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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

(Mark One)

Or

Commission File Number 0-28402

California (State or other jurisdiction of incorporation or organization)

94-3133088 (I.R.S. Employer Identification No.)

        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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

        Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

ARADIGM CORPORATION
INDEX

			Page No.
PART I.  FINANCIAL INFORMATION
ITEM 1.		Condensed Financial Statements (unaudited)
		Condensed Balance Sheets
		At June 30, 2004 and December 31, 2003 (unaudited)	2
		Condensed Statements of Operations
		Three months ended June 30, 2004 and 2003 (unaudited)	3
		Six months ended June 30, 2004 and 2003 (unaudited)	4
		Statements of Cash Flows
		Six months ended June 30, 2004 and 2003 (unaudited)	5
		Notes to Unaudited Condensed Financial Statements	6
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
ITEM 4.		Controls and Procedures	12
PART II.  OTHER INFORMATION
ITEM 4.		Submission of Matters to a Vote of Security Holders	13
ITEM 5.		Other Information	13
ITEM 6.		Exhibits and Reports on Form 8-K	14
Signatures
Index to Exhibits
Exhibits

 

1

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

ARADIGM CORPORATION
CONDENSED BALANCE SHEETS

				June 30, 2004				December 31, 2003
				(Unaudited)				(Note 1)
				(In thousands, except shares data)
ASSETS
Current assets:
	Cash and cash equivalents			$	10,591			$	18,327
	Short-term investments				8,332				11,443
	Receivables				135				140
	Current portion of notes receivable from officers and employees				61				104
	Prepaid expenses and other current assets				1,739				1,910
		Total current assets			20,858				31,924
Property and equipment, net					60,628				62,612
Noncurrent portion of notes receivable from officers and employees					249				294
Other assets					454				388
		Total assets		$	82,189			$	95,218
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	1,005			$	885
	Accrued clinical and cost of other studies				216				149
	Accrued compensation				3,588				2,021
	Deferred revenue				8,104				7,891
	Current portion of capital lease obligations				—				427
	Other accrued liabilities				745				843
		Total current liabilities			13,658				12,216
Noncurrent portion of deferred revenue					4,576				5,040
Noncurrent portion of deferred rent					1,656				1,323
Commitments and contingencies
Redeemable convertible preferred stock, no par value; 5,000,000 shares authorized; issued and outstanding shares: 1,544,626 at June 30, 2004 and at December 31, 2003; liquidation preference of $37,380 at June 30, 2004 and at December 31, 2003					23,669				23,669
Shareholders’ equity:
Common stock, no par value; 150,000,000 and 100,000,000 shares authorized at June 30, 2004 and December 31, 2003, respectively; issued and outstanding shares: 63,564,493 at June 30, 2004 and 62,751,196 at December 31, 2003					269,267				268,406
Accumulated deficit					(230,637	)			(215,436	)
		Total shareholders’ equity			38,630				52,970
			Total liabilities, redeemable convertible preferred stock and shareholders’ equity	$	82,189			$	95,218

See accompanying notes.

 

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ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS

			Three Months Ended June 30,
			2004				2003
			(Unaudited) (In thousands, except per share data)
Contract revenues (Including amounts from related parties:     2004 — $7,006; 2003 — $9,255)			$	7,078			$	9,378
Operating expenses:
	Research and development			11,412				14,001
	General and administrative			3,167				2,844
		Total operating expenses		14,579				16,845
Loss from operations				(7,501	)			(7,467	)
Interest income				49				86
Interest expense				(5	)			(39	)
Net loss			$	(7,457	)		$	(7,420	)
Basic and diluted net loss per share			$	(0.12	)		$	(0.15	)
Shares used in computing basic and diluted net loss per share				63,531				51,144

See accompanying notes.

 

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ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS

			Six Months Ended June 30,
			2004				2003
			(Unaudited) (In thousands, except per share data)
Contract revenues (Including amounts from related parties:    2004 — $13,616; 2003 — $16,824			$	13,721			$	17,068
Operating expenses:
	Research and development			23,299				27,000
	General and administrative			5,703				5,513
		Total operating expenses		29,002				32,513
Loss from operations				(15,281	)			(15,445	)
Interest income				115				194
Interest expense				(15	)			(95	)
Net loss			$	(15,181	)		$	(15,346	)
Basic and diluted net loss per share:
Net loss per share			$	(0.24	)		$	(0.35	)
Shares used in computing basic and diluted net loss per share				63,238				43,440

See accompanying notes.

 

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ARADIGM CORPORATION
STATEMENTS OF CASH FLOWS

			Six Months Ended June 30,
			2004				2003
			(Unaudited) (In thousands)
Cash flows from operating activities:
	Net loss		$	(15,181	)		$	(15,346	)
	Adjustments to reconcile net loss to cash used in operating activities:
		Depreciation and amortization		2,576				3,177
		Loss on disposal of fixed assets		257				—
		Issuance of warrants and common stock for services		75				10
		Changes in operating assets and liabilities:
		Receivables		5				115
		Prepaid expenses and other current assets		171				81
		Other assets		(66	)			10
		Accounts payable		120				(941	)
		Accrued compensation		1,567				1,173
		Other accrued liabilities		(30	)			157
		Deferred rent		332				108
		Deferred revenue		(251	)			(2,801	)
Net cash used in operating activities				(10,425	)			(14,257	)
Cash flows from investing activities:
	Capital expenditures			(849	)			(2,488	)
	Sale (purchase) of available-for-sale investments			(6,376	)			(1,663	)
	Proceeds from maturities of available-for-sale investments			9,468				4,792
Net cash provided by investing activities				2,243				641
Cash flows from financing activities:
	Proceeds from issuance of common stock, net			481				16,560
	Proceeds from exercise of options and warrants for common stock			305				—
	Notes receivable from officers			87				(165	)
	Payments on lease obligations and equipment loans			(427	)			(1,185	)
Net cash provided by financing activities				446				15,208
Net increase (decrease) in cash and cash equivalents				(7,736	)			1,592
Cash and cash equivalents at beginning of period				18,327				22,800
Cash and cash equivalents at end of period			$	10,591			$	24,392
Supplemental disclosure of cash flow information:
	Cash paid for interest		$	16			$	95
Non-cash investing and financing activities:
	Issuance of common stock through conversion of Series A preferred stock		$	—			$	3,165
	Issuance of warrants in conjunction with private placement of common stock		$	—			$	2,469
	Issuance of warrants and options to purchase common stock for services		$	75			$	10

See accompanying notes.

 

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ARADIGM CORPORATION

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
June 30, 2004

       Organization

        Aradigm Corporation (the “Company”) is a California corporation engaged in the development and commercialization of non-invasive drug delivery systems. 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.

       Basis of Presentation

        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. 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, 2003 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.

       Stock Based Compensation

        The Company has elected to follow Accounting Principles Board Opinion No. (APB) 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its employee stock options. Compensation expense is based on the difference, if any, between the fair value of the Company’s common stock and the exercise price of the option or share right on the measurement date, which is typically the date of grant. This amount is recorded as “Deferred Stock Compensation” in the Balance Sheet and amortized as a charge over the vesting period of the applicable options or share rights. In accordance with Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation -- Transition and Disclosure,” the Company has provided below, the pro forma disclosures of the effect on net loss and loss per share as if SFAS 123 had been applied in measuring compensation expense for all periods presented (in thousands, except per share data).

 

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		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2004		2003		2004		2003
Net loss applicable to common shareholders — as reported		$  (7,457	)	$ (7,420	)	$ (15,181	)	$(15,346	)
Less:
	Total stock-based employee compensation expense determined under fair value based method for all awards	$  (1,299	)	$ (1,327	)	$   (2,403	)	$  (2,883	)
Pro forma net loss applicable to common shareholders		$  (8,756	)	$ (8,747	)	$ (17,584	)	$(18,229	)
Basic and diluted net loss per share:
	As reported	$    (0.12	)	$   (0.15	)	$     (0.24	)	$    (0.35	)
	Pro forma	$    (0.14	)	$   (0.17	)	$     (0.28	)	$    (0.42	)

        The Company accounts for options and warrants issued to non-employees under SFAS 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” using the Black-Scholes option pricing model. The value of options and warrants are periodically remeasured over their vesting terms.

       Computation of Net Loss 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, warrants and redeemable convertible preferred stocks are antidilutive.

        In January and April 2004, holders of warrants to purchase 455,693 shares of common stock elected to exercise the warrants, either with cash or by operation of cashless exercise provisions contained in the warrants. The Company issued an aggregate of 371,002 shares of common stock in connection with the exercise of these warrants, 406 shares of common stock in connection with the exercise of options, and 441,889 shares of common stock under the Employee Stock Purchase Plan during the six months ending June 30, 2004.

        In January 2004, we amended the operating lease for one of our facilities. Effective January 1, 2004, the new agreement reduces the aggregate annual lease payments by $1.1 million through 2006 and increases the aggregate annual payments by $1.1 million from 2007 through 2010. In consideration for the amended lease agreement, we replaced warrants to purchase 135,000 shares of common stock at prices ranging from $10.16 to $21.72 per share with new warrants to purchase 135,000 shares of common stock at $1.71 per share. The repricing resulted in additional expense of $88,000 that we will amortize on a straight-line basis over the remaining life of the lease.

        Novo Nordisk and its affiliate, Novo Nordisk Pharmaceuticals, Inc., are considered related parties and at June 30, 2004 own approximately 11.3% of the Company’s total outstanding common stock (on an as-converted basis).

 

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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 most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission.

        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, distribution and other 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 that 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 innovative drug delivery systems. Beginning with our AERx pulmonary delivery system and more recently with the Intraject subcutaneous delivery technology acquired in May 2003 from Weston Medical, we are building a solid platform in needle-free drug delivery. As of June 30, 2004, we had an accumulated deficit of $231 million. We have never 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 in the upcoming year. Our 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 with the AERx system 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 an agreement pursuant to which we are developing pulmonary delivery systems with Novo Nordisk A/S, to manage diabetes using insulin.

        We expect to perform various studies evaluating our Intraject subcutaneous delivery platform following the completion of clinical performance verification trials scheduled for later this year. While Aradigm will be actively engaging partners for discussions on Intraject, we believe that it is unlikely that a new commercial agreement for Intraject will be signed until the clinical verification trial is completed and presented to potential partners later this year. In some cases, a partnership may not be disclosed until a long-term development agreement has been established.

        Our lead development program is developing pulmonary delivery systems to manage diabetes using insulin with our partner Novo Nordisk. Since Novo Nordisk and we successfully initiated Phase 3 clinical trials in September 2002, we have been focused on supporting our partner in the existing and planned additional Phase 3 clinical trials that will be needed for their regulatory submission and commercial scale-up activities. In April 2004, Novo Nordisk and we announced results from a planned interim analysis of the initial Phase 3 trial. Although the results showed that the trial met its primary safety and efficacy

 

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endpoints, the analysis showed delayed post-meal plasma glucose suppression in type 1 diabetics using the AERx system. Because of the unexpected nature of these observations, Novo Nordisk has decided to amend the current trial protocol. Novo Nordisk will make decisions concerning the structure and timing of additional clinical trials after these observations have been fully assessed.

        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 product sales 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. For the six months ended June 30, 2004, this partner-funded program has contributed approximately 99.2% of our total contract revenues. At June 30, 2004, Novo Nordisk and its affiliate, Novo Nordisk Pharmaceuticals, Inc., own approximately 11.3% of our total outstanding common stock (on an as-converted basis) and are considered a related party.

        In general, it is our policy not to disclose the partner and/or the drug until a long-term development agreement has been established; both parties agree to highlight a clinical advancement in the program or under special circumstances in which both parties agree to disclosure.

Critical Accounting Policies

        We consider certain accounting policies related to revenue recognition and the use of estimates to be critical accounting policies that require the use of significant judgments and estimates relating to matters that are inherently uncertain and may result in materially different results under different assumptions and conditions.

       Revenue Recognition

        Contract revenues consist of revenue from collaboration agreements and feasibility studies. We recognize revenue under the agreements as costs are incurred. Deferred revenue represents the portion of all refundable and nonrefundable research payments received that have not been earned. In accordance with contract terms, milestone payments from collaborative research agreements are considered reimbursements for costs incurred under the agreements and, accordingly, are generally recognized as revenue either upon the completion of the milestone effort when payments are contingent upon completion of the effort or are based on actual efforts expended over the remaining term of the agreements when payments precede the required efforts. Costs of contract revenues are approximate or are greater than such revenue and are included in research and development expenses. Refundable development and license fee payments are deferred until the specified performance criteria are achieved. Refundable development and license fee payments are generally not refundable once the specific performance criteria are achieved.

       Impairment of Long-Lived Assets

        We review for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values and the loss is recognized on the Statements of Operations.

       Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements

 

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and accompanying notes to the financial statements. These estimates include useful lives for property and equipment and related depreciation calculations, estimated amortization period for payments received from product development and license agreements as they relate to the revenue recognition of deferred revenue and assumptions for valuing options and warrants. Actual results could differ from these estimates.

Three Months Ended June 30, 2004 and 2003

        Contract and License Revenues: Contract revenues for the three months ended June 30, 2004 decreased to $7.1 million from $9.4 million for the same period in 2003. Revenue from Novo Nordisk was $7.0 million for the three months ended June 30, 2004 and $9.3 million for the same period in 2003. Clinical supply and product development activities for the ongoing Phase 3 clinical program with Novo Nordisk were higher for the same period in 2003 and are decreasing as the program matures. Costs associated with collaborative agreements are included in research and development expenses. The Company expects that the revenue from Novo Nordisk may trend down over the coming quarters due to the expected level of activity in support of the ongoing Phase 3 clinical program.

        Research and Development Expenses: Research and development expenses for the three months ended June 30, 2004 decreased to $11.4 million from $14.0 million for the same period in 2003. The decrease in research and development expenses is due to the decrease in Novo Nordisk program activities and continued cost saving efforts.

        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, increase development expense to support Intraject subcutaneous delivery technology, 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 the future success of, and funding levels supported by, our existing development collaborations, as well as obtaining new collaborative agreements.

        Our lead development program is developing pulmonary delivery systems to manage diabetes using insulin with our partner Novo Nordisk. Since Novo Nordisk and we successfully initiated Phase 3 clinical trials in September 2002, we have been focused on supporting our partner in the existing and planned additional Phase 3 clinical trials that will be needed for their regulatory submission and commercial scale-up activities.

        General and Administrative Expenses: General and administrative expenses for the three months ended June 30, 2004 increased by 11.4% to $3.2 million from $2.8 million for the same period in 2003 due to an increase in cost associated with increased marketing and legal expenses, which were slightly offset by lower depreciation.

        Interest Income: Interest income for the three months ended June 30, 2004 decreased to $49,000 from $86,000 for the same period in 2003. The decrease is due to lower average investment portfolio balances and lower yields.

        Interest Expense: Interest expense for the three months ended June 30, 2004 decreased to $5,000 from $39,000 for the same period in 2003. The decrease is primarily due to the pay off of the outstanding capital lease and equipment loan balances under various equipment and lease lines of credit.

        Net Loss: Net loss for the three months ended June 30, 2004 increased by 0.5% to $7.5 million from $7.4 million for the same period in 2003, reflecting lower Novo Nordisk contract revenues and primarily offset by reduced associated development expense.

Six Months Ended June 30, 2004 and 2003

        Contract Revenues: Contract revenues for the six months ended June 30, 2004 decreased by 19.6% to $13.7 million from $17.1 million for the same period in 2003. Revenue from Novo Nordisk was $13.6 million for the six months ended June 30, 2004 and $16.8 million for the same period in 2003. The decrease in revenue is related to lower budgeted Novo Nordisk activities for clinical supply and product

 

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development activities for the ongoing phase 3 clinical program and by lower revenue from other funded programs. Costs associated with collaborative agreements are included in research and development expenses. The Company expects that the revenue from Novo Nordisk may trend down over the coming quarter(s) due to the expected level of activity in support of the ongoing phase 3 clinical program.

        Research and Development Expenses: Research and development expenses for the six months ended June 30, 2004 decreased to $23.3 million from $27.0 million for the same period in 2003. The decrease in research and development expenses is due to the decrease in Novo Nordisk program activities and continued cost saving efforts.

        General and Administrative Expenses: General and administrative expenses for the six months ended June 30, 2004 increased by 3.5% to $5.7 million from $5.5 million for the same period in 2003. The increase is primarily due to higher marketing, insurance, legal and consulting costs.

        Interest Income: Interest income for the six months ended June 30, 2004 decreased to $115,000 from $194,000 for the same period in 2003. The decrease is due to lower invested balances.

        Interest Expense: Interest expense for the six months ended June 30, 2004 decreased to $15,000 from $95,000 for the same period in 2003. The decrease is primarily due to the pay off of the outstanding capital lease and equipment loan balances under various equipment and lease lines of credit.

        Net Loss: Net loss for the six months ended June 30, 2004 decreased to $15.2 million from $15.3 million for the same period in 2003 reflecting lower Novo Nordisk contract revenues and primarily offset by reduced associated development expense.

Liquidity and Capital Resources

        We have financed our 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 June 30, 2004, we had cash, cash equivalents and short-term investments of approximately $18.9 million.

        In January and April 2004, the Company received net proceeds of approximately $786,000 and issued an aggregate of 813,297 shares of Common Stock in connection with the exercise of options and warrants, and the sale of common stock under the Employee Stock Purchase Plan.

        Net cash used in operating activities for the six months ended June 30, 2004 decreased to $10.4 million from $14.3 million for the same period in 2003. As the net loss for the two periods was similar, the significant decline in net cash used in operating activities was primarily the result of the timing of cash payments and receipts for accounts payable and deferred revenue. The accounts payable balance at the end of the second quarter of 2004 was lower than in 2003 due to lower research and development activities. The amortization of deferred revenue decreased in 2004 relative to 2003 due to the significantly higher deferred balance held at year-end 2003 that was recognized as revenue in the first six months of 2004.

        Investing activities for the six months ended June 30, 2004 provided cash of $2.2 million, compared to $0.6 million for the same period in 2003. Higher capital expenditures in 2003 related to the acquisition of certain assets and the intellectual property of related Intraject subcutaneous delivery technology from Weston Medical Group.

        Net cash provided by financing activities for the six months ended June 30, 2004 was $0.4 million, compared to $15.2 million for the same period in 2003. Net cash provided in the six months ended June 30, 2003 was higher as a result of the completion of a private placement financing in March 2003.

        The development of our technology and proposed products, including the Intraject development program, 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. Our 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

 

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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 2004 and beyond. We particularly focus on capital spending requirements to ensure that capital outlays are not expended sooner than necessary. We expect our total annual capital outlays for 2004 will be from $5.0 to $8.0 million. In January 2004, we amended the operating lease for one of our facilities. Effective January 1, 2004, the new agreement reduces the aggregate annual lease payments by $1.1 million through 2006 and increases the aggregate annual payments by $1.1 million from 2007 through 2010. We believe that our existing cash balances at June 30, 2004, funding commitments from corporate development partners and interest earned on our investments should be sufficient to meet our needs for at least the next 12 months. There can be no assurance that our funding commitments from corporate development partners will not be amended or terminated, and if they are amended or terminated, we will need to obtain additional sources of capital sooner than would otherwise be the case.

        If our development programs, including the Intraject development program, continue to progress, 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 June 30, 2004, we had cash, cash equivalents and short-term investments of $18.9 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934), our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

        We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Chief Executive Officer and the Chief Financial Officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.

 

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Changes in Internal Controls

        There were no significant changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

        (a) The Annual Meeting of Shareholders of Aradigm Corporation was held on May 20, 2004.

        (b) Frank H. Barker, Stan M. Benson, Igor Gonda, Stephen O. Jaeger, John M. Nehra, Wayne I. Roe, Richard P. Thompson and Virgil D. Thompson, were elected to the Board of Directors to hold office until the next Annual Meeting of Shareholders and until their successors are elected and qualified.

        (c) The matters voted upon at the meeting and the voting of the shareholders with respect thereto were as follows:

(1a) The election of Frank H. Barker as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified:	For:	52,627,276
	Withheld:	1,697,513
(1b) The election of Stan M. Benson as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified:	For: Withheld:	52,686,256 1,638,533
(1c) The election of Igor Gonda as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified:	For: Withheld:	52,697,958 1,626,831
(1d) The election of Stephen O. Jaeger as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified:	For: Withheld:	52,564,918 1,759,871
(1e) The election of John M. Nehra as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified:	For: Withheld:	52,663,854 1,660,935
(1f) The election of Wayne I. Roe as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified:	For: Withheld:	52,629,756 1,695,033
(1g) The election of Richard P. Thompson as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified:	For: Withheld:	52,670,520 1,654,269
(1h) The election of Virgil D. Thompson as Director to hold office until the next Annual Meeting of Shareholders and until his successor is elected and qualified:	For: Withheld:	52,611,954 1,712,835
(2) Proposal to amend the Company’s Amended and Restated Articles of Incorporation to increase the authorized number of shares of common stock from 100,000,000 to 150,000,000:	For: Against: Abstain:	52,328,415 1,916,505 79,869
(3) Ratification of the selection of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 2004:	For: Against: Abstain:	53,929,761 323,118 71,910

Item 5. Other Information

        On July 26, 2004 we received a letter from the Nasdaq informing us that we were not in compliance with the Nasdaq minimum bid price requirement. Our common stock is currently listed on the Nasdaq National Market and, since June 10, 2004, has had a closing bid price of less than $1.00. Pursuant to the

 

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Nasdaq’s minimum bid price requirement, our common stock could be de-listed from the Nasdaq National Market as a result of trading below $1.00 for 30 consecutive trading days and not trading above $1.00 for 10 consecutive days within the next 180 calendar days. We have until January 24, 2005 to regain compliance with this requirement. If we are unable to meet the Nasdaq requirements to maintain listing on the Nasdaq National Market, our common stock could trade on the Nasdaq Small Cap Market, the OTC Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, will be adversely impacted as a result.

Item 6. Exhibits and Reports on Form 8-K

       (a) Exhibits

       (b) Reports on Form 8-K

 

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SIGNATURES

        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.

	ARADIGM CORPORATION
	(Registrant)
	/s/ V. BRYAN LAWLIS
	V. Bryan Lawlis
	President and Chief Executive Officer
	/s/ THOMAS C. CHESTERMAN
	Thomas C. Chesterman
	Senior Vice President and Chief Financial Officer
Dated: August 13, 2004

 

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INDEX TO EXHIBITS

Exhibit Number		Description
3.7		Certificate of Amendment of Amended and Restated Articles of Incorporation of the Company.
3.8		Certificate of Amendment of Certificate of Determination of Series A Junior Participating Preferred Stock of the Company.
31.1		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.