Royalty Agreement, Note Payable and Accrued Interest	3 Months Ended
Mar. 31, 2014
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Royalty Agreement, Note Payable and Accrued Interest	7. Royalty Agreement, Note Payable and Accrued Interest *Zogenix* In August 2006, the Company sold all assets related to its needle-free injector technology platform and products, including 12 U.S. patents along with foreign counterparts, to Zogenix, Inc. In July 2009, Zogenix was granted approval by the U.S. Food and Drug Administration (“FDA”) of the SUMAVEL* DosePro* (sumatriptan injection) needle-free delivery system for the treatment of acute migraine and cluster headache. The Company was entitled to quarterly royalty payments of 3% of net sales on all SUMAVEL DosePro sales. The Company recorded royalty revenue of $200,000 for the three months ended March 31, 2014. *Royalty Financing* In June 2011, the Company entered into an $8.5 million royalty financing agreement with a syndicate of lenders. The agreement created a debt obligation (the “Term Loan”) that was to be repaid through and secured by royalties from net sales of the SUMAVEL DosePro needle-free delivery system payable to the Company under its Asset Purchase Agreement (“APA”) with Zogenix. Under the terms of the royalty financing agreement, the Company received a loan of $8.5 million, less fees and expenses (approximately $473,000) and $250,000 set aside for an Interest Reserve Account. The lenders were entitled to receive 100% of all royalties payable to the Company under the APA until the principal and accrued interest of the Term Loan are fully repaid, after which time the benefit of any further royalties made under the APA will accrue to Aradigm. The Term Loan accrued interest at the rate equal to the greater of a) LIBOR or b) 1.50%, plus a margin of 14.5%. To the extent royalty payments are insufficient to pay accrued and unpaid interest under the financing, the shortfall was to be funded from the Interest Reserve Account or, if the account is insufficient to pay all of the interest due, the shortfall will be capitalized and added to the principal balance of the Term Loan. During the three months ended March 31, 2012, the Interest Reserve Account was fully utilized and future shortfalls were capitalized and added to the principal balance of the Term Loan. The lenders were granted a security interest in the assets of an Aradigm subsidiary, Aradigm Royalty Financing LLC, which holds Aradigm’s rights to receive royalty payments under the APA. The lenders have no recourse to other assets of Aradigm for repayment of the loan. The Company capitalized the fees and expenses of approximately $473,000 and recorded this amount in other assets. The capitalized expenses were to be amortized to interest expense using the effective interest method over a period of 48 months, however, the full amount of the remaining capitalized fees and expenses were recognized in the three months ended March 31, 2014, which was the accounting period following the completion of the transfer of payment rights to the lenders as described below. In connection with the original royalty financing transaction, the Company issued to the lenders warrants to purchase a total of 2,840,909 shares of the Company’s common stock at a strike price of $0.22 per share, representing a 20% premium above the average closing price of the Company’s common stock for the ten trading days immediately preceding the closing of the royalty financing transaction. The warrants expire on December 31, 2016. In accordance with Accounting Standards Topic 815 – Derivatives and Hedging, the warrants were accounted for as equity instruments and their fair value was determined to be approximately $390,000. The relative fair value of the warrants is considered a discount against the note and was recorded as a reduction of the note payable. The note discount was being amortized to interest expense using the effective interest method with an annual rate of 18.7% over a period of 48 months, however, the full amount of the remaining note discount was recognized in the three months ended March 31, 2014, which was the accounting period following the completion of the transfer of payment rights to the lenders as described below. While the term loan is non-recourse to the assets of Aradigm Corporation, the term loan agreement contained a minimum royalty covenant. If the minimum royalty covenant was breached and the subsidiary did not cure the breach through a cash contribution to pay down the accrued principal and interest, then the lenders had the right to declare the agreement in default and obtain the right to all future royalties and payments due to Aradigm under the Zogenix asset purchase agreement. In 2012, the minimum royalty covenant was breached and the Company made cash payments of approximately $167,000 to the lenders for accrued interest in order to cure the breach. In the twelve months ended December 31, 2013, the covenant was again breached and the cumulative cash shortfall the Company would need to contribute to keep the agreement from default stood at $525,000. In the first quarter of 2014, the Company elected not to make this or any future contributions. On March 4, 2014, the Company and the other parties executed an Assignment Agreement that transferred the rights to the lenders, effective February 28, 2014, for all future royalty payments from Zogenix under the APA in full and complete satisfaction of the Company’s obligations under the loan agreement and the other agreements entered into in connections with the royalty financing. Under the Assignment Agreement, the parties agreed that the value of the Assigned Interest is $5.8 million. Zogenix consented to the Assignment. The Company valued the assignment of the royalty rights at $5.8 million in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) in accordance with the Assignment Agreement which was recorded as a gain on fair value of royalty rights in the quarter ended March 31, 2014. The balance of the note payable and accrued interest extinguished in the transaction offset by deferred loan costs and unamortized debt discount as of the assignment date less the fair value of the royalty rights resulted in a gain from debt extinguishment of $3.0 million which was recognized in the quarter ended March 31, 2014 in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). All debts and obligations of Aradigm and its subsidiary would be considered to be paid and satisfied in full.

7. Royalty Agreement, Note Payable and Accrued Interest

Zogenix

In August 2006, the Company sold all assets related to its needle-free injector technology platform and products, including 12 U.S. patents along with foreign counterparts, to Zogenix, Inc. In July 2009, Zogenix was granted approval by the U.S. Food and Drug Administration (“FDA”) of the SUMAVEL* DosePro* (sumatriptan injection) needle-free delivery system for the treatment of acute migraine and cluster headache. The Company was entitled to quarterly royalty payments of 3% of net sales on all SUMAVEL DosePro sales. The Company recorded royalty revenue of $200,000 for the three months ended March 31, 2014.

Royalty Financing

In June 2011, the Company entered into an $8.5 million royalty financing agreement with a syndicate of lenders. The agreement created a debt obligation (the “Term Loan”) that was to be repaid through and secured by royalties from net sales of the SUMAVEL DosePro needle-free delivery system payable to the Company under its Asset Purchase Agreement (“APA”) with Zogenix.

Under the terms of the royalty financing agreement, the Company received a loan of $8.5 million, less fees and expenses (approximately $473,000) and $250,000 set aside for an Interest Reserve Account. The lenders were entitled to receive 100% of all royalties payable to the Company under the APA until the principal and accrued interest of the Term Loan are fully repaid, after which time the benefit of any further royalties made under the APA will accrue to Aradigm. The Term Loan accrued interest at the rate equal to the greater of a) LIBOR or b) 1.50%, plus a margin of 14.5%. To the extent royalty payments are insufficient to pay accrued and unpaid interest under the financing, the shortfall was to be funded from the Interest Reserve Account or, if the account is insufficient to pay all of the interest due, the shortfall will be capitalized and added to the principal balance of the Term Loan. During the three months ended March 31, 2012, the Interest Reserve Account was fully utilized and future shortfalls were capitalized and added to the principal balance of the Term Loan. The lenders were granted a security interest in the assets of an Aradigm subsidiary, Aradigm Royalty Financing LLC, which holds Aradigm’s rights to receive royalty payments under the APA. The lenders have no recourse to other assets of Aradigm for repayment of the loan.

The Company capitalized the fees and expenses of approximately $473,000 and recorded this amount in other assets. The capitalized expenses were to be amortized to interest expense using the effective interest method over a period of 48 months, however, the full amount of the remaining capitalized fees and expenses were recognized in the three months ended March 31, 2014, which was the accounting period following the completion of the transfer of payment rights to the lenders as described below.

In connection with the original royalty financing transaction, the Company issued to the lenders warrants to purchase a total of 2,840,909 shares of the Company’s common stock at a strike price of $0.22 per share, representing a 20% premium above the average closing price of the Company’s common stock for the ten trading days immediately preceding the closing of the royalty financing transaction. The warrants expire on December 31, 2016. In accordance with Accounting Standards Topic 815 – Derivatives and Hedging, the warrants were accounted for as equity instruments and their fair value was determined to be approximately $390,000. The relative fair value of the warrants is considered a discount against the note and was recorded as a reduction of the note payable. The note discount was being amortized to interest expense using the effective interest method with an annual rate of 18.7% over a period of 48 months, however, the full amount of the remaining note discount was recognized in the three months ended March 31, 2014, which was the accounting period following the completion of the transfer of payment rights to the lenders as described below.

While the term loan is non-recourse to the assets of Aradigm Corporation, the term loan agreement contained a minimum royalty covenant. If the minimum royalty covenant was breached and the subsidiary did not cure the breach through a cash contribution to pay down the accrued principal and interest, then the lenders had the right to declare the agreement in default and obtain the right to all future royalties and payments due to Aradigm under the Zogenix asset purchase agreement. In 2012, the minimum royalty covenant was breached and the Company made cash payments of approximately $167,000 to the lenders for accrued interest in order to cure the breach. In the twelve months ended December 31, 2013, the covenant was again breached and the cumulative cash shortfall the Company would need to contribute to keep the agreement from default stood at $525,000. In the first quarter of 2014, the Company elected not to make this or any future contributions.

On March 4, 2014, the Company and the other parties executed an Assignment Agreement that transferred the rights to the lenders, effective February 28, 2014, for all future royalty payments from Zogenix under the APA in full and complete satisfaction of the Company’s obligations under the loan agreement and the other agreements entered into in connections with the royalty financing. Under the Assignment Agreement, the parties agreed that the value of the Assigned Interest is $5.8 million. Zogenix consented to the Assignment. The Company valued the assignment of the royalty rights at $5.8 million in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) in accordance with the Assignment Agreement which was recorded as a gain on fair value of royalty rights in the quarter ended March 31, 2014. The balance of the note payable and accrued interest extinguished in the transaction offset by deferred loan costs and unamortized debt discount as of the assignment date less the fair value of the royalty rights resulted in a gain from debt extinguishment of $3.0 million which was recognized in the quarter ended March 31, 2014 in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). All debts and obligations of Aradigm and its subsidiary would be considered to be paid and satisfied in full.