Plan, which was renamed the 1996 Equity
Incentive Plan;
(vi) the adoption of the 1996 Non-Employee
Directors' Stock Option Plan; and
(vii) the adoption of a form of Indemnity
Agreement, which was entered into by the Company with each
of its directors and executive officers.
Shareholder approval was solicited by means of a
written consent. All shareholders were solicited. The
Company received consents voting in favor of each of the
proposals above from shareholders holding 5,051,773 shares
out of a total of 5,062,726 shares outstanding on June 5,
1996. The Company did not receive any consents voting
against any of the proposals above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(11) Net loss per share calculation
(27) Financial Data Schedule
(b) Reports on Forms 8-K.
The Company filed no reports on Form 8-K during
the quarter ended June 30, 1996.
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 13, 1996
ARADIGM CORPORATION
(Registrant)
/s/ Richard P. Thompson
Richard P. Thompson
President, Chief Executive
Officer, Chief Financial
Officer and Director
(Principal Executive Officer
and Chief Accounting Officer)
<TABLE>
Exhibit (11) Net Loss Per Share Calculation
Three Months Ended Six Months Ended
June 30, June 30,
1995 1996 1995 1996
<CAPTION>
<S> <C> <C> <C> <C>
Weighted average shares outstanding 936,680 2,146,038 936,680 1,946,272
Weighted average shares outstanding
- conversion of preferred stock to
common stock - 5,611,910 - 2,805,955
Net effect of dilutive and antidilutive
stock options, warrants and convertible
preferred stock (Series E) - based on the
treasury stock method using average
market price 2,687,955 - 2,687,955 -
Total shares used in computing net loss 3,624,635 7,757,948 3,624,635 4,752,227
per share
Net loss $(1,078,082) $(2,122,120) $(2,197,798) $(3,729,868)
Net loss per share $ (0.30) $ (0.27) $ (0.61) $ (0.78)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 34,450,133
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,636,829
<PP&E> 1,299,631
<DEPRECIATION> (487,408)
<TOTAL-ASSETS> 35,689,377
<CURRENT-LIABILITIES> 1,976,142
<BONDS> 0
0
0
<COMMON> 49,964,570
<OTHER-SE> (893,920)
<TOTAL-LIABILITY-AND-EQUITY> 35,689,377
<SALES> 0
<TOTAL-REVENUES> 172,500
<CGS> 0
<TOTAL-COSTS> 4,168,676
<OTHER-EXPENSES> (289,226)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,918
<INCOME-PRETAX> (3,729,868)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,729,868)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,729,868)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> 0
</TABLE>
