e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
Or
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o |
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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)
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California
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94-3133088 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
3929 Point Eden Way
Hayward, CA 94545
(Address of principal executive offices including zip code)
(510) 265-9000
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See details of accelerated filer or large accelerated filer as
defined in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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(Class)
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(Outstanding at July 31, 2006) |
Common
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14,765,502 |
ARADIGM CORPORATION
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED FINANCIAL STATEMENTS
ARADIGM CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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June 30, |
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December 31, |
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2006 |
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2005 |
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(Note 1) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
8,407 |
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$ |
27,694 |
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Short-term investments |
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507 |
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Receivables |
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552 |
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400 |
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Current portion of notes receivable from officers and employees |
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20 |
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62 |
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Prepaid expenses and other current assets |
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662 |
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874 |
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Total current assets |
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10,148 |
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29,030 |
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Property and equipment, net |
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6,294 |
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9,875 |
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Non-current portion of notes receivable from officers and employees |
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151 |
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129 |
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Other assets |
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456 |
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463 |
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Total assets |
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$ |
17,049 |
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$ |
39,947 |
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LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS EQUITY (DEFICIT) |
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Current liabilities: |
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Accounts payable |
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$ |
672 |
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$ |
3,034 |
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Accrued clinical and cost of other studies |
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523 |
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398 |
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Accrued compensation |
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3,021 |
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3,814 |
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Deferred revenue |
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217 |
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222 |
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Other accrued liabilities |
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573 |
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475 |
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Total current liabilities |
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5,006 |
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7,943 |
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Non-current portion of deferred rent |
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824 |
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714 |
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Commitments and contingencies |
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Redeemable convertible preferred stock, no par value; 5,000,000 shares
authorized; issued and outstanding shares: 1,544,626 at June 30, 2006
and December 31, 2005; liquidation preference of $41,866 at June 30,
2006 and December 31, 2005 |
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23,669 |
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23,669 |
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Shareholders equity (deficit): |
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Common stock, no par value; 100,000,000 shares authorized; issued and
outstanding shares: 14,765,502 at June 30, 2006 and 14,562,809 at
December 31, 2005 |
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283,107 |
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282,004 |
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Accumulated other comprehensive income (loss) |
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(2 |
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5 |
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Accumulated deficit |
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(295,555 |
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(274,838 |
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Total shareholders equity (deficit) |
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(12,450 |
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7,171 |
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Total liabilities, redeemable convertible preferred
stock and shareholders equity (deficit) |
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$ |
17,049 |
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$ |
39,497 |
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See accompanying Notes to Condensed Financial Statements
3
ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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June 30, |
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2006 |
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2005 |
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Contract and
milestone revenues (including amounts from related parties: 2006 - $18; 2005 - $267) |
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$ |
1,807 |
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$ |
1,212 |
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Operating expenses: |
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Research and development |
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6,357 |
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7,317 |
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General and administrative |
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2,685 |
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2,713 |
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Restructuring and asset impairment |
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5,370 |
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Total operating expenses |
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14,412 |
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10,030 |
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Loss from operations |
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(12,605 |
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(8,818 |
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Interest income |
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135 |
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350 |
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Interest expense and other income (expense ) |
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37 |
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(8 |
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Net loss |
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$ |
(12,433 |
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$ |
(8,476 |
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Basic and diluted net loss per common share |
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$ |
(0.85 |
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$ |
(0.58 |
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Shares used in computing basic and diluted net loss per common share |
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14,656 |
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14,512 |
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See accompanying Notes to Condensed Financial Statements
4
ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Six Months Ended |
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June 30, |
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2006 |
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2005 |
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Contract and
milestone revenues (including amounts from related parties: 2006 - $50; 2005 - $7,711) |
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$ |
2,880 |
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$ |
8,926 |
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Operating expenses: |
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Research and development |
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13,098 |
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14,387 |
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General and administrative |
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5,537 |
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5,948 |
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Restructuring and asset impairment |
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5,370 |
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Total operating expenses |
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24,005 |
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20,335 |
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Loss from operations |
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(21,125 |
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(11,409 |
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Interest income |
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380 |
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638 |
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Interest expense and other income (expense) |
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27 |
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(45 |
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Net loss |
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$ |
(20,717 |
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$ |
(10,816 |
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Basic and diluted net loss per common share |
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$ |
(1.42 |
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$ |
(0.75 |
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Shares used in computing basic and diluted net loss per common share |
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14,614 |
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14,486 |
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See accompanying Notes to Condensed Financial Statements
5
ARADIGM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(20,717 |
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$ |
(10,816 |
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Adjustments to reconcile net loss to cash used in operating activities: |
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Non-cash asset impairment on property and equipment |
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4,000 |
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Depreciation and amortization |
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549 |
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743 |
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Stock-based compensation expense related to employee stock options
and employee stock purchases |
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854 |
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Loss on retirement and sale of property and equipment |
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6 |
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25 |
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Cost of warrants and stock options for services |
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93 |
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Amortization of deferred compensation |
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7 |
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Changes in operating assets and liabilities: |
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Receivables |
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(152 |
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(650 |
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Prepaid and other current assets |
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212 |
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444 |
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Other assets |
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7 |
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(118 |
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Accounts payable |
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(2,362 |
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(248 |
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Accrued compensation |
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(793 |
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147 |
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Other accrued liabilities |
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223 |
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(889 |
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Deferred rent |
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110 |
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(1,337 |
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Deferred revenue |
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(5 |
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(7,472 |
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Net cash used in operating activities |
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(18,068 |
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(20,071 |
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Cash flows from investing activities: |
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Capital expenditures |
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(974 |
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(2,490 |
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Proceeds from the sale of property and equipment |
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50,291 |
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Purchases of available-for-sale investments |
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(514 |
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(5,530 |
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Increase in restricted cash |
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Proceeds from maturities and sales of available-for-sale
investments |
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538 |
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Net cash provided by (used in) investing activities |
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(1,488 |
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42,809 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
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249 |
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254 |
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Proceeds from exercise of options and warrants for common stock
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42 |
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Payments received on notes receivable from officers and employees
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20 |
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30 |
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Net cash provided by financing activities |
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269 |
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326 |
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Net increase (decrease) in cash and cash equivalents |
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(19,287 |
) |
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23,064 |
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Cash and cash equivalents at beginning of period |
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27,694 |
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14,308 |
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Cash and cash equivalents at end of period |
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$ |
8,407 |
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$ |
37,372 |
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See accompanying Notes to Condensed Financial Statements
6
ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
June 30, 2006
1. Organization and Basis of Presentation
Organization
Aradigm Corporation (the Company) is a California corporation engaged in the development and
commercialization of non-invasive drug delivery systems combined with novel formulations creating
products that enable patients to comfortably self-administer biopharmaceuticals and small molecule
drugs. 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. The Company does not anticipate receiving any revenue
from the sale of products in the upcoming year. These factors indicate that the Companys ability
to continue its research, development and commercialization activities is dependent upon the
ability of management to obtain additional financing as required. The Company operates as a single
operating segment.
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to the Securities and
Exchange Commissions rules and regulations. In the opinion of management, the financial statements
reflect all adjustments, which are only of a normal recurring nature, necessary for a fair
presentation. The accompanying condensed financial statements should be read in conjunction with
the financial statements and notes thereto included with the Companys Annual Report on Form 10-K
for the year ended December 31, 2005, as filed with the Securities and Exchange Commission. The
results of the Companys 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, 2005 has been derived from the audited financial statements
at that date, but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. 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.
Revenue Recognition
Contract revenues consist of revenue from collaboration agreements and feasibility studies. We
recognize revenue under the provisions of the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104). Under the agreements, revenue is
recognized 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 to or are greater
than such revenue and are included in research and development expenses. Refundable development and
license fee payments are
7
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 and
accepted.
Impairment or Disposal 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 in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144), Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its eventual disposition.
Future cash flows that are contingent in nature are generally not recognized. 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. We have recorded an impairment charge on long-lived assets during the three and six
months ended June 30, 2006. See Note 8.
3. Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for its stock-based employee compensation
arrangements under the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), as allowed by SFAS No.123, Accounting
for Stock-based Compensation (SFAS No. 123), as amended by SFAS No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure (SFAS No. 148). As a result, no expense was
recognized for options to purchase the Companys common stock that were granted with an exercise
price equal to fair market value at the date of grant and no expense was recognized in connection
with purchases under the Companys employee stock purchase plan.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
(revised 2004) Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123 and supersedes
APB No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of
employee stock options, restricted stock awards and employee stock purchases related to the
Companys employee stock purchase plan, to be recognized in the financial statements based on their
fair values. Subsequent to the effective date, the pro forma disclosures previously permitted under
SFAS No. 123 are no longer an alternative to financial statement recognition. Effective January 1,
2006, we have adopted SFAS No. 123R using the modified-prospective transition method. Under this
method, compensation cost recognized during the three-month and six-month periods ended June 30,
2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123 amortized on a straight-line basis over the options vesting
period, and (b) compensation cost for all share-based payments, including employee stock options,
restricted stock awards and employee stock purchases related to the Companys employee stock
purchase plan, granted subsequent to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of SFAS No. 123R amortized on a straight-line basis over the
awards vesting period. Results for prior periods have not been restated. As a result of adopting
SFAS No. 123R on January 1, 2006, the Companys net loss for the three-month and six month periods
ended June 30, 2006 is higher by $384,000 and $854,000 respectively, than if had continued to
account for stock-based employee compensation under APB No.25. basic and dilute net loss per common
share for the three-month and six-month periods ended June 30, 2006 are $0.03 and $0.06 higher
respectively, than if the Company had continued to account for share based compensation under APB
No.25. As stock-based compensation expense recognized in the statement of operations for the
periods subsequent to the adoption of SFAS No. 123R is based on awards ultimately expected to vest,
it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. In the Companys pro forma information required under SFAS No. 123 for the
periods prior to January 1, 2006, the Company accounted for forfeitures as they occurred. Since the
Company continues to operate at a net loss, the adoption of SFAS No.123R had no tax-related effects
on cash flow from operations and cash flow from financing activities for the three-month and
six-month periods ended June 30, 2006.
8
Employee Stock Plans
As of June 30, 2006, the Company had outstanding shares or options under the following
share-based compensation plans:
2005 Equity Incentive Plan
In April 1996, the Companys Board of Directors adopted and the Companys shareholders
approved the 1996 Equity Incentive Plan (the 1996 Plan), which amended and restated the Companys
earlier equity incentive plan. The original plan reserved 960,000 shares for future grants. During
May 2001, the Companys shareholders approved an amendment to the 1996 Plan to include an evergreen
provision. In 2003, the 1996 Plan was amended to increase the maximum number of shares available
for issuance under the evergreen feature of the 1996 Plan by 400,000 shares to 2,000,000 shares.
The evergreen provision automatically increases the number of shares reserved under the 1996 Plan,
subject to certain limitations, by 6% of the issued and outstanding Common Stock of the Company or
such lesser number of shares as determined by the Board of Directors on the date of the annual
meeting of shareholders of each year beginning 2001 and ending 2005. The aggregate number of shares
reserved for grants was 2,964,278 shares.
Options granted under the 1996 Plan may be immediately exercisable if permitted in the
specific grant approved by the Board of Directors and, if exercised early, the issued shares may be
subject to repurchase provisions. The shares acquired generally vest over a period of four years
from the date of grant. The 1996 Plan also provides for a transition from employee to consultant
status without termination of the vesting period as a result of such transition. Any unvested stock
issued is subject to repurchase agreements whereby the Company has the option to repurchase
unvested shares upon termination of employment at the original issue price. The common stock has
voting rights but does not have resale rights prior to vesting. The Company has repurchased a total
of 7,658 shares in accordance with these agreements through December 31, 1998. Subsequently, no
grants with early exercise provision have been made under the 1996 Plan and no shares have been
repurchased. As of December 31, 2005, the Company had 1,662,883 options outstanding under the 1996
Plan.
In March 2005, the Companys Board of Directors adopted and in May 2005 the Companys
shareholders approved the 2005 Equity Incentive Plan (the 2005 Plan), which amended, restated and
retitled the 1996 Plan. No shares were added to the share reserve under the 2005 Plan other than
the shares available for future issuance under the 1996 Plan. All outstanding awards granted under
the 1996 Plan remain subject to the terms of the 1996 Plan. All stock awards granted on or after
the adoption date are subject to the terms of the 2005 Plan. As of March 21, 2005, the Company had
2,918,638 shares of common stock authorized for issuance under the 1996 Plan. Options (net of
canceled or expired options) covering an aggregate of 1,999,252 shares of the Companys Common
Stock had been granted under the 1996 Plan and 919,386 shares became available for issuance under
the 2005 Plan.
Options granted under the 2005 Plan are immediately exercisable, if expressly permitted in the
specific grant approved by the Board of Directors and, if exercised early, the underlying shares
may be subject to repurchase by the Company. The shares acquired generally expire 10 years from the
date of grant and vest over a period of four years from the date of grant. Options granted under
the 2005 Plan may be either incentive or non-statutory stock options. For incentive and
non-statutory stock option grants, the option price shall be at least 100% and 85%, respectively,
of the fair value on the date of grant, as determined by the Companys Board of Directors. If at
any time the Company grants an option, and the optionee directly or by attribution owns stock
possessing more than 10% of the total combined voting power of all classes of stock of the Company,
the option price shall be at least 110% of the fair value and the option shall not be exercisable
more than five years after the date of grant.
The 2005 Plan also provides for a transition from employee to consultant status without
termination of the vesting period as a result of such transition. Under the 2005 Plan, employees
may exercise options in exchange for a note payable to the Company, if expressly permitted under
the applicable grant. As of June 30, 2006 there were no outstanding notes receivables from
shareholders. Any unvested stock issued is subject to repurchase agreements whereby the Company has
the option to repurchase unvested shares upon termination of employment at the original issue
price. The common stock has voting rights but cannot be resold prior to vesting. No grants with
early exercise provisions have been made under the 2005 Plan and no shares have been repurchased.
During 2006, the Company increased the aggregate number of shares
9
authorized for issuance by 2,000,000 shares and granted options to purchase 700,900 shares of
common stock under the 2005 Plan. As of June 30, 2006, the Company had 1,957,635 shares of common
stock authorized for future issuance under the 2005 Plan (including 179,458 shares cancelled and
transferred in from the 1996 plan and an additional 21,938 shares forfeited and transferred in from
the restricted stock plan).
1996 Non-Employee Directors Plan
The 1996 Non-Employee Directors Stock Option Plan (the Directors Plan) initially had
45,000 shares of common stock authorized for issuance. Options granted under the Directors Plan
expire no later than 10 years from date of grant. The exercise price shall be at 100% of the fair
value on the date of grant as determined by the Board of Directors. The options generally vest
quarterly over a period of one year. During 2000, the Board of Directors approved the termination
of the Directors Plan. Accordingly, no more options can be granted under the Directors plan. The
termination of the Directors Plan had no effect on the options already outstanding. There was no
activity in the Directors Plan during the year ended December 31, 2005 or the six months ended
June 30, 2006. Options to purchase an aggregate of 21,186 shares remain outstanding with no
additional shares available for grant, as of June 30, 2006.
Employee Stock Purchase Plan
In April 1996, the Companys Board of Directors adopted the Employee Stock Purchase Plan (the
Purchase Plan) and the shareholders of the Company approved the adoption of the Purchase Plan in
June 1996. Employees generally are eligible to participate in the Purchase Plan if they have been
continuously employed by the Company for at least 10 days prior to the first day of the offering
period and are customarily employed at least 20 hours per week and at least five months per
calendar year and are not a 5% or greater stockholder. Shares may be purchased under the Purchase
Plan at 85% of the lesser of the fair market value of the common stock on the grant date or
purchase date. Employee contributions, through payroll deductions, are limited to the lesser of
fifteen percent of earnings or $25,000.
As of June 30, 2006 a total of 682,086 shares have been issued under the Purchase plan,
leaving a balance of 367,914 shares available for future issuance.
Pro Forma Information for Period Prior to Adoption of SFAS No.123R
The following table illustrates the effect on net loss and net loss per common share had we
applied the fair value recognition provisions of SFAS No. 123 to account for our employee stock
option and employee stock purchase plans for the three and six months ended June 30, 2005. For
purposes of pro forma disclosure, the estimated fair value of the stock awards, as prescribed by
SFAS No. 123, is amortized, on a straight line basis, to expense over the vesting period of such
awards (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2005 |
|
Net loss, as reported |
|
$ |
(8,476 |
) |
|
$ |
(10,816 |
) |
Add: Stock-based employee compensation expense
included in reported net loss |
|
|
2 |
|
|
|
7 |
|
Less: Total stock-based employee compensation
expense determined under fair value method |
|
|
(867 |
) |
|
|
(1,605 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(9,284 |
) |
|
$ |
(12,414 |
) |
|
|
|
|
|
|
|
Basic and diluted net loss per share, as reported: |
|
$ |
(0.60 |
) |
|
$ |
(0.75 |
) |
|
|
|
|
|
|
|
Basic and diluted pro forma loss per share |
|
$ |
(0.65 |
) |
|
$ |
(0.85 |
) |
|
|
|
|
|
|
|
Note that the above pro forma disclosure was not presented for the three and six months ended
June 30, 2006 because stock-based employee compensation has been accounted for and recognized in
the statement of operations using the fair value recognition method under SFAS No. 123R for these
periods.
10
Valuation Assumptions
SFAS No. 123R requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model. The Company has elected to use the Black-Scholes
option-pricing model to determine the fair-value of stock based awards under SFAS No. 123R,
consistent with that used for pro forma disclosures under SFAS No. 123. The Black-Scholes
option-pricing model incorporates various assumptions including volatility, expected life, and
risk-free interest rates. The expected volatility is based on the historical volatility of the
Companys common stock over the most recent period commensurate with the expected life of the
Companys stock options. The expected life of an award is based on historical experience and on the
terms and conditions of the stock awards granted to employees.
The assumptions used for the three and six months ended June 30, 2006 and 2005 and the
resulting estimates of weighted-average fair value per share of options granted and for stock
purchases during those periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Employee Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
85.8 |
% |
|
|
98.0 |
% |
|
|
85.8 |
% |
|
|
97.9 |
% |
Risk-free interest rate |
|
|
5.1 |
% |
|
|
3.8 |
% |
|
|
4.9 |
% |
|
|
3.7 |
% |
Expected life (years) |
|
|
4.2 |
|
|
|
4.0 |
|
|
|
4.2 |
|
|
|
4.0 |
|
Weighted-average fair value
of options granted during
the periods |
|
$ |
1.11 |
|
|
$ |
3.73 |
|
|
$ |
1.64 |
|
|
$ |
4.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Volatility factor |
|
|
85.7 |
% |
|
|
87.3 |
% |
|
|
85.7 |
% |
|
|
87.3 |
% |
Risk-free interest rate |
|
|
4.8 |
% |
|
|
3.5 |
% |
|
|
4.8 |
% |
|
|
3.5 |
% |
Expected life (years) |
|
|
0.7 |
|
|
|
1.2 |
|
|
|
0.7 |
|
|
|
1.2 |
|
Weighted-average fair value
of employee stock purchases
during the periods |
|
$ |
1.33 |
|
|
$ |
2.67 |
|
|
$ |
1.33 |
|
|
$ |
2.67 |
|
Adoption of SFAS No.123R
The following table shows the effect of SFAS No.123R stock-based employee compensation expense
included in the condensed statement of operations for the three and six month periods ended June
30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30,2006 |
|
|
June 30,2006 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
$ |
207 |
|
|
$ |
469 |
|
General and administrative |
|
|
177 |
|
|
|
385 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
384 |
|
|
$ |
854 |
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per share |
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost as of June 30, 2006.
Since the Company has an accumulated net operating loss, there was no recognized tax benefit during
the three and six months ended June 30, 2006 associated with stock-based compensation expense.
For restricted common stock issued at discounted prices, we recognize compensation expense
over the vesting period for the difference between the exercise or purchase price and the fair
market value on the measurement date. There are 117,562 restricted share awards issued and
outstanding for the period ended June 30, 2006. Total compensation expense for restricted stock
recognized in our financial statements for
11
stock-based awards under SFAS No. 123R was $27,792 and
$41,624 for the three-month and six-month periods ended June 30, 2006 respectively.
Stock Option Activity
A summary of the status of our stock option plans at June 30, 2006 and changes during the
period then ended is presented in the table below (share numbers and aggregate intrinsic value in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
Aggregate |
|
|
Number |
|
Average |
|
Remaining |
|
Intrinsic |
|
|
of |
|
Exercise |
|
Contractual |
|
Value (in |
|
|
Shares |
|
Price |
|
Life |
|
000s) |
Options outstanding at January 1, 2006 |
|
|
1,730 |
|
|
$ |
19.47 |
|
|
|
7.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
1,145 |
|
|
$ |
2.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(645 |
) |
|
$ |
2.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options cancelled |
|
|
(300 |
) |
|
$ |
7.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2006 |
|
|
2,573 |
|
|
$ |
13.28 |
|
|
|
7.83 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2006 |
|
|
1,229 |
|
|
$ |
24.02 |
|
|
|
6.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2006, the Company granted
stock options to
purchase approximately 700,900 shares and 1,144,900 shares respectively, of common stock with an
estimated weighted-average grant-date fair value of $1.69 per share and $2.5 per share,
respectively. The Company granted stock options to purchase an
additional 787,500 shares, with the grant date and the
exercise price set as of the first date on which the grants can be made, following issuance of a
permit by the California Department of Corporations for the 2005 Plan. The Company expects that the
permit will be issued within the next quarter. There were no options exercised during the three
months ended June 30, 2006.
The following table summarizes information about stock options outstanding and exercisable at
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
Number |
|
Contractual |
|
Average |
|
Number |
|
Average |
Range
of |
|
Outstanding |
|
Life |
|
Exercise |
|
Exercisable |
|
Exercise |
Exercise
Price |
|
(in thousands) |
|
(in years) |
|
Price |
|
(in thousands) |
|
Price |
$ 1.29-$ 1.29 |
|
|
300 |
|
|
|
9.99 |
|
|
$ |
1.29 |
|
|
|
0 |
|
|
$ |
0.00 |
|
$ 1.52-$ 1.70 |
|
|
316 |
|
|
|
9.94 |
|
|
$ |
1.69 |
|
|
|
0 |
|
|
$ |
0.00 |
|
$ 3.14-$ 3.14 |
|
|
84 |
|
|
|
9.78 |
|
|
$ |
3.14 |
|
|
|
4 |
|
|
$ |
3.14 |
|
$ 3.63-$ 3.77 |
|
|
338 |
|
|
|
9.68 |
|
|
$ |
3.77 |
|
|
|
1 |
|
|
$ |
3.63 |
|
$ 3.80-$ 5.30 |
|
|
299 |
|
|
|
7.50 |
|
|
$ |
5.02 |
|
|
|
232 |
|
|
$ |
5.01 |
|
$ 5.35-$ 5.95 |
|
|
296 |
|
|
|
8.48 |
|
|
$ |
5.89 |
|
|
|
129 |
|
|
$ |
5.88 |
|
$ 6.25-$ 12.00 |
|
|
301 |
|
|
|
7.55 |
|
|
$ |
10.45 |
|
|
|
226 |
|
|
$ |
10.13 |
|
$ 13.00-$ 24.10 |
|
|
341 |
|
|
|
5.64 |
|
|
$ |
20.67 |
|
|
|
339 |
|
|
$ |
20.72 |
|
$ 25.55-$107.81 |
|
|
258 |
|
|
|
3.23 |
|
|
$ |
53.27 |
|
|
|
258 |
|
|
$ |
53.27 |
|
$112.50-$120.63 |
|
|
40 |
|
|
|
3.65 |
|
|
$ |
113.96 |
|
|
|
40 |
|
|
$ |
113.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,573 |
|
|
|
|
|
|
|
|
|
|
|
1,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average period over which compensation expense related to these options is expected to
be recognized is 1.44 years.
12
4. Net Loss Per Share
Net income (loss) per share is calculated using the weighted average number of shares of
common stock outstanding during the period. The following securities, representing the historical
amounts and not the common stock equivalent amounts, were excluded from the calculation of diluted
loss per share as their effect would be antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Options to purchase common stock |
|
|
|
|
|
|
4,552 |
|
|
|
4,328 |
|
|
|
11,287 |
|
Preferred convertible shares |
|
|
1,235,701 |
|
|
|
1,235,701 |
|
|
|
1,235,701 |
|
|
|
1,235,701 |
|
Unearned restricted stock |
|
|
139,500 |
|
|
|
|
|
|
|
109,690 |
|
|
|
|
|
Warrants to purchase common shares |
|
|
|
|
|
|
120,809 |
|
|
|
|
|
|
|
120,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,375,201 |
|
|
|
1,361,062 |
|
|
|
1,349,719 |
|
|
|
1,367,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Comprehensive Loss
Comprehensive loss includes net loss and other comprehensive loss, which for the Company is
primarily comprised of unrealized holding gains and losses on the Companys available-for-sale
securities that are excluded from the statement of operations in computing net loss and reported
separately in stockholders equity (deficit). Comprehensive loss and its components are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Net loss |
|
$ |
(12,433 |
) |
|
$ |
(8,477 |
) |
|
$ |
(20,717 |
) |
|
$ |
(10,816 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain
(loss) on
available-for-sale
securities |
|
|
3 |
|
|
|
(4 |
) |
|
|
(7 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(12,430 |
) |
|
$ |
(8,481 |
) |
|
$ |
(20,724 |
) |
|
$ |
(10,815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Cash, Cash Equivalents and Investments
The following summarizes the fair value of the Companys cash, cash equivalents and
investments (thousands):
|
|
|
|
|
|
|
|
|
|
|
June |
|
|
December |
|
|
|
30, 2006 |
|
|
31, 2005 |
|
Cash and Cash equivalents: |
|
|
|
|
|
|
|
|
Money market fund |
|
$ |
4,216 |
|
|
$ |
1,321 |
|
Commercial paper |
|
|
4,191 |
|
|
|
26,373 |
|
|
|
|
|
|
|
|
|
|
$ |
8,407 |
|
|
$ |
27,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
Corporate and Government notes |
|
$ |
507 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
We consider all highly liquid investments purchased with a maturity of three months or less to
be cash equivalents. All short-term investments at June 30, 2006 mature in less than one year. We
place our cash and cash equivalents in money market funds, commercial paper, government and
corporate notes.
7. Reverse Stock Split
On January 4, 2006, the Company filed an amendment to its Amended and Restated Certificate of
Incorporation with the California Secretary of State effecting a 1-for-5 reverse split of the
Companys common stock. All share and per share amounts have been retroactively restated in the
accompanying condensed financial statements, notes to the condensed financial statements and
elsewhere in this document for all periods presented.
13
8. Restructuring and Asset Impairment
On May 15, 2006 the Company announced the implementation of a strategic restructuring of its
business operations to focus resources on advancing the current pipeline and developing products in
the area of respiratory care, leveraging the Companys core expertise and intellectual property.
The Company accounted for the restructuring activity in accordance with FAS No. 146, Accounting for
Costs Associated with Exit or Disposal. The restructuring included a reduction in force of 36
employees, the majority of which were research personnel. As of the three and six month periods
ending June 30, 2006, the Company recorded a restructuring charge of $1.4 million primarily related
to the reduction in its workforce, which is included in restructuring and asset impairment expense
line item in the accompanying balance sheet. The Company expects to pay the severance related balance in full by the end of 2007.
The Company recorded a non-cash impairment charge of $4.0 million during the three months
ended June 30, 2006, which was incurred to write down its Intraject-related assets to their net
realizable value. The net realizable value does not include any future contingent milestones or
royalties. The Company anticipates that these assets will be sold in connection with the ongoing
negotiations of the sale of its Intraject platform to a third party.
The following table summarizes the charges and expenditures related to our restructuring and
asset impairment expenses during the three months ended June 30, 2006 (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
Non-cash |
|
|
|
|
|
|
Balance at |
|
Type of Liability |
|
Charges |
|
|
Impairment |
|
|
Payments |
|
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
Quarter Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and related benefits |
|
$ |
1,300 |
|
|
$ |
|
|
|
$ |
261 |
|
|
$ |
1,039 |
|
Out-placement Services |
|
|
70 |
|
|
|
|
|
|
|
17 |
|
|
|
53 |
|
Impairment on Intraject-related assets |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,370 |
|
|
$ |
4,000 |
|
|
$ |
277 |
|
|
$ |
1,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Related Party
Novo Nordisk, A/S and its affiliates, Novo Nordisk Pharmaceuticals, Inc. and NNDT, are
considered related parties, and at June 30, 2006 own approximately 10.7% of the Companys total
outstanding common stock (9.9% on an as-converted basis).
As of January 26, 2005, the Company completed the restructuring of its AERx®iDMS
program, pursuant to the Restructuring Agreement entered into with Novo Nordisk, A/S and NNDT as of
September 28, 2004. At the closing of the restructuring transaction, the Company received $50.3
million in cash, applied $4.0 million of deposits from Novo Nordisk, A/S and recorded $731,000 as
payment for inventory, prepaid, and other assets from NNDT in consideration for $54.5 million of
fixed assets at net book value, $515,000 of inventory and $317,000 for prepaid expenses and other
assets.
As a result of this transaction the Company was no longer obligated to continue work related
to a non-refundable milestone payment from Novo Nordisk, A/S related to the commercialization of
AERx®. Upon consummation of the restructuring, the Company recorded the outstanding
deferred milestone revenue held
on the balance sheet at December 31, 2004 of $5.2 million into revenue. Additionally, the Company
was released from its contractual obligation relating to future operating leases payments for the
two leases assigned to NNDT and accordingly reversed to current period rent expense the deferred
rent expense related to the two buildings of $1.4 million. As a result of the restructuring
transaction, contract revenue from our development agreement with Novo Nordisk, A/S ceased in
January 2005. The Company recorded project development revenue from Novo Nordisk, A/S for the first
26 days of 2005 of approximately $2.3 million related to transition and support agreements entered
into in connection with the restructuring transaction through the six months ended June 30, 2005.
10. Subsequent Event
On July 3, 2006, the Company and Novo Nordisk A/S entered into a Second Amended and Restated
License Agreement (the License Agreement) to reflect; (i) the transfer of certain intellectual
property including all right, title and interest to its patents that contain claims that pertain
generally to breath control
14
or specifically to the pulmonary delivery of monomeric insulin and
monomeric insulin analogs, together with interrelated patents, which are linked via terminal
disclaimers, as well as certain pending patent applications and continuations thereof by the
Company for a cash payment to the Company of $12 million, (ii) a reduction by 100 basis points of
each royalty rate payable by Novo Nordisk to the Company for a cash payment to the Company of $8
million and (iii) a loan to the Company in the principal amount of $ 7.5 million bearing interest
at 5% per annum and payable in three installments of $2.5 million in principal, plus accrued
interest, at June 30, 2012, 2013 and 2014, secured by a pledge of the net royalty stream payable to
the Company by Novo Nordisk pursuant to the amended License Agreement.
The above description is qualified in its entirety by reference to the Second Amended and
Restated License Agreement dated as of July 3, 2006 between the Company and Novo Nordisk A/S, filed
as exhibit 10.27.
On August 10, 2006 the Company announced the appointment of Igor Gonda, Ph.D. as its President
and Chief Executive Officer effective immediately. Dr. Gonda has more than 30 years of
pharmaceutical drug development experience and is currently both a member of the Companys Board of
Directors and Chairman of its Scientific Advisory Board. Most recently, Dr. Gonda was Managing
Director and Chief Executive Officer of Acrux Limited, a publicly
traded specialty pharmaceutical company based in Melbourne,
Australia. Prior to joining Acrux in 2001 Dr. Gonda served as the Companys Chief Scientific
Officer.
Accordingly, Dr. Lawlis is stepping down from his position as Director on the Companys Board
effective immediately. Dr Lawlis will be eligible for severance benefits pursuant to the Companys
severance program set forth in our most recently filed Proxy and other SEC filings.
Item 2. MANAGEMENTS 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 our most recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Our 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 update these forward-looking statements in light of events or
circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.
Overview
Aradigm Corporation is a leading developer of innovative drug delivery systems that enable
patients to self-administer liquid drugs. Our hand-held AERx® delivery system is
designed for the rapid and reproducible delivery of a wide range of pharmaceutical drugs and
biotech compounds either to the lungs for respiratory conditions or through the lung to treat
systemic disease. We believe that our patient-friendly delivery systems, AERx and the Intraject
needle-free injector, will be welcome alternatives to injection-based drug delivery. In addition,
both of our systems may improve therapeutic efficacy and safety in cases where other existing drug
administration methods, such as pills, transdermal patches, other types of inhalers or auto
injectors, deliver too slowly or lead to poor compliance by patients due to fear of needles or
inadequate administration technique.
15
Since our inception in 1991,
we have been engaged in the development of needle-free drug
delivery systems. We have not been profitable since inception and expect to incur additional
operating losses over the next several years as research and
development efforts continue, including
preclinical and clinical testing activities. To date, we have not had any product sales and do not
anticipate receiving any revenue from the sale of products in 2006. As of June 30, 2006 we had an
accumulated deficit of $295.6 million. The sources of working capital have been equity financings,
equipment lease financings, contract and license revenues and interest earned on investments.
AERx® Technology Platform
Our proprietary AERx® technology platform enables pulmonary delivery of a wide
range of pharmaceuticals in liquid formulations for local or systemic effect. Efficient and
reproducible delivery of medication to the lung with the AERx® hand-held systems is
achieved through unique small-particle aerosol generation and by control of patient inhalation. We
have developed these proprietary technologies by an integrated approach that combines expertise in
physics, engineering, and pharmaceutical sciences.
AERx® Diabetes Management System
The AERx® insulin Diabetes Management System (AERx®iDMS) permits
patients with diabetes to non-invasively self-administer insulin. We believe that when patients are
provided a non-invasive delivery alternative to injection, they will be more likely to
self-administer insulin as often as needed to keep tight control of their blood-glucose levels. In
January 2005, we completed the restructuring of the AERx®iDMS program, pursuant to the
Restructuring Agreement entered into with Novo Nordisk and Novo Nordisk Delivery Technologies Inc.
(NNDT), a newly created wholly owned subsidiary of Novo Nordisk, in September 2004. Under our
current agreement with Novo Nordisk, Novo Nordisk has assumed responsibility for the completion of
development, manufacturing and commercialization of the AERx® insulin product, and we
have no further material financial or operational commitments for this program. We will be entitled
to royalties on future sales of the commercialized product.
AERx® Hydrochloroquine
The AERx® Hydrochloroquine (HCQ) program is investigating a novel aerosolized
formulation of HCQ as a treatment for asthma. In oral formulations, HCQ is currently a treatment
for lupus and rheumatoid arthritis as an alternative to steroid therapy. It is our belief that a
targeted local pulmonary delivery application combined with a patented formulation could result in
an innovative asthma treatment. Currently, the HCQ program is in Phase 2 clinical trials and is
partnered with APT Pharmaceuticals (APT), a privately held biotechnology company. The program has
advanced following a positive Phase 1 study in healthy volunteers, which has determined that
AERx®-delivered HCQ had a favorable safety and tolerability profile. We believe that
this product may have similar anti-inflammatory properties to inhaled steroids but with a
potentially improved safety profile. According to Datamonitor, a leader in market intelligence, in
2005 asthma affected 41.5 million people, with the highest prevalence occurring in the U.S. and
U.K., with 9.5 million of those affected being children. The annual treatment costs of asthma,
including indirect costs, are estimated to be $16.1 billion in the US and $16.3 billion in the EU.
Liposomal Ciprofloxacin
Each of our two liposomal ciprofloxacin programs utilizes a novel patented formulation of a
powerful anti-infective to treat bio-terrorism-related disease and infections related to cystic
fibrosis (CF). The liposomal ciprofloxacin bioterrorism program is partnered with the Canadian
Department of Defense to develop a treatment and prophylaxis for inhaled anthrax. Ciprofloxacin, or
Cipro, as it is more commonly known, is a widely used anti-infective agent for the treatment of a
variety of bacterial infections. As part of this partnership we have licensed the rights to a
patented formulation of the drug that is designed to (1) enhance the duration of action of the drug
in the lung to provide extended duration of protection and treatment against infection and (2)
enable better interaction of the drug with the disease target.
The second program
utilizing the same formulation of liposomal ciprofloxacin is in the
treatment and control of respiratory infections related to CF. The preclinical data developed for
the inhaled anthrax program above is being used to assess and potentially develop this opportunity.
CF is a severely debilitating genetic disease that commonly affects a persons breathing and
digestion patterns. In particular, CF patients may develop life-threatening lung infections that
require treatment with antibiotics. Treatment of these
16
infections by direct administration of
antibiotics to the lung may improve both the safety, efficacy of the treatment compared to oral
administration, as well as convenience compared injections. Currently, there is only one
inhalation antibiotic approved for the treatment of this disease. We believe an alternative
treatment, if proven safe and effective, would be valuable for CF patients. CF affects roughly
30,000 children and adults in the United States and roughly 60,000 worldwide. According to the
Centers for Disease Control, the majority of studies done in the early 1990s state that the annual
direct medical care costs for an individual with CF were $15,000 to $20,000 (1996 dollars).
AERx® Smoking Cessation
Our AERx® Smoking Cessation product is based on the capabilities of the
AERx® system to titrate and deliver accurate doses of small droplet aerosols to the deep
lung for systemic uptake. We believe that this system that employs a liquid nicotine formulation
combined with our delivery system, and using an algorithm that gradually diminishes the nicotine
doses over time, offers both patients and physicians an attractive tool for nicotine cessation
therapy. We further believe that by creating such a product that mimics the pharmacokinetic profile
of nicotine resulting from inhalation of tobacco smoke, but without the risks associated with the
products of tobacco combustion we will be addressing an unmet need for patients wanting to quit but
unable to do so due to their addiction. We think that such a product if proven safe and effective,
could further expand the available treatment options for smoking cessation. (According to Decision
Resources, the smoking cessation market, currently dominated by nicotine replacement treatments, in
the form of transdermal patches, gums, and nasal sprays, is expected to increase to nearly $1.5
billion by 2007.)
AERx® Treprostinil
AERx® Treprostinil product is a novel, sustained-release inhaled liposomal
formulation for the treatment of pulmonary arterial hypertension (PAH). This product is being
developed as part of a commercial agreement with United Therapeutics, a leader in cardiovascular
therapies, to deliver an aerosolized formulation of their drug treprostinil, marketed as Remodulin,
an approved and marketed intravenously or subcutaneously delivered prostacyclin analogue. We
believe that the AERx® delivery system offers a non-invasive and more direct approach to
treatment over the currently available methods. According to Decision Resources, in 2003, PAH
affected over 130,000 people worldwide with sales of related medical treatments of $600 million per
year and are expected to reach $1.2 billion by 2013. Patients with PAH experience elevated blood
pressure in the pulmonary arteries. Symptoms of the disease include fatigue, shortness of breath on
exertion, chest pain and dizziness. When left untreated, the median survival time following
diagnosis may be as short as three years.
Potential Product Applications
We believe the AERx® platform is positioned to address multiple therapeutic disease
areas in a manner that is competitive against other delivery technologies. We have demonstrated to
date, in human clinical trials, effective deposition and, where required, systemic absorption of a
wide variety of drugs including small molecules, peptides and proteins using our AERx delivery
systems. We are developing the hand-held AERx® system based on a comprehensive approach
to pulmonary drug delivery that includes drug formulation, aerosol generation, patient breath
control and compliance monitoring technologies. We are currently developing AERx®
products for applications in respiratory diseases such as asthma and chronic
obstructive pulmonary disease (COPD). In addition, we have extensive experience using the
AERx® system for the non-invasive delivery of certain other drugs, including proteins,
peptides oligonucleotides, gene products and small molecules.
Intraject
Intraject, a pen-sized, pre-filled, single-use system, is designed to enable patients and
healthcare workers to deliver precise, measured doses of drug to the subcutaneous layer of the skin
without the use of needles. The Companys most advanced Intraject application is for the delivery
of Sumatriptan, developed as a needle-free alternative for migraine sufferers. The Company
completed the manufacture of registration batches to be used as a basis for regulatory approval in
2005.
With this milestone achieved, and commercial scale production now explicitly demonstrated, the
Company has not invested further in this platform. Furthermore, the Company has engaged in a
process of
17
investigating strategic alternatives for the Intraject program, including the potential sale
or spin-off. The Company is currently finalizing negotiations in this regard. In connection with a
potential sale of assets related to the Intraject platform, the Company has recognized an asset
impairment of approximately $4 million to reflect the net realizable value of these assets. The net
realizable value does not include any future contingent milestones or royalties.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, stock-based
compensation, and impairment of long-lived assets 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. The
preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires us to make estimates and assumptions that affect the amounts reported in the
financial statements 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, warrants
and other stock based compensation. Our actual results could differ from these estimates.
Revenue Recognition
Contract revenues consist of revenue from collaboration agreements and feasibility studies. We
recognize revenue under the provisions of the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104). Under the agreements, revenue is
recognized 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 to 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 and accepted.
Impairment or Disposal 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 in accordance with SFAS No.144.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. Future cash flows that are contingent in
nature are generally not recognized. 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. We recorded a
non-cash impairment charge of $4.0 million during the three months ended June 30, 2006 related to
our estimate of the net realizable value of the Intraject related assets.
Stock-Based Compensation Expense
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R
using the modified prospective transition method and, therefore, have not restated prior periods
results. Under this method, we recognize compensation expense, net of estimated forfeitures, for
all stock-based payments granted after January 1, 2006 and all stock based payments granted prior
to but not vested as of January 1, 2006.
Under the provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant
date based on the awards fair value and is recognized as expense, net of estimated forfeitures,
ratably over the requisite vesting period. We have elected to calculate an awards fair value based
on the Black-Scholes
option-pricing model. The Black-Scholes model requires various assumptions including expected
option
18
life and volatility. If any of the assumptions used in the Black-Scholes model or the
estimated forfeiture rate change significantly, stock-based compensation expense may differ
materially in the future from that recorded in the current period.
Under SFAS No. 123R, we recognized compensation expense for stock-based compensation of
$384,000 and $854,000, respectively, for the three and six months ended June 30, 2006.
Results of Operations
Three Months Ended June 30, 2006 and 2005
Total revenue consists of contract and milestone revenue. Our revenue in the three-month
periods ended June 30, 2006 and 2005 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue |
|
$ |
1,710 |
|
|
$ |
1,212 |
|
|
$ |
498 |
|
|
|
41 |
% |
Percentage of Total Revenue |
|
|
95 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
Milestone revenue |
|
|
97 |
|
|
|
|
|
|
|
97 |
|
|
|
100 |
% |
Percentage of Total Revenue |
|
|
5 |
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
1,807 |
|
|
$ |
1,212 |
|
|
$ |
595 |
|
|
|
(49% |
) |
Total contract revenue increased 41% for the second quarter of 2006 over the comparable period
in 2005 due to increases in contract revenues of our continuing AERx® programs.
Increases of $603,000 and $107,000 were due to AERx® CF and AERx® PAH
respectively. AERx® HCQ program contract revenue increased by $92,000 and an additional
$9,000 was recorded for the AERx® nicotine program. These increases in contract revenue
are offset by a decrease in revenue of $249,000 from AERx® iDMS Consulting agreement
which ended on January 26, 2006, and a decrease of $64,000 related to AERx® Pulmoshield
program which was completed in second quarter 2006. Milestone revenue increased by $97,000 for the
second quarter of fiscal 2006 from our AERx® HCQ development program which continued
from 2005.
Cost and Expenses: Our cost and expenses for the three-month periods ended June 30, 2006 and,
2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Research and Development Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative |
|
$ |
1,653 |
|
|
$ |
1,183 |
|
|
$ |
470 |
|
|
|
40 |
% |
Self-Funded |
|
|
4,704 |
|
|
|
6,134 |
|
|
|
(1,430 |
) |
|
|
(23 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Research and Development Expense |
|
$ |
6,357 |
|
|
$ |
7,317 |
|
|
$ |
(960 |
) |
|
|
(15 |
)% |
Research and Development. Research and development expenses include salaries, payments to
contract manufacturers, and contract research organizations, contractor and consultant fees,
stock-based compensation expense, and other support costs including facilities, depreciation and
travel costs. Stock based compensation expense charged to research and development for the three
months ended June 30, 2006 was $207,000 due to the adoption of SFAS No.123R effective January 1,
2006.
Collaborative research and development expense increased 40% due primarily to the Companys
continuing development of its existing AERx programs including AERx Nicotine and Liposomal
Treprostinol programs. Self funded research and development expense decreased by 23% due primarily
to the completion of the Intraject program clinical batch registration lot activities, substantially
completed at year-end 2005 and finalized in early 2006.
19
The Company expects its research and development expenses to remain relatively constant over
the next few quarters, as it continues to develop its AERx programs and increases its focus on drug
development.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2006 |
|
2005 |
|
Dollars |
|
Percent |
General and Administrative Expenses |
|
$ |
2,685 |
|
|
$ |
2,713 |
|
|
$ |
(28 |
) |
|
|
(1 |
)% |
General and Administrative. General and administrative expenses are comprised of salaries,
legal fees including those associated with the establishment and protection of our patents,
insurance, marketing research, contractor and consultant fees, stock based compensation expense,
and other support costs including facilities, depreciation and travel costs. Stock based
compensation expense charged to general and administrative expenses for the three months ended June
30, 2006 was $28,000 due to the adoption of SFAS No.123R effective January 1, 2006.
General and administrative expenses for the three months ended June 30, 2006 increased over
the comparable period in 2005 due primarily to severance related expenses, an increase in employee
stock based compensation and an increase in associated legal expense resulting from the Companys
restructuring activity. The increase was offset by a reduction in associated costs for building and
maintenance costs, labor benefits, insurance expense and marketing expense. The Company expects
that its general and administrative expenses will remain relatively constant or reduced slightly
over the next few quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2006 |
|
2005 |
|
Dollars |
|
Percent |
Restructuring and Asset Impairment Expenses |
|
$ |
5,370 |
|
|
$ |
|
|
|
$ |
5,370 |
|
|
|
100 |
% |
Restructuring and Asset Impairment. Restructuring and asset impairment expenses are comprised
of severance related expenses including payroll, health insurance expenses, outplacement expenses
and Intraject related asset impairment expenses. Severance related expense for the three months
ended June 30, 2006 was $1.4 million. Non-cash asset impairment charge was $4.0 million for the
three month period ended June 30, 2006. The Company recorded a non-cash impairment charge of $4.0
million during the three months ended June 30, 2006, to write down its Intraject-related assets to
their net realizable value. The net realizable value does not include any future contingent
milestones or royalties. The Company anticipates that these assets will be sold in connection with
the ongoing negotiations of the sale of its Intraject platform to a third party.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Interest Income, Interest and Other Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
$ |
135 |
|
|
$ |
350 |
|
|
$ |
(215 |
) |
|
|
(61 |
)% |
Interest and Other income (expense) |
|
|
37 |
|
|
|
(8 |
) |
|
|
45 |
|
|
|
563 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income, Interest and Other Expense |
|
$ |
172 |
|
|
$ |
341 |
|
|
$ |
(170 |
) |
|
|
(49 |
)% |
Interest income for the three months ended June 30, 2006 decreased 61 % over the comparable
period in 2005 due to a lower average invested balance. Interest and Other income and expenses for
the three months ended June 30, 2006, primarily represent exchange rate gain realized on revenue
transactions.
20
Six Months Ended June 30, 2006 and 2005
Total revenue consists of contract and milestone revenue. Our revenue for the six-month
periods ended June 30, 2006 and June 30, 2005 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue |
|
$ |
2,686 |
|
|
$ |
3,740 |
|
|
$ |
(1,054 |
) |
|
|
(28 |
%) |
Percentage of Total Revenue |
|
|
93 |
% |
|
|
42 |
% |
|
|
|
|
|
|
|
|
Milestone revenue |
|
|
194 |
|
|
|
5,186 |
|
|
|
(4,992 |
) |
|
|
(96 |
%) |
Percentage of Total Revenue |
|
|
7 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
2,880 |
|
|
$ |
8,926 |
|
|
$ |
(6,046 |
) |
|
|
(68 |
%) |
Total revenue decreased 68% for the six months ended June 30, 2006 over the comparable period
in fiscal 2005 due to decreases in both contract and milestone revenues. The primary reason for the
decreases in both milestone and contract revenue was the result of concluding the Novo Nordisk
Development iDMS Restructuring Agreement on January 26, 2005. In the six month period ended June
30, 2006, we recorded increased contract revenue of $1.5 million from our AERx® programs
including AERx® CF, AERx® PAH, AERx® HCQ and AERx®
nicotine for $683,000, $423,000, $241,000 and $166,000 respectively. This increase was primarily
offset by a net decrease in contract revenue of $2.1 million due to the Novo Nordisk Restructuring
Agreement and $0.4 million from the Novo Nordisk A/S transition service agreement that ended on
January 27, 2006. Milestone revenue for the six month period ended June 30, 2006 decreased by $5.2
million primarily due to the conclusion of Novo Nordisk restructuring agreement on January 26, 2005
offset by an increase of $194,000 for our AERx® HCQ development program.
Cost and Expenses: Our cost and expenses for the six-month periods ended June 30, 2006 and
2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Research and Development Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaborative |
|
$ |
2,882 |
|
|
$ |
3,231 |
|
|
$ |
(349 |
) |
|
|
(11 |
)% |
Self-Funded |
|
|
10,216 |
|
|
|
11,156 |
|
|
|
(940 |
) |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Research and Development Expense |
|
$ |
13,098 |
|
|
$ |
14,387 |
|
|
$ |
(1,289 |
) |
|
|
(9 |
)% |
Research and Development: Research and development expenses include salaries, payments to
contract manufacturers, and contract research organizations, contractor and consultant fees,
stock-based compensation expense, and other support costs including facilities, depreciation and
travel costs. Stock based compensation expense charged to research and development for the six
months ended June 30, 2006 was $469,000 due to the adoption of SFAS No.123R effective January 1,
2006.
Collaborative program expenses in the six months ended June 30, 2006 decreased by $349,000 due
to the conclusion of the Novo Nordisk Development restructuring agreement in the first six months
of 2005. Similarly, research and development expense for self-funded projects decreased by $940,000
due primarily to reductions in the Companys AERx development programs and the Companys Intraject
clinical batch registration lot activities substantially completed at year-end 2005 and finalized
in early 2006. The Company expects that its research and development expenses will remain
relatively constant over the next few quarters as the Company redirects its focus from Intraject to
its pulmonary programs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2006 |
|
2005 |
|
Dollars |
|
Percent |
General and Administrative Expenses |
|
$ |
5,537 |
|
|
$ |
5,948 |
|
|
$ |
(411 |
) |
|
|
(7 |
)% |
General and Administrative. General and administrative expenses are comprised of salaries,
legal fees including those associated with the establishment and protection of our patents,
insurance, marketing research, contractor and consultant fees, stock based compensation expense,
and other support costs including facilities, depreciation and travel costs. Stock based
compensation expense charged to general
21
and administrative expenses for the six months ended June
30, 2006 was $385,000 due to the adoption of SFAS 123R effective January 1, 2006.
General and administrative expenses for the six months ended June 30, 2006 decreased over the
comparable period in 2005 primarily as the result of concluding the Novo Nordisk Development
Restructuring Agreement on January 26, 2005. As a result of the restructuring agreement associated
costs for building and maintenance costs, labor, labor benefits and insurance expense were reduced.
The reduction in expense was offset by the increase in stock based compensation. The Company
expects that its general and administrative expenses will remain relatively constant over the next
few quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
Change in |
|
Change in |
|
|
2006 |
|
2005 |
|
Dollars |
|
Percent |
Restructuring and Asset Impairment Expenses |
|
$ |
5,370 |
|
|
$ |
|
|
|
$ |
5,370 |
|
|
|
100 |
% |
Restructuring and Asset Impairment. Restructuring and asset impairment expenses are comprised
of severance related expenses including payroll, health insurance payments, outplacement expenses
and Intraject related asset impairment expenses. Severance related expense for the six months ended
June 30, 2006 was $1.4 million. Non-cash asset impairment charge was $4.0 million for the six month
period ended June 30, 2006. The Company recorded a non-cash impairment charge of $4.0 million to
write down its Intraject-related assets to their net realizable value. The net realizable value
does not include any future contingent milestones or royalties. The Company anticipates that these
assets will be sold in connection with the ongoing negotiations of the sale of its Intraject
platform to a third party.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
Change in |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
Interest Income, Interest and Other Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
$ |
380 |
|
|
$ |
638 |
|
|
$ |
(258 |
) |
|
|
(40 |
)% |
Interest and Other Income (Expense) |
|
|
27 |
|
|
|
(45 |
) |
|
|
72 |
|
|
|
160 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income, Interest and Other Expense |
|
$ |
407 |
|
|
$ |
593 |
|
|
$ |
186 |
|
|
|
(31 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income for the six months ended June 30, 2006 decreased 40 % over the comparable
period in 2005 due to a lower average invested balance. Interest and other income and expenses
primarily represent realized gains from exchange rate transactions and loss on the disposition of
assets. The gain reported in the six-month period ended June 30, 2006, primarily reflected the gain
on exchange rate transactions offset by the loss on sale of asset. The loss reported in the second
quarter of 2005 is the loss recognized from exchange rate transactions and on the retirement of the
assets located at our leased facility warehouse. The Company allowed the lease on that facility to
lapse as we no longer needed the space.
Liquidity and Capital Resources
As of June 30, 2006, we had cash, cash equivalents and short-term investments of $8.9 million
and total working capital of $5.1 million. Our principal requirements for cash are to fund working
capital needs, and, to a lesser extent, capital expenditures for equipment purchases.
For the six months ended June 30, 2006, our operating activities used net cash of $18.1
million and reflect our net loss of $20.7 million offset by non-cash charges including stock-based
compensation expense under SFAS No. 123R, impairment charges on property and equipment and
depreciation expense and our use of operating cash to fund changes in operating assets and
liabilities. Cash was used to pay for an increase in invoices outstanding for the Intraject
project, to pay for severance related expenses accrued for the reduction in workforce and to fund
accounts receivable, primarily related to the partnered programs. This compares to the net cash
used in our operating activities for the six months ended June 30, 2005 of
$20.1 million reflecting our net loss of $10.8 million offset by non-cash charges including
depreciation expense and our use of cash to fund changes in operating assets and liabilities. The
primary reduction in operating assets and liabilities of $10.1 million is due primarily to the
recognition of the deferred revenue of $7.5 million, and reduction of deferred rent of $1.3
million, recognized in the statement of operations in the six month period ended June 30, 2005 in
conjunction with the Novo Nordisk restructuring agreement.
22
For the six month period ended June 30, 2006, our net cash used in investing activities was
$1.5 million. We used $974,000 for purchases of equipment primarily for the Intraject
commercialization program and $514,000 was used to purchase short term investments. This compares
to net cash provided by investing activities for the six month period ended June 30, 2005 of $42.8
million which consisted primarily of $50.3 million in net proceeds from NNDT in connection with the
restructuring agreement, offset by our purchase of $2.5 million of fixed assets relating to our
Intraject platform and our purchases of $5.5 million in securities classified as short-term
investments with funds received in connection with the restructuring agreement.
Net cash provided by financing activities was $269,000 for the six months ended June 30, 2006
compared to $326,000 for the comparable period in the prior year. Net cash provided by financing
activities was attributable primarily to purchases under our employee stock plans.
As of June 30, 2006, we had an accumulated deficit of $295.6 million, working capital of $5.1
million, and a shareholders deficit of $12.5 million. Management believes that cash and cash
equivalents on hand at June 30, 2006 together with expected funding to be received under additional
collaborative arrangements, or equity or debt financing(s) will be sufficient to enable us to meet
our obligations through at least the next twelve months. Shareholders equity is negative and is
expected to remain negative absent additional equity financing or conversion of redeemable
preferred stock.
See Notes to Financial Statements, Subsequent Event for additional information.
Contractual Obligations
Our contractual obligations and future minimum lease payments that are non-cancelable at June
30, 2006 are disclosed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
(amounts in thousands) |
|
|
|
Total |
|
|
2006 (1) |
|
|
2007/2008 |
|
|
2009/2010 |
|
|
2011+ |
|
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
22,174 |
|
|
$ |
812 |
|
|
$ |
4,798 |
|
|
$ |
4,631 |
|
|
$ |
11,933 |
|
Unconditional purchase obligations |
|
|
2,255 |
|
|
|
2,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments |
|
$ |
24,429 |
|
|
$ |
3,067 |
|
|
$ |
4,798 |
|
|
$ |
4,631 |
|
|
$ |
11,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For six months ending June 30, 2006 |
Off-Balance Sheet Financings and Liabilities
Other than contractual obligations incurred in the normal course of business, we do not have
any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or
contingent interests in transferred assets or any obligation arising out of a material variable
interest in an unconsolidated entity. We do not have any majority-owned subsidiaries.
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, 2006, we had cash, cash equivalents and short-term investments of $8.9 million,
consisting of cash, cash equivalents and highly liquid short-term investments. Our short-term
investments will likely decline by an immaterial amount if market interest rates increase, and
therefore, we believe our exposure to interest rate changes has been immaterial. Declines of
interest rates over time will, however, reduce our interest income from short-term investments
23
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Based on their evaluation of our disclosure
controls and procedures (as defined in the rules 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 to ensure
that information required to be disclosed in this report was recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms.
Changes in internal control. 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.
Limitations on the effectiveness of controls. 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 our
chief executive officer and our chief financial officer have concluded that these controls and
procedures are effective at the reasonable assurance level.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. RISK FACTORS
In addition to the other information contained in this Form 10-Q, and risk factors set forth
in our most recently filed Form 10-K and other SEC filings, the following risk factors should be
considered carefully in evaluating our business. Our business, financial condition, or results of
operations could be materially adversely affected by any of these risks. Please note that
additional risks not presently known to us or that we currently deem immaterial may also impair our
business and operations.
The Companys common stock currently trades on the Nasdaq Capital Market and may be subject to
delisting.
The Companys common stock currently trades on the Nasdaq Capital Market. On May 18, 2006 the
Company received a notice from Nasdaq indicating that the Company has failed to comply with
Marketplace Rule requiring a market value of listed securities of $35 million and stockholders
equity of at least $2.5 million or net income from continuing operations of at least $500,000 in
the last completed fiscal year or two of the last three completed fiscal years, respectively. On
June 23, 2006 the Company was notified by Nasdaq that the Companys grace period for regaining
compliance had run and that it no longer met the criteria necessary for continued listing on the
Nasdaq Capital Markets.
On August 3, 2006, the Company attended a hearing with the Nasdaq Listing Qualifications Panel
to appeal the Nasdaq Staff Determination to delist the Companys securities. At the hearing the
Company presented a plan to regain and maintain compliance with all applicable maintenance criteria
on the Nasdaq Capital Markets. A final determination from the panel is expected in the next 30
days. If the Company is unable to remain listed on the Nasdaq Capital Market, it may only be traded on the Pink
Sheets®, which may further reduce the liquidity of, and adversely affect the price of
the Companys stock. There is no guarantee that the Company will be able to meet the initial
listing standards to reapply for trading on the Nasdaq Global Market and, additionally, there is no
guarantee the Company will meet the continued listing requirements to continue trading on the
Nasdaq Capital Market.
We may not be able to effectively implement our restructuring activities, and our restructuring
activities may not result in the expected benefits, which would negatively impact our future
results of operations.
24
In May 2006, the Company restructured its operations, which included the shutdown of its
Intraject program and a reduction in size of its workforce, majority of which were research
personnel. Despite its restructuring efforts, the Company cannot assure that it will achieve all of
the operating expense reductions and improvements in operating margins and cash flows currently
anticipated from these restructuring activities in the periods contemplated, or at all. The
Companys inability to realize these benefits, and its failure to appropriately structure its
business to meet market conditions, could negatively impact the results of operations. This
reduction in staffing levels could require the Company to forego certain future opportunities due
to resource limitations, which could negatively affect its long-term revenues. In addition, these
workforce reductions could result in a lack of focus and reduced productivity by remaining
employees due to changes in responsibilities or concern about future prospects, which in turn may
negatively affect the Companys future revenues. Further, the Company believes its future success
depends, in large part, on its ability to attract and retain highly skilled personnel. The
Companys restructuring activities could negatively affect its ability to attract such personnel as
a result of perceived risk of future workforce reductions. The Company cannot assure that it will
not be required to implement further restructuring activities or reductions in its workforce based
on changes in the markets and industries in which it competes or that any future restructuring
efforts will be successful.
Other than as discussed above, there have been no material changes to the risk factors
previously included in our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Companys Annual Meeting of Stockholders held on May 18, 2006, three matters were voted
upon. A description of each matter and tabulation of the votes for each of the matters is as
follows:
1. |
|
To elect directors nominees to hold office until the next Annual Meeting of Shareholders or
until their successors are elected: |
|
|
|
|
|
|
|
|
|
|
|
Votes |
Nominee |
|
For |
|
Withheld |
Frank H. Barker |
|
|
11,850,567 |
|
|
|
405,878 |
|
Igor Gonda |
|
|
11,216,431 |
|
|
|
1,040,014 |
|
Stephen O. Jaeger |
|
|
11,714,067 |
|
|
|
542,378 |
|
V. Bryan Lawlis |
|
|
11,821,347 |
|
|
|
435,098 |
|
Virgil D. Thompson |
|
|
11,718,568 |
|
|
|
537,877 |
|
2. |
|
To approve the Companys 2005 Equity Incentive Plan, as amended and restated, to increase the
aggregate number of shares of common stock authorized for issuance under such plan by
2,000,000 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
|
For |
|
Against |
|
Abstain |
|
|
|
5,356,634 |
|
|
|
1,510,034 |
|
|
|
75,600 |
|
3. |
|
To ratify the selection of Ernst and Young LLP as the Companys independent registered public
accounting firm for the fiscal year ending December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
|
For |
|
Against |
|
Abstain |
|
|
|
12,075,810 |
|
|
|
148,515 |
|
|
|
32,120 |
|
25
Item 6. EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.27*
|
|
Second Amended and Restated License Agreement dated as of July 3, 2006 between
the Company and Novo Nordisk A/S |
|
|
|
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. |
|
|
|
* |
|
Confidential treatment has been requested with respect to portions of this exhibit |
26
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/ Igor Gonda |
|
|
Igor Gonda |
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
/s/ Thomas C. Chesterman
|
|
|
Thomas C. Chesterman |
|
|
Senior Vice President and Chief Financial Officer |
|
|
Dated: August 14, 2006
27
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.27*
|
|
Second Amended and Restated License Agreement dated as of July 3, 2006 between
the Company and Novo Nordisk A/S |
|
|
|
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. |
|
|
|
* |
|
Confidential treatment has been requested with respect to portions of this exhibit |
28