10-Q 1 f77153e10-q.txt FORM 10-Q PERIOD ENDING SEPTEMBER 30, 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 SEPTEMBER 30, 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 29,536,383 (Class) (Outstanding at November 7, 2001)
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ARADIGM CORPORATION INDEX
PAGE NO. ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Statements of Operations (Unaudited) Three months ended September 30, 2001 and 2000.............. 1 Nine months ended September 30, 2001 and 2000............... 2 Balance Sheets September 30, 2001 (Unaudited) and December 31, 2000........ 3 Statements of Cash Flows (Unaudited) Nine months ended September 30, 2001 and 2000............... 4 Notes to Unaudited Financial Statements......................... 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 8 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk....... 12 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds....................... 13 ITEM 6. Exhibits and Reports on Form 8-K................................ 13 Signature................................................................ 14
i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ARADIGM CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, ------------------ 2001 2000 -------- ------- (UNAUDITED) Contract revenues........................................... $ 6,889 $ 4,715 -------- ------- Expenses: Research and development.................................. 14,890 11,974 General and administrative................................ 2,233 2,399 -------- ------- Total expenses.................................... 17,123 14,373 -------- ------- Loss from operations........................................ (10,234) (9,658) Interest income............................................. 167 936 Interest expense and other.................................. (216) (413) -------- ------- Net loss.................................................... $(10,283) $(9,135) ======== ======= Basic and diluted net loss per share........................ $ (0.48) $ (0.51) ======== ======= Shares used in computing basic and diluted net loss per share..................................................... 21,581 17,967 ======== =======
See accompanying notes. 1 ARADIGM CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- (UNAUDITED) Contract revenues........................................... $ 22,096 $ 15,219 -------- -------- Expenses: Research and development.................................. 44,349 34,379 General and administrative................................ 6,883 6,925 -------- -------- Total expenses.................................... 51,232 41,304 -------- -------- Loss from operations........................................ (29,136) (26,085) Interest income............................................. 1,134 2,300 Interest expense and other.................................. (841) (1,101) -------- -------- Loss before extraordinary gain.............................. (28,843) (24,886) Extraordinary gain.......................................... 6,675 -- -------- -------- Net loss.................................................... $(22,168) $(24,886) ======== ======== Basic and diluted net loss per share: Loss before extraordinary gain.............................. $ (1.45) $ (1.47) Extraordinary gain.......................................... 0.34 -- -------- -------- Net loss per share.......................................... $ (1.11) $ (1.47) ======== ======== Shares used in computing basic and diluted net loss per share..................................................... 19,929 16,878 ======== ========
See accompanying notes. 2 ARADIGM CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES DATA)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 18,046 $ 20,732 Short-term investments.................................... 2,965 23,649 Receivables............................................... 334 70 Prepaid expenses and other current assets................. 1,576 735 --------- --------- Total current assets.............................. 22,921 45,186 Property and equipment, net................................. 51,905 25,323 Notes receivable from officers and employees................ 105 119 Other assets................................................ 595 743 --------- --------- Total assets...................................... $ 75,526 $ 71,371 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 4,362 $ 4,894 Accrued clinical and cost of other studies................ 1,210 517 Accrued compensation...................................... 3,019 1,246 Deferred revenue.......................................... 10,452 6,622 Current portion of capital lease obligations.............. 3,314 3,099 Other accrued liabilities................................. 646 2,234 Notes payable............................................. -- 6,712 --------- --------- Total current liabilities......................... 23,003 25,324 Noncurrent portion of deferred revenue...................... 2,182 2,032 Capital lease obligations, less current portion............. 3,705 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: September 30, 2001 -- 23,870,660; December 31, 2000 -- 18,266,955.... 179,345 148,573 Shareholder notes receivable................................ (1) (131) Deferred compensation....................................... (95) (216) Accumulated deficit......................................... (132,613) (110,441) --------- --------- Total shareholders' equity........................ 46,636 37,785 --------- --------- Total liabilities and shareholders' equity........ $ 75,526 $ 71,371 ========= =========
See accompanying notes. 3 ARADIGM CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(22,168) $(24,886) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization........................... 3,280 2,289 Extraordinary gain related to Genentech note............ (6,675) -- Issuance of common stock for services................... 48 -- Amortization of deferred compensation................... 121 122 Changes in operating assets and liabilities: Receivables........................................... (264) 2,125 Prepaid expenses and other current assets............. (841) 186 Other assets.......................................... 148 -- Accounts payable...................................... (532) (587) Accrued compensation.................................. 1,773 1,787 Other accrued liabilities............................. (932) 1,888 Deferred revenue...................................... 3,980 (3,854) -------- -------- Net cash used in operating activities....................... (22,062) (20,930) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (29,863) (4,800) Purchase of available-for-sale investments................ (5,733) (10,191) Proceeds from maturities of available-for-sale investments............................................. 26,414 22,731 -------- -------- Net cash provided by (used in) investing activities......... (9,182) 7,740 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net............... 30,724 45,473 Proceeds from notes payable............................... -- 2,756 Proceeds from repayments of shareholder notes............. 130 11 Proceeds from notes receivable from officers.............. 14 25 Proceeds from equipment loans............................. -- 1,275 Payments on lease obligations and equipment loans......... (2,310) (1,616) -------- -------- Net cash provided by financing activities................... 28,558 47,924 -------- -------- Net (decrease) increase in cash and cash equivalents........ (2,686) 34,734 Cash and cash equivalents at beginning of period............ 20,732 9,347 -------- -------- Cash and cash equivalents at end of period.................. $ 18,046 $ 44,081 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................... $ 714 $ 652 ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of warrants for services......................... $ -- $ 249 ======== ========
See accompanying notes. 4 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 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 any 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. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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. The Balance Sheet at December 31, 2000 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 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 a price of $14.71 per share to GlaxoSmithKline plc ("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 raised $5 million through the sale of 436,110 shares of common stock at an average price of $11.46 per share to Acqua Wellington North American Equities Fund, Ltd. ("Acqua") under the terms of an equity sales agreement signed in November 2000 (the "Acqua Agreement"). In June 2001, the Company raised $5 million through the sale of 708,216 shares of common stock at a price of $7.06 per share to Novo Nordisk A/S ("Novo Nordisk"). The sale was made pursuant to the exercise of a put option by the Company under the terms of the collaboration agreement with Novo Nordisk. In July 2001, the Company raised $539,000 through the sale of 92,407 shares of common stock at an average price of $5.84 per share to Acqua under the terms of the Acqua Agreement. In August 2001, the Company completed a private placement of shares of common stock for gross proceeds of $14.6 million to a group of institutional investors. Under the terms of the private placement, the 5 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED) Company sold 3,639,316 shares of common stock at a price of $4.00 per share. The company also issued warrants to the investors to purchase 363,929 shares of common stock at an exercise price of $5.41 per share or a 15% premium to the Nasdaq National Market price on the closing date. The Company valued the warrants using the Black-Scholes option pricing model and recorded approximately $978,969 as issuance costs related to the private placement. These warrants are exercisable through August 21, 2005. 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 and 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 sought 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 agreement to grant Lilly a nonexclusive license under such patent application. The complaint also contained 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 as 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. The Company recently filed a motion asking the Court to reconsider summary judgment on the inventorship and unjust enrichment claims, based on evidence recently produced by Lilly. Trial was set for November 2001, but has been continued due to a conflict on the Court's calendar. The risks to the Company should Lilly prevail in this case are that Lilly would be given rights of an owner, along with the Company, on one or more Aradigm patents relating to pulmonary delivery of insulin analogs and/or that Lilly would be awarded damages on its remaining claims for breach of contract and unjust enrichment. Management believes that it has meritorious defenses against each of Eli Lilly's remaining 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 6 ARADIGM CORPORATION NOTES TO THE UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED) 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. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will no longer be amortized, but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. Companies are required to adopt SFAS No. 142 for fiscal years beginning after December 31, 2001. The Company did not complete any business combinations through the nine months ended September 30, 2001, as a result these standards did not have a material impact on its financial position or operating results. In August 2001, the FASB issued FASB Statement No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-lived Assets". FAS 144 supercedes FASB Statement No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation of a subsidiary for which control is likely to be temporary. Companies are required to adopt FAS 144 for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, but early adoption is encouraged. The Company has not yet determined the impact this standard will have on its financial position and results of operations, although it does not anticipate that the adoption of this standard will have a material impact on the Company's financial position or results of operations. 5. SUBSEQUENT EVENT In October 2001, the Company raised $20 million through the sale of 5,665,723 shares of common stock at $3.53 per share to Novo Nordisk Pharmaceuticals, Inc. Under the terms of the investment, Novo Nordisk will retain all of the Company's common stock held by it for at least two years from the date of the agreement, subject to certain exceptions. 7 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 September 30, 2001, we had an accumulated deficit of $132.6 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 any revenue from the sale of products 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 A/S ("Novo Nordisk"), to manage diabetes using insulin and other blood glucose regulating compounds, and with GlaxoSmithKline plc ("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 2001, this partner-funded program has contributed a majority of our total contract revenues. 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 before year-end, but there can be no assurance that GlaxoSmithKline will elect to restore its rights. 8 If we elect to terminate the agreement and continue or intend to continue any development activities, either alone or in collaboration with a third party, we will be obligated to pay an exit fee to GlaxoSmithKline. This development program is currently being funded through existing working capital. 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. During 2001, we reimbursed Genentech $773,000 for unspent project prepayments. In addition to the diabetes and pain management programs, we have four additional partner-funded programs and a gene therapy effort, which is funded through the National Institutes of Health. It is our policy not to disclose the partner or the drug until we have entered into long-term development agreements with a partner. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Contract Revenues: Contract revenues for the three months ended September 30, 2001 increased to $6.9 million from $4.7 million for the same period in 2000. The revenue increase results primarily from an increase in partner-funded project development revenue from Novo Nordisk, which was $6.1 million for the three months ended September 30, 2001 and $4.0 million for the same period in 2000. Costs associated with collaborative agreements approximate contract revenue as these expenses are incurred under the program agreements. These costs are included in research and development expenses. Research and Development Expenses: Research and development expenses for the three months ended September 30, 2001 increased to $14.9 million from $12.0 million for the same period in 2000. The increase relates primarily to the hiring of additional scientific personnel and the expansion of other development efforts to support the ongoing program with Novo Nordisk. Expenses for other funded and unfunded development areas including manufacturing scale-up efforts remained relatively unchanged from the same period in 2000. Research and development expenses associated with collaborative agreements approximate contract revenue as these expenses are incurred under the program agreements. 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 September 30, 2001 decreased to $2.2 million from $2.4 million for the same period in 2000. The decrease resulted primarily from lower overall operating expenses in this area. Interest Income: Interest income for the three months ended September 30, 2001 decreased to $167,000 from $936,000 for the same period in 2000. The decrease is due to income being earned on lower cash and investment balances. Interest Expense and Other: Interest expense for the three months ended September 30, 2001 decreased to $216,000 from $413,000 for the same period in 2000. The decrease is primarily due to the cancellation of loans made by Genentech in connection with product development that had been funded by them. 9 Net Loss: Net loss for the three months ended September 30, 2001 increased to $10.3 million from $9.1 million for the same period in 2000. The increase in net loss is primarily due to an increase in net loss from operations, which was $10.2 million for the three months ended September 30, 2001 and $9.7 million for the same prior year period and a decrease in interest income, which was $167,000 for the three months ended September 30, 2001 and $936,000 for the same prior year period. NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Contract Revenues: Contract revenues for the nine months ended September 30, 2001 increased to $22.1 million from $15.2 million for the same period in 2000. The revenue increase results primarily from an increase in partner-funded project development revenue from Novo Nordisk, which was $18.5 million for the nine months ended September 30, 2001 and $11.1 million for the same period in 2000. Revenue also increased in other partner-funded programs, which was $2.1 million for the nine months ended September 30, 2001 and $1.3 million for the same period in 2000. These increases were offset by a reduction in partner-funded project development revenue from GlaxoSmithKline, which was $1.5 million for the nine months ended September 30, 2001 and $2.8 million for the same period in 2000. Costs associated with collaborative agreements approximate contract revenue as these expenses are incurred under the program agreements. These costs are included in research and development expenses. Research and Development Expenses: Research and development expenses for the nine months ended September 30, 2001 increased to $44.3 million from $34.4 million for the same period in 2000. The increase relates primarily from the hiring of additional scientific personnel and the expansion of research and development efforts to support the ongoing program with Novo Nordisk and an expansion of research and development efforts in other funded and unfunded development areas including manufacturing scale-up efforts. Research and development expenses associated with collaborative agreements approximate contract revenue as these expenses are incurred under the program agreements. General and Administrative Expenses: General and administrative expenses for the nine months ended September 30, 2001 remained relatively unchanged from the same period in 2000. Interest Income: Interest income for the nine months ended September 30, 2001 decreased to $1.1 million from $2.3 million for the same period in 2000. The decrease is due to interest income being earned on lower cash and investment balances. Interest Expense and Other: Interest expense for the nine months ended September 30, 2001 decreased to $841,000 from $1.1 million for the same period in 2000. The decrease is primarily due to the cancellation of loans made by Genentech in connections with product development that had been funded by them. Extraordinary Gain: For the nine months ended September 30, 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 product development with the program that had been funded by Genentech. Net Loss: Net loss for the nine months ended September 30, 2001 decreased to $22.2 million from $24.9 million for the same period in 2000. The decrease in net loss is primarily due to the $6.7 million extraordinary gain recorded during 2001 resulting from the cancellation of outstanding loans and accrued interest required to conduct product development that had been funded by Genentech offset by an by an increase in net loss from operations, which was $29.1 million for the nine months ended September 30, 2001 and $26.1 million for the same prior year period and a decrease in interest income, which was $1.1 million for the nine months ended September 30, 2001 and $2.3 million for the same prior year period. LIQUIDITY AND CAPITAL RESOURCES The Company 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 September 30, 2001, we have received approximately $179.4 million in net proceeds from 10 sales of capital stock. As of September 30, 2001, we had cash, cash equivalents and short-term investments of approximately $21 million. In January 2001, we raised $5 million through the sale of 339,961 common shares at a 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 raised $5 million through the sale of 436,110 shares of common stock at an average price of $11.46 per share to Acqua Wellington North American Equities Fund, Ltd. ("Acqua") under the terms of the equity sales agreement signed in November 2000 (the "Acqua Agreement"). In June 2001, we raised $5 million through the sale of 708,216 shares of common stock at a price of $7.06 per share to Novo Nordisk. The sale was made pursuant to the exercise of a put option by us under the terms of the collaboration agreement with Novo Nordisk. In July 2001, we raised $539,000 through the sale of 92,407 shares of common stock at an average price of $5.84 per share to Acqua under the terms of the Acqua Agreement. In August 2001, we completed a private placement of shares of common stock for gross proceeds of $14.6 million to a group of institutional investors. Under the terms of the private placement, we sold 3,639,316 shares of common stock at a price of $4.00 per share. We also issued warrants to the investors to purchase 363,929 shares of common stock at an exercise price of $5.41 per share or a 15% premium to the Nasdaq National Market price on the closing date. In October 2001, we raised $20 million through the sale of 5,665,723 shares of common stock at a price of $3.53 per share to Novo Nordisk Pharmaceuticals, Inc. under the terms of a stock purchase agreement signed in October 2001. Net cash used in operating activities for the nine months ended September 30, 2001 increased to $22.1 million from $20.9 million for the same period in 2000. The increase in net cash used resulted primarily from a decrease in accounts payable and other accrued liabilities combined with increases in receivables, prepaid expenses and other current assets and net loss before extraordinary gain partially offset by increases in deferred revenue and accrued compensation. The decrease in the net loss was primarily due to the forgiveness of outstanding loans and accrued interest under the cancellation of the development agreement with Genentech. The decrease in accounts payable results primarily from accelerated payments for expenses associated with development programs and capital expenditures. The increase in accounts receivable results primarily from increased activity in a partner-funded program, which is billed in arrears. Net cash used by investing activities for the nine months ended September 30, 2001 was $9.2 million compared to cash provided by investing activities of $7.7 million for the same period in 2000. The change results primarily from increased capital expenditures relating primarily to construction of the large-scale commercial manufacturing facility offset by a decrease in new investments and an increase in proceeds from maturing investments. Net cash provided by financing activities for the nine months ended September 30, 2001 decreased to $28.6 million from $47.9 million for the same period in 2000. The decrease results primarily from a net reduction in proceeds from the issuance of common stock due to an overall reduction in the amount of equity funding received, a reduction in proceeds from notes payable due to the forgiveness of outstanding loans under the cancellation of the development agreement with Genentech and a reduction in funding from equipment financing agreements partially offset by increased principal payments on lease obligations and equipment loans. 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 11 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 continue to review our planned operations through the end of 2001, and beyond. We are also focusing on capital spending requirements to ensure that capital outlays are not expended sooner than necessary. We expect our total capital outlays for 2001 will be in the range of $35 to $37 million. We believe that our existing cash balances at September 30, 2001, together with the $20 million in proceeds from the subsequent sale of common stock to Novo Nordisk and funding commitments from corporate development partners, should be sufficient to meet our needs for the next twelve months. If we continue to make good progress in our development programs, we would expect our cash requirements for capital spending and operations to 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. 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 September 30, 2001, we had cash and cash equivalents and short-term investments of $21 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. 12 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In August 2001, we completed a private stock sale of 3,639,316 shares of common stock to certain institutional investors for an aggregate purchase price of $14,557,264. In connection with the sale, we issued warrants to purchase 363,929 shares of common stock at an exercise price of $5.41 per share. The warrants are exercisable at the election of such investors for a four-year term. The sale and issuance of common stock and warrants was deemed to be exempt from registration under the Securities Act of 1933, as amended, by virtue of Regulation D promulgated under such Act. Each purchaser represented that it was an accredited investor within the meaning of Rule 501(a) of the Act and that it was acquiring the securities for investment only and not with the view to the distribution thereof. In October 2001, we issued 5,665,723 shares of common stock to Novo Nordisk Pharmaceuticals, Inc. for an aggregate purchase price of $20 million. The sale and issuance of common stock was deemed to be exempt from registration under the Securities Act of 1933, as amended, by virtue of Regulation D promulgated under such Act. The purchaser represented that it was an accredited investor under Regulation D and that it was acquiring the securities for investment only and not with the view to the distribution thereof. 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 September 30, 2001. 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: November 14, 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 14