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 March 31, 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 jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
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 10,199,617 shares
(Class) (Outstanding at April 4, 1997)
ARADIGM CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page No.
Statements of Operations (Unaudited)
Three months ended March 31, 1997 and
1996 and period from January 30, 1991
(inception) through March 31, 1997 3
Balance Sheets
March 31, 1997 (Unaudited) and December 4
31, 1996
Statements of Cash Flows (Unaudited)
Three months ended March 31, 1997 and
1996 and period from January 30, 1991
(inception) through March 31, 1997 5
Notes to Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
Signatures 12
Exhibits 13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARADIGM CORPORATION
(A development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
Period from
January 30,
1991
(inception)
Three months ended, through
March 31, March 31, March 31,
1997 1996 1997
Contract
revenues $ 570,017 $ 86,250 $1,580,017
Expenses:
Research and
development 2,524,659 1,239,185 17,808,604
General and
administrative 914,688 591,143 9,103,828
Total expenses 3,439,347 1,830,328 26,912,432
Loss from
operations (2,869,330) (1,744,078) (25,332,415)
Interest income 382,110 147,213 1,825,721
Interest expense (14,287) (10,883) (145,507)
Net loss $(2,501,507) $(1,607,748) $(23,652,201)
Net loss per
share $ (0.25) $ (0.40)
Shares used in
computation of
net loss per
share 10,209,242 4,006,108
See accompanying notes.
ARADIGM CORPORATION
(A development stage company)
BALANCE SHEETS
March 31, December 31,
1997 1996
Assets (unaudited)
Current assets:
Cash and cash $14,757,036 $18,553,831
equivalents
Short-term investments 10,209,306 6,977,331
Other current assets 844,076 451,220
Total current assets 25,810,418 25,982,382
Investments - 3,002,445
Property and equipment,
net 1,451,422 1,452,968
Notes receivable from
officers 222,814 219,739
Other assets 68,242 75,657
Total assets $27,552,896 $30,733,191
Liabilities and
shareholders' equity
Current liabilities:
Accounts payable $ 801,111 $ 601,230
Accrued clinical and
other studies - 898,635
Accrued compensation 550,662 279,985
Other accrued
liabilities 66,180 278,985
Deferred revenue 156,083 169,500
Current portion of
capital lease
obligations 268,514 268,514
Total current
liabilities 1,842,550 2,496,849
Noncurrent portion of
capital lease obligations 274,974 350,171
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: March 31, 1997-
10,199,617; December
31, 1996 - 10,214,054 49,811,777 49,821,157
Notes receivable from
shareholders (460,544) (482,805)
Deferred compensation (257,021) (308,239)
Deficit accumulated during
development stage (23,658,840) (21,143,942)
Total shareholders'
equity 25,435,372 27,886,171
Total liabilities and
shareholders' equity $27,552,896 $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
Three months ended (inception)
March 31, through
1997 1996 March 31,
1997
Cash flows used
in operating
activities
Net loss $(2,501,507) $(1,607,748) $(23,652,201)
Adjustments to
reconcile net
loss to net
cash flow used
in operating
activities
Depreciation
and
amortization 133,413 81,598 852,872
Amortization of
deferred
compensation 51,218 33,000 237,872
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 (392,856) (6,234) (844,076)
Other assets 7,415 (6,964) (68,242)
Accounts
payable 199,881 3,518 801,111
Accrued
liabilities (840,763) (13,288) 616,842
Deferred
revenue (13,417) (86,250) 156,083
Net cash used
in operating
activities (3,356,616) (1,342,368) (21,734,157)
Cash flows used
in investing
activities
Capital
expenditures (131,867) (16,324) (1,827,611)
Purchases of
investments (17,586,617) - (208,253,264)
Proceeds from
maturities of
investments 17,343,696 - 198,037,319
Net cash used
in investing
activities (374,788) (16,324) (12,043,556)
Cash flows
(used in)
provided by
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 - 52,721 24,710,973
Repurchase of
common stock - - (6,574)
Proceeds from
repayment of
shareholder
notes 12,881 - 12,881
Proceeds from
sale of
equipment in
sale-leaseback
transaction - - 389,621
Notes
receivable from
officers (3,075) (11,703) (222,814)
Payments on
lease
obligations (75,197) (20,220) (435,775)
Net cash (used
in) provided by
financing
activities (65,391) 20,798 48,534,749
Net (decrease)
increase in
cash and cash
equivalents (3,796,795) (1,337,894) 14,757,036
Cash and cash
equivalents at
beginning of
period 18,553,831 12,117,355 -
Cash and cash
equivalents at
end of period $14,757,036 $10,779,461 $14,757,036
Supplemental
investing and
financing
activities
Common stock
issued in
exchange for
equipment $ - $ - $ 20,000
Common stock
issued in
exchange for
notes
receivable $ - $ 204,157 $ 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 $ - $ 149,294 $ 979,263
See accompanying notes.
ARADIGM CORPORATION
(A development stage company)
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
March 31, 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 March 31, 1997 and for the three-month periods
ended March 31, 1997 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) that 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. 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
March 31,
1997 1996
Pro forma net loss per share $ (0.25) $ (0.21)
Shares used in computation of 10,209,242 7,509,576
pro forma net loss per share
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 quarters ended March
31, 1997 and March 31, 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 advancement of
pulmonary drug delivery systems. As of March 31, 1997 the
Company had an accumulated deficit of $23.7 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 Months Ended March 31, 1997 and 1996
Contract Revenue. Contract revenue for the three-month
period ended March 31, 1997 increased to $570,000 from
$86,000 for the same period in 1996. This increase resulted
from revenue recognized on three 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 March
31, 1997 increased to $2.5 million from $1.2 million for the
same period in 1996. This increase was 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
March, 1997 increased to $915,000 from $591,000 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 significantly 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 March 31, 1997 increased to $382,000 from
$147,000 for the same period in 1996. This increase was due
to 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 March 31, 1997 increased to $14,000 from
$11,000 for the same period in 1996. This increase was due
to 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 financings of equipment
acquisitions, contract revenue and interest earned on
investments. As of March 31, 1997, the Company had realized
approximately $48.8 million in net proceeds from sales of
its capital stock. The Company also has a $1.75 million
equipment line of credit. At March 31, 1997, $770,000
remained available under the line of credit for purchases
through June 1997. As of March 31, 1997, the Company had
cash, cash equivalents and investments of approximately
$25.0 million.
Net cash used in operating activities in the three
months ending March 31, 1997, was $3.4 million compared to
$1.3 million in 1996. The increase resulted primarily from
the increase in the net loss of $900,000, net decreases in
accrued liabilities and increases in current assets.
Net cash used in investing activities in the three
months ending March 31, 1997, was $375,000 compared to
$16,000 in 1996. The increase resulted primarily from the
Company's net purchase of available-for-sale investments and
additional capital expenditures.
Net cash used in financing activities in the three
months ending March 31, 1997, was $65,000 resulting
primarily from increased payments on capital lease
obligations. Net cash provided by financing activities in
the three months ending March 31, 1996 was $21,000 resulting
primarily from proceeds of issuances of common stock offset
partially by payments on capital lease obligations.
The Company expects that its cash requirements will
increase due to 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 financings. 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 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 (SEC EDGAR Version only)
(b) Reports on Forms 8-K.
The Company filed no reports on Form 8-K during
the quarter ended March 31, 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: May 9, 1997
ARADIGM CORPORATION
(Registrant)
/s/Richard P. Thompson
Richard P. Thompson
President, Chief Executive
Officer and Director
(Principal Executive Officer)
ARADIGM CORPORATION
FORM 10Q
INDEX TO EXHIBITS
Exhibit Number Description
11.1 Statement Regarding Computation of Net Loss Per Share
EXHIBIT 11.1
ARADIGM CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
Three Months Ended March 31,
1997 1996
Net loss $(2,501,507) $(1,607,748)
Shares used in computation
of net loss per share:
Weighted average Common
shares outstanding 10,209,242 1,318,153
Shares related to SAB
Nos. 55, 64, and 83 - 2,687,955
Shares used in
computing net loss per
share 10,209,242 4,006,108
Net loss per share $ (.25) $ (.40)
Shares used in computation
of pro forma net loss
per share:
Shares used in
computing net loss per
share 10,209,242 4,006,108
Adjustment to reflect
effect of assumed
conversion of preferred
stock from date of
issuance - 3,503,468
Shares used in
computing pro forma net
loss per share 10,209,242 7,509,576
Pro forma net loss per
share $ (.25) $ (.21)
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,757,036
<SECURITIES> 10,209,306
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,810,418
<PP&E> 2,296,218
<DEPRECIATION> (844,796)
<TOTAL-ASSETS> 27,552,896
<CURRENT-LIABILITIES> 1,842,550
<BONDS> 0
0
0
<COMMON> 49,811,777
<OTHER-SE> (717,565)
<TOTAL-LIABILITY-AND-EQUITY> 27,552,896
<SALES> 0
<TOTAL-REVENUES> 570,017
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,439,347
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,287
<INCOME-PRETAX> (2,501,507)
<INCOME-TAX> (2,501,507)
<INCOME-CONTINUING> (2,501,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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