10-Q 1 f72512e10-q.txt 10-Q 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 2001 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 (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3929 POINT EDEN WAY HAYWARD, CA 94545 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE) (510) 265-9000 (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 19,221,879 (CLASS) (OUTSTANDING AT APRIL 24, 2001)
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PAGE NO. ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Operations (Unaudited) Three months ended March 31, 2001 and 2000.................. 1 Balance Sheets March 31, 2001 (Unaudited) and December 31, 2000............ 2 Statements of Cash Flows (Unaudited) Three months ended March 31, 2001 and 2000.................. 3 Notes to Unaudited Financial Statements..................... 4 Management's Discussion and Analysis of Financial Condition Item 2. and Results of Operations................................... 6 Item 3. Quantitative and Qualitative Disclosure About Market Risk... 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................ 10 Signature............................................................ 11
i 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ARADIGM CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------ 2001 2000 ------- ------- (UNAUDITED) Contract revenues........................................... $ 6,687 $ 5,700 ------- ------- Expenses: Research and development.................................. 14,160 10,896 General and administrative................................ 2,328 2,073 ------- ------- Total expenses.................................... 16,488 12,969 ------- ------- Loss from operations........................................ (9,801) (7,269) Interest income............................................. 668 395 Interest expense and other.................................. (262) (321) ------- ------- Loss before extraordinary gain.............................. (9,395) (7,195) Extraordinary gain.......................................... 6,675 -- ------- ------- Net loss.................................................... $(2,720) $(7,195) ======= ======= Basic and diluted net loss per share: Loss before extraordinary gain.............................. $ (0.50) $ (0.48) Extraordinary gain.......................................... 0.36 -- ------- ------- Net loss per share.......................................... $ (0.14) $ (0.48) ------- ------- Shares used in computing basic and diluted net loss per share..................................................... 18,838 14,846 ======= =======
See accompanying notes. 1 4 ARADIGM CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES DATA) ASSETS
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 14,602 $ 20,732 Short-term investments.................................... 13,689 23,649 Receivables............................................... 3,234 70 Prepaid expenses and other current assets................. 1,744 735 --------- --------- Total current assets.............................. 33,269 45,186 Property and equipment, net................................. 34,373 25,323 Notes receivable from officers.............................. 108 119 Other assets................................................ 683 743 --------- --------- Total assets...................................... $ 68,433 $ 71,371 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 3,628 $ 4,894 Accrued clinical and cost of other studies................ 405 517 Accrued compensation...................................... 2,288 1,246 Deferred revenue.......................................... 3,371 6,622 Other accrued liabilities................................. 1,346 2,234 Notes payable............................................. 773 6,712 Current portion of capital lease obligations.............. 3,323 3,099 --------- --------- Total current liabilities......................... 15,134 25,324 Noncurrent portion of deferred revenue...................... 2,667 2,032 Capital lease obligations, less current portion............. 5,283 6,230 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized; no shares issued or outstanding............ -- -- Common stock, no par value; 40,000,000 shares authorized; issued and outstanding shares: March 31, 2001 -- 19,069,825; December 31, 2000 -- 18,266,955.... 158,763 148,573 Shareholder notes receivable................................ (94) (131) Deferred compensation....................................... (176) (216) Accumulated deficit......................................... (113,144) (110,441) --------- --------- Total shareholders' equity........................ 45,349 37,785 --------- --------- Total liabilities and shareholders' equity........ $ 68,433 $ 71,371 ========= =========
See accompanying notes. 2 5 ARADIGM CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 -------- ------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (2,720) $(7,195) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization.......................... 992 666 Extraordinary gain related to the Genentech note....... (6,675) -- Issuance of common stock for services.................. 8 -- Amortization of deferred compensation.................. 41 41 Changes in operating assets and liabilities: Receivables.......................................... (3,164) 150 Prepaid expenses and other current assets............ (1,009) 625 Other assets......................................... 60 -- Accounts payable..................................... (1,266) (500) Accrued compensation................................. 1,042 751 Other accrued liabilities............................ (264) 1,269 Deferred revenue..................................... (2,616) (2,560) -------- ------- Net cash used in operating activities............. (15,571) (6,753) -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (10,042) (1,417) Purchase of available-for-sale investments................ (5,733) (824) Proceeds from maturities of available-for-sale investments............................................ 15,709 11,840 -------- ------- Net cash provided (used) by investing activities....................................... (66) 9,599 -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net............... 10,182 1,451 Notes payable............................................. -- 1,630 Proceeds from repayments of shareholder notes............. 37 17 Notes receivable from officers............................ 11 34 Payments on lease obligations and equipment loans......... (723) (492) -------- ------- Net cash provided by financing activities......... 9,507 2,640 -------- ------- Net increase in cash and cash equivalents................... (6,130) 5,486 Cash and cash equivalents at beginning of period............ 20,732 9,347 -------- ------- Cash and cash equivalents at end of period.................. $ 14,602 $14,833 ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................... $ 248 $ 213 ======== =======
See accompanying notes. 3 6 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS MARCH 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Aradigm Corporation (the "Company") is a California corporation. Since inception, Aradigm has been engaged in the development and commercialization of non-invasive pulmonary drug delivery systems. Through June 1997, the Company was in the development stage. The Company does not anticipate receiving significant revenue from the sale of products in the upcoming year. Principal activities to date have included obtaining financing, recruiting management and technical personnel, securing operating facilities, conducting research and development, and expanding commercial production capabilities. These factors indicate that the Company's ability to continue its research, development and commercialization activities is dependent upon the ability of management to obtain additional financing as required. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with the Company's Annual Report on Form 10-K, as amended. The results of the Company's operations for the interim periods presented are not necessarily indicative of operating results for the full fiscal year or any future interim period. Net Loss Per Share Historical net loss per share has been calculated under Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic net loss per share has been computed using the weighted average number of shares of common stock outstanding less the weighted average number of shares subject to repurchase during the period. No diluted loss per share information has been presented in the accompanying statements of operations since potential common shares from stock options and warrants are antidilutive. 2. SHAREHOLDERS' EQUITY In January 2001, the Company raised $5 million through the sale of 339,961 common shares at an average price of $14.71 per share to GlaxoSmithKline. The sale was made pursuant to the exercise of a put option by the Company under the terms of the collaboration agreement with GlaxoSmithKline. In February 2001, the Company had a second sale of common stock to Acqua Wellington North American Equities Fund, Ltd. under the terms of an equity sales agreement signed with them in November, 2000. The Company raised $5 million through the sale of 436,110 common shares at an average price of $11.46 per share. 3. CONTINGENCIES In June 1998, Eli Lilly and Company ("Lilly") filed a complaint against the Company in the United States District Court for the Southern District of Indiana. The complaint made various allegations against the Company, arising from the Company's decision to enter into an exclusive collaboration with Novo Nordisk with respect to the development and commercialization of a pulmonary delivery system for insulin and insulin analogs. The Company has sponsored various studies of the pulmonary delivery of insulin analogs using materials supplied by Lilly under a series of agreements dating from January 1996. The Company and Lilly had also conducted negotiations concerning a long-term supply agreement under which Lilly would supply bulk insulin to the Company for commercialization in the Company's AERx Diabetes Management System, and a separate agreement under which the Company would license certain intellectual property to Lilly. These negotiations were terminated after the Company proceeded with its agreement with Novo Nordisk. The complaint seeks a declaration that Lilly scientists were co-inventors of a patent application filed by the Company relating to pulmonary delivery of an insulin analog or, in the alternative, enforcement of an alleged 4 7 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 agreement to grant Lilly a nonexclusive license under such patent application. The complaint also contains allegations of misappropriation of trade secrets, breach of fiduciary duty, conversion and unjust enrichment and seeks unspecified damages and injunctive relief. The Company filed an answer denying all material allegations of the complaint and a motion for summary judgment directed against all claims in Lilly's complaint. The Court has issued two written rulings on the Company's motion substantially limiting the claims against the Company. Specifically, the Court granted the Company's motion as to Lilly's claim to enforce an alleged license agreement, for misappropriation of trade secrets, breach of fiduciary duty, conversion, estoppel and breach of contract (in part) and dismissed those claims from the case. The Court denied the Company's motion to Lilly's claims for declaratory relief, unjust enrichment and breach of contract (in part), based on factual disputes between the parties, and those issues remain to be resolved. Trial date has been set for November 2001. Management believes that it has meritorious defenses against each of Eli Lilly's claims and that this litigation will not have a material adverse effect on the Company's financial position, results of operations or cash flows. However, there can be no assurance that the Company will prevail in this case. 4. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), which establishes accounting and reporting standards for derivative instruments and hedging activities. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", which amended FAS 133 by deferring the effective date to the fiscal year beginning after June 30, 2000. In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an Amendment to FASB Statement No. 133", which amended FAS 133 with respect to four specific issues. The Company adopted FAS 133, as amended, as of January 1, 2001. The adoption of this statement had no material effect on the financial position, results of operations or cash flows. 5 8 ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to management. Our future results, performance or achievements could differ materially from those expressed in, or implied by, any such 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 Securities and Exchange Commission on March 30, 2001, as amended. The business is subject to significant risks including, but not limited to, the success of research and development efforts, dependence on corporate partners for marketing and distribution resources, obtaining and enforcing patents important to the business, clearing the lengthy and expensive regulatory process and possible competition from other products. Even if the 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 may be found to be ineffective during clinical trials, fail to receive necessary regulatory approvals, are difficult to manufacture on a large scale, are uneconomical to market, are precluded from commercialization by proprietary rights of third parties or may not gain acceptance from health care professionals and patients. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW Since our inception in 1991, we have been engaged in the development of pulmonary drug delivery systems. As of March 31, 2001, we had an accumulated deficit of $113.1 million. We have not been profitable since inception and expect to incur additional operating losses over the next several years as research and development efforts, preclinical and clinical testing activities and manufacturing scale-up efforts expand and as we plan and build our late-stage clinical and early commercial production capabilities. To date, we have not had any material product sales and do not anticipate receiving revenue from product sales during 2001. The sources of working capital have been equity financings, equipment lease financings, contract revenues and interest earned on investments. We have performed initial feasibility work on a number of compounds and have been compensated for expenses incurred while performing this work in several cases pursuant to feasibility study agreements with third parties. Once feasibility is demonstrated with respect to a potential product, we seek to enter into development contracts with pharmaceutical corporate partners. We currently have such agreements pursuant to which we are developing pulmonary delivery systems with Novo Nordisk, to manage diabetes using insulin and other blood glucose regulating compounds, and with GlaxoSmithKline, to manage acute and breakthrough pain using opioid analgesics. The collaborative agreement with Novo Nordisk provides for reimbursement of research and development expenses as well as additional payments to us as we achieve certain significant milestones. We also expect to receive royalties from this development partner based on revenues from sales of product and to receive revenue from the manufacturing of unit dose packets and hand-held devices. We recognize revenues under the terms of our collaborative agreement as the research and development expenses are incurred, to the extent they are reimbursable. During December 2000, GlaxoSmithKline and we amended the product development and commercialization agreement whereby we assumed full control and responsibility for conducting and financing the remainder of all development activities. Under the amendment, unless we have terminated the agreement, GlaxoSmithKline can restore its rights to participate in development and commercialization of the product under the amended agreement upon payment of a restoration fee to us. We anticipate that GlaxoSmithKline will review its restoration election upon the delivery of Phase 2b trial results, which are expected to be available during the summer of 2001, but there can be no assurance that GlaxoSmithKline will elect to restore its rights. If we elect to terminate the agreement and continue or intend to continue any development 6 9 activities, either alone or in collaboration with a third party, we will be obligated to pay an exit fee to GlaxoSmithKline. In February 2001, we announced that we had mutually agreed with Genentech to discontinue the development of rhDNase using our proprietary AERx system. We also entered into a new agreement allowing Genentech to evaluate the feasibility of using the AERx Pulmonary Drug Delivery System for pulmonary delivery of other Genentech compounds. Under the terms of the agreement, Genentech did not require us to repay the loan of funds required to conduct product development to date under the discontinued program. Forgiveness of the loan and accrued interest resulted in an extraordinary gain during the first quarter of 2001 of approximately $6.7 million. We will be required to reimburse Genentech $773,000 for unspent project prepayments. RESULTS OF OPERATIONS Three Months Ended March 31, 2001 and 2000 Contract Revenues: Contract revenues for the three months ended March 31, 2001 increased to $6.7 million from $5.7 million for the same period in 2000. The revenue increase results primarily from an increase in partner-funded project development revenue from Novo Nordisk offset by the reduction in partner-funded project development revenue from GlaxoSmithKline. Costs associated with contract revenues are included in research and development expenses. Research and Development Expenses: Research and development expenses for the three months ended March 31, 2001 increased to $14.2 million from $10.9 million for the same period in 2000. The increase resulted primarily from the hiring of additional scientific personnel and the expansion of research and development efforts to support the ongoing program with Novo Nordisk. These expenses represent proprietary research expenses as well as costs related to contract revenues and include salaries and benefits of scientific and development personnel, laboratory supplies, consulting services and expenses associated with the development of manufacturing processes. We expect research and development spending to increase over the next few years as we continue to expand our development activities to support current and potential future collaborations and initiate commercial manufacturing of the AERx systems. The increase in research and development expenditures cannot be predicted accurately as it depends in part upon future success in pursuing existing development collaborations, as well as obtaining new collaborative agreements. General and Administrative Expenses: General and administrative expenses for the three months ended March 31, 2001 increased to $2.3 million from $2.1 million for the same period in 2000. The increase resulted primarily from additional personnel and leased facilities to support our expansion of research, development and manufacturing activities, and increased efforts to develop collaborative relationships with corporate partners. Interest Income: Interest income for the three months ended March 31, 2001 increased to $668,000 from $395,000 for the same period in 2000. The increase is due to our maintaining larger cash and investment balances. The higher cash and investment balances in the current period are due to our receiving $5 million in proceeds from the sale of common stock to GlaxoSmithKline and $5 million from the sale of common stock to Acqua Wellington North American Equities Fund, Ltd. ("Acqua") under an existing equity sales agreement. Interest Expense and Other: Interest expense and other for the three months ended March 31, 2001 decreased to $262,000 from $321,000 for the same period in 2000. The decrease is primarily due to lower interest expense on loan balances that resulted from reimbursement of development expenses from Genentech offset by higher interest expense on capital lease and equipment loan balances. Extraordinary Gain: For the three months ended March 31, 2001, we reported an extraordinary gain of approximately $6.7 million. The extraordinary gain results from the cancellation of outstanding loans and accrued interest required to conduct development for the Pulmozyme program that had been funded by Genentech. Cancellation of this program was announced in February, 2001. 7 10 LIQUIDITY AND CAPITAL RESOURCES The business has financed its operations since inception primarily through private placements and public offerings of capital stock, proceeds from equipment lease financing, contract revenues and interest earned on investments. As of March 31, 2001, we have received approximately $158.8 million in net proceeds from sales of capital stock. As of March 31, 2001, we had cash, cash equivalents and short-term investments of approximately $28.3 million. In January 2001, we raised $5 million through the sale of 339,961 common shares at an average price of $14.71 per share to GlaxoSmithKline. The sale was made pursuant to the exercise of a put option by us under the terms of the collaboration agreement with GlaxoSmithKline. In February 2001, we sold common stock to Acqua under the terms of an equity sales agreement signed with them in November, 2000. We raised $5 million through the sale of 436,110 common shares at an average price of $11.46 per share. Net cash used in operating activities for the three months ended March 31, 2001 increased to $15.6 million from $6.8 million for the same period in 2000. The increase in net cash used resulted primarily from decreases in accounts payable and deferred revenue combined with increases in receivables, other current assets and net loss before extraordinary gain partially offset by an increase in accrued compensation. The decrease in the net loss was a result of the forgiveness of notes payable under the cancellation of the development agreement with Genentech. Net cash used by investing activities for the three months ended March 31, 2001 was $66,000 compared to cash provided by investing activities of $9.6 million for the same period in 2000. The decrease results primarily from increased capital expenditures. Net cash provided by financing activities for the three months ended March 31, 2001 increased to $9.5 million from $2.6 million for the same period in 2000. The increase primarily reflects receipt of $5 million in proceeds from the Acqua common stock purchase, the exercise of a put option by us in the amount of $5 million under the terms of the collaboration agreement with GlaxoSmithKline partially offset by net payments from the use of equipment lines of credit. The development of our technology and proposed products will require a commitment of substantial funds to conduct the costly and time-consuming research, preclinical studies and clinical trial activities necessary to develop and refine the technology and proposed products and bring such products to market. Future capital requirements will depend on many factors, including continued progress and results from research and development for the technology and drug delivery systems, the ability to establish and maintain favorable collaborative arrangements with others, progress with preclinical studies and clinical trials and the results thereof, the time and costs involved in obtaining regulatory approvals, the cost of development and the rate of scale-up for the required production technologies, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and the need to acquire licenses or other rights to new technology. We are currently reviewing our planned operations through the end of 2001, and beyond, focusing particularly on capital spending requirements to ensure that capital outlays are not expended sooner than is necessary. As a result, we now expect our capital outlays for 2001 will be approximately $25 million. We believe our existing cash balances, together with proceeds from the existing equity line and other equipment lease financing agreements, should be sufficient to meet our needs through the end of the year. If we continue to make good progress in our development programs, however, we expect our cash requirements for capital spending and operations will increase in future periods. We will need to raise additional capital to fund our capital spending and operations before we become profitable. We may seek additional funding through collaborations, borrowing arrangements or through public or private equity financings. There can be no assurance that additional financing can be obtained on acceptable terms, or at all. Dilution to shareholders may result if funds are raised by issuing additional equity securities. If adequate funds are not available, we may be required to delay, to reduce the scope of, or to eliminate one or more of our research and development programs, or to obtain funds through arrangements with collaborative partners or other sources that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish. 8 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Disclosures In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk associated with interest rate movement. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas. As of March 31, 2001, we had cash and cash equivalents and short-term investments of $28.3 million consisting of cash and highly liquid short-term investments. Our short-term investments will decline by an immaterial amount if market interest rates increase, and therefore, our exposure to interest rate changes has been immaterial. Declines of interest rates over time will, however, reduce our interest income from our short-term investments. Our outstanding capital lease obligations are all at fixed interest rates and, therefore, have minimal exposure to changes in interest rates. 9 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS (a) Exhibits None (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended March 31, 2001. 10 13 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 11, 2001 ARADIGM CORPORATION (Registrant) /s/ RICHARD P. THOMPSON -------------------------------------- Richard P. Thompson President and Chief Executive Officer /s/ MICHAEL MOLKENTIN -------------------------------------- Michael Molkentin Acting Chief Financial Officer 11