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, 2011
or
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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: 000-28402
Aradigm Corporation
(Exact name of registrant as specified in its charter)
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California
(State or other jurisdiction of
incorporation or organization)
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94-3133088
(I.R.S. Employer
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 has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(do not check if a smaller reporting company)
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Smaller reporting company 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)
Common
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(Outstanding at August 1, 2011)
198,114,301 |
ARADIGM CORPORATION
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ARADIGM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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June 30, |
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December 31, |
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2011 |
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2010 |
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(Unaudited) |
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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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$ |
8,481 |
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$ |
5,295 |
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Short-term investments |
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899 |
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251 |
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Receivables |
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97 |
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180 |
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Prepaid and other current assets |
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480 |
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180 |
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Total current assets |
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9,957 |
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5,906 |
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Property and equipment, net |
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1,319 |
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1,553 |
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Notes receivable |
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56 |
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54 |
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Other assets |
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583 |
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115 |
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Total assets |
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$ |
11,915 |
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$ |
7,628 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
212 |
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$ |
257 |
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Accrued clinical and cost of other studies |
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921 |
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993 |
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Accrued compensation |
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716 |
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327 |
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Facility lease exit obligation |
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108 |
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99 |
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Other accrued liabilities |
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778 |
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450 |
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Total current liabilities |
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2,735 |
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2,126 |
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Deferred rent |
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121 |
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99 |
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Facility lease exit obligation, non-current |
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677 |
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729 |
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Other non-current liabilities |
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75 |
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75 |
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Note payable, net of discount and accrued interest |
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8,145 |
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Total liabilities |
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11,753 |
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3,029 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, 5,000,000 shares authorized, none outstanding |
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Common stock, no par value; authorized shares: 213,527,214 at
June 30, 2011 and December 31, 2010; issued and outstanding
shares: 173,114,301 at June 30, 2011; 172,304,235 at December
31, 2010 |
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359,328 |
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358,424 |
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Accumulated deficit |
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(359,166 |
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(353,825 |
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Total shareholders equity |
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162 |
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4,599 |
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Total liabilities and shareholders equity |
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$ |
11,915 |
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$ |
7,628 |
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
3
ARADIGM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenue: |
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Royalty revenue |
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184 |
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366 |
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4,000 |
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Operating expenses: |
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Research and development |
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1,584 |
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2,736 |
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3,064 |
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5,573 |
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General and administrative |
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1,440 |
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1,382 |
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2,575 |
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2,635 |
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Restructuring and asset impairment |
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10 |
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13 |
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20 |
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26 |
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Total operating expenses |
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3,034 |
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4,131 |
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5,659 |
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8,234 |
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Loss from operations |
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(2,850 |
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(4,131 |
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(5,293 |
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(4,234 |
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Interest income |
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1 |
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4 |
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3 |
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14 |
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Interest expense |
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(46 |
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(109 |
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(53 |
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(218 |
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Other income (expense), net |
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1 |
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108 |
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2 |
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106 |
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Net loss |
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$ |
(2,894 |
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$ |
(4,128 |
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$ |
(5,341 |
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$ |
(4,332 |
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Basic and diluted net loss per common share |
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$ |
(0.02 |
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$ |
(0.04 |
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$ |
(0.03 |
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$ |
(0.04 |
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Shares used in computing basic and diluted net loss per common share |
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170,731 |
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104,891 |
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170,435 |
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102,396 |
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
4
ARADIGM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six months ended |
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June 30, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(5,341 |
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$ |
(4,332 |
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Adjustments to reconcile net loss to cash used in operating activities: |
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Amortization and accretion of investments |
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1 |
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26 |
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Depreciation and amortization |
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240 |
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322 |
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Stock-based compensation expense |
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378 |
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451 |
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Compensation expense from warrants for services rendered |
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428 |
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Changes in operating assets and liabilities: |
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Receivables |
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83 |
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(239 |
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Prepaid and other current assets |
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(262 |
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(171 |
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Other assets |
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(470 |
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3 |
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Accounts payable |
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(46 |
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376 |
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Accrued compensation |
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389 |
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311 |
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Other liabilities |
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290 |
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138 |
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Deferred rent |
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22 |
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(13 |
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Facility lease exit obligation |
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(43 |
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(124 |
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Net cash used in operating activities |
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(4,331 |
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(3,252 |
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Cash flows from investing activities: |
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Capital expenditures |
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(5 |
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(5 |
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Purchases of short-term investments |
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(1,149 |
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Proceeds from sales and maturities of short-term investments |
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500 |
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5,200 |
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Net cash provided by (used in) investing activities |
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(654 |
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5,195 |
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Cash flows from financing activities: |
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Proceeds from private placement of common stock, net |
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3,719 |
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Proceeds from issuance of common stock |
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60 |
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43 |
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Proceeds from issuance of note payable |
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8,111 |
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Net cash provided by financing activities |
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8,171 |
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3,762 |
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Net increase in cash and cash equivalents |
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3,186 |
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5,705 |
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Cash and cash equivalents at beginning of period |
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5,295 |
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3,903 |
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Cash and cash equivalents at end of period |
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$ |
8,481 |
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$ |
9,608 |
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See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements
5
ARADIGM CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
1. Organization, Basis of Presentation and Liquidity
Organization
Aradigm Corporation (the Company, we, our, or us) is a California corporation,
incorporated in 1991, focused on the development and commercialization of drugs delivered by
inhalation for the treatment of severe respiratory diseases. The Companys principal activities to
date have included conducting research and development and developing collaborations. Management
does not anticipate receiving any revenues from the sale of products in the upcoming year, except
for royalty revenue from Zogenix. The Company operates as a single operating segment.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with United States 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 United States generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). In the opinion of management, the financial statements reflect all adjustments, which are
of a normal recurring nature, necessary for fair presentation. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31,
2010, as filed with the SEC on March 25, 2011 (the 2010 Annual Report on Form 10-K). 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, 2010 has been derived from the audited financial statements
at that date, but does not include all of the information and footnotes required by United States
generally accepted accounting principles for complete financial statements. For further
information, please refer to the financial statements and notes thereto included in the 2010 Annual
Report on Form 10-K.
The accompanying unaudited condensed consolidated financial statements include the accounts of
Aradigm Corporation and the Companys active wholly-owned subsidiary, Aradigm Royalty Financing
LLC. All intercompany transactions have been eliminated.
Liquidity
The Company had cash, cash equivalents and short-term investments of approximately $9.4
million as of June 30, 2011. Management believes that this amount, as well as the proceeds from the
July 2011 private placement (see Note 12), will be sufficient to fund operations through at least
the second quarter of 2012.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements, in conformity with United States 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 expenses associated with the June 2011 royalty financing transaction and for payments
received from product development and license agreements as they relate to revenue recognition,
assumptions for valuing options and warrants, and income taxes. Actual results could differ
materially from these estimates.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less at the time of purchase
are classified as cash equivalents.
6
Investments
Management determines the appropriate classification of the Companys investments, which
consist solely of debt securities, at the time of purchase. All investments are classified as
available-for-sale, carried at estimated fair value and reported in cash and cash equivalents or
short-term investments. Unrealized gains and losses on available-for-sale securities are excluded
from earnings and losses and are reported as a separate component in the statement of shareholders
equity until realized. Fair values of investments are based on quoted market prices where
available. Investment income is recognized when earned and includes interest, dividends,
amortization of purchase premiums and discounts, and realized gains and losses on sales of
securities. The cost of securities sold is based on the specific identification method. The Company
regularly reviews all of its investments for other-than-temporary declines in fair value. When the
Company determines that the decline in fair value of an investment below the Companys accounting
basis is other-than-temporary, the Company reduces the carrying value of the securities held and
records a loss equal to the amount of any such decline. No such reductions were required during any
of the periods presented.
Property and Equipment
The Company records property and equipment at cost and calculates depreciation using the
straight-line method over the estimated useful lives of the respective assets. Machinery and
equipment includes external costs incurred for validation of the equipment. The Company does not
capitalize internal validation expense. Computer equipment and software includes capitalized
computer software. All of the Companys capitalized software is purchased; the Company has not
internally developed computer software. Leasehold improvements are depreciated over the shorter of
the term of the lease or useful life of the improvement.
Impairment of Long-Lived Assets
In accordance with Accounting Standards Codification (ASC) 360-10, Property, Plant, and
Equipment Overall, the Company reviews for impairment whenever events or changes in circumstances
indicate that the carrying amount of property and equipment may not be recoverable. Determination
of recoverability is based on an estimate of undiscounted future cash flows resulting from the use
of the asset and its eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, the assets are written down to their
estimated fair values and the loss is recognized in the statements of operations.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420), the Company
recognizes a liability for the cost associated with an exit or disposal activity that is measured
initially at its fair value in the period in which the liability is incurred. The Company accounted
for the partial sublease of its headquarters building as an exit activity and recorded the sublease
loss in its statement of operations (see Note 5).
According to ASC 420, costs to terminate an operating lease or other contracts are (a) costs
to terminate the contract before the end of its term or (b) costs that will continue to be incurred
under the contract for its remaining term without economic benefit to the entity. In periods
subsequent to initial measurement, changes to the liability are measured using the credit-adjusted
risk-free rate that was used to measure the liability initially.
Revenue Recognition
The Company recognizes revenue under the provisions of the Securities and Exchange Commission
issued Staff Accounting Bulletin 104, Topic 13, Revenue Recognition Revised and Updated (SAB Topic
13) and ASC 605-25, Revenue Recognition Multiple Elements (ASC 605-25). Revenue for arrangements
not having multiple deliverables, as outlined in ASC 605-25, is recognized once costs are incurred
and collectability is reasonably assured.
In accordance with contract terms, milestone payments from collaborative research agreements
are considered reimbursements for costs incurred under the agreements and, accordingly, are
recognized as revenue either upon 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 agreement when payments precede the required efforts. Refundable development payments are
deferred until specific performance criteria are achieved. Refundable development payments are
generally not refundable once specific performance criteria are achieved and accepted.
Collaborative license and development agreements that require the Company to provide multiple
deliverables, such as a license, research and product steering committee services and other
performance obligations, are accounted for in accordance with ASC 605-25. Under ASC 605-25,
delivered items are evaluated to determine whether such items have value to the Companys
collaborators on a stand-alone basis and whether objective reliable evidence of fair value of the
undelivered items exists. Deliverables that meet these
7
criteria are considered a separate unit of accounting. Deliverables that do not meet these
criteria are combined and accounted for as a single unit of accounting. The appropriate revenue
recognition criteria are identified and applied to each separate unit of accounting.
Royalty revenue will be earned under the terms of the asset sale agreement with Zogenix. The
Company will recognize revenue when the amounts under this agreement can be determined and when
collectability is probable. The Company has no performance obligations under this agreement. The
Company anticipates recognizing revenue from quarterly royalty payments one quarter in arrears
since it believes it will not be able to determine quarterly royalty earnings until it receives the
royalty statements from Zogenix.
Research and Development
Research and development expenses consist of costs incurred for company-sponsored,
collaborative and contracted research and development activities. These costs include direct and
research-related overhead expenses. The Company expenses research and development costs as such
costs are incurred.
Stock-Based Compensation
The Company accounts for share-based payment arrangements in accordance with ASC 718,
Compensation-Stock Compensation and ASC 505-50, Equity-Equity Based Payments to Non-Employees which
requires the recognition of compensation expense, using a fair-value based method, for all costs
related to share-based payments including stock options and restricted stock awards and stock
issued under the Companys employee stock purchase plan. This guidance requires companies to
estimate the fair value of share-based payment awards on the date of the grant using an
option-pricing model. The Company has adopted the simplified method to calculate the beginning
balance of the additional paid-in capital, or APIC pool of excess tax benefits, and to determine
the subsequent effect on the APIC pool and statement of cash flows of the tax effects of
stock-based compensation awards.
Income Taxes
The Company makes certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the calculation of certain tax
assets and liabilities, which arise from differences in the timing of recognition of revenue and
expense for tax and financial statement purposes. As part of the process of preparing the financial
statements, the Company is required to estimate income taxes in each of the jurisdictions in which
it operates. This process involves the Company estimating its current tax exposure under the most
recent tax laws and assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and liabilities, which
are included in the balance sheets.
The Company assesses the likelihood that it will be able to recover its deferred tax assets.
It considers all available evidence, both positive and negative, including the historical levels of
income and losses, expectations and risks associated with estimates of future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a valuation
allowance. If the Company does not consider it more likely than not that it will recover its
deferred tax assets, the Company records a valuation allowance against the deferred tax assets that
it estimates will not ultimately be recoverable. At June 30, 2011 and December 31, 2010, the
Company believed that the amount of its deferred income taxes would not be ultimately recovered.
Accordingly, the Company recorded a full valuation allowance for deferred tax assets. However,
should there be a change in the Companys ability to recover its deferred tax assets, the Company
would recognize a benefit to its tax provision in the period in which it determines that it is more
likely than not that it will recover its deferred tax assets.
Net Loss Per Common Share
Basic net loss per common share is computed using the weighted-average number of shares of
common stock outstanding during the period less the weighted-average number of restricted shares of
common stock subject to repurchase. Potentially dilutive securities were not included in the net
loss per common share calculation for the three and six months ended June 30, 2011 and 2010,
because the inclusion of such shares would have had an anti-dilutive effect.
Recently Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-17, Milestone Method of Revenue Recognition a consensus of the FASB Emerging
Issues Task Force. This standard provides guidance on defining a milestone and determining when it
may be appropriate to apply the milestone method for revenue recognition for research and
development arrangements. This standard provides guidance on the criteria that should be met to
recognize revenue upon achievement of the related milestone event. The ASU is effective for fiscal
years (and interim periods within those fiscal years) beginning on or after June 15, 2010. The
Company adopted this guidance in the third quarter of 2010. While the Company does not
8
expect the adoption of this standard to have a material impact on the Companys financial
position and results of operations, this standard may impact the Company in the event the Company
completes future transactions.
In September 2009, the FASB issued ASU 2009-13 Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1 Revenue Arrangements with
Multiple Deliverables). This standard modifies the revenue recognition guidance for arrangements
that involve the delivery of multiple elements, such as product, license fees and research and
development reimbursements, to a customer at different times as part of a single revenue generating
transaction. This standard provides principles and application guidance to determine whether
multiple deliverables exist, how the individual deliverables should be separated and how to
allocate the revenue in the arrangement among those separate deliverables. The standard also
significantly expands the disclosure requirements for multiple deliverable revenue arrangements.
While the Company does not expect the adoption of this standard to have a material impact on the
Companys financial position and results of operations, this standard may impact the Company in the
event the Company completes future transactions.
In June 2011, the Financial Accounting Standards Board issued ASU 2011-05, Comprehensive
Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 eliminates the option to
present components of other comprehensive income as part of the statement of changes in
stockholders equity and instead requires separate statements of comprehensive income. The
amendment is effective for the fiscal years, and interim periods within those years, beginning
after December 15, 2011. We do not expect the adoption of ASU 2011-05 to have a material impact on
our financial position and results of operation.
3. Cash, Cash Equivalents and Short-Term Investments
At June 30, 2011 and December 31, 2010, the amortized cost of the Companys cash, cash
equivalents and short-term investments approximated their fair values. The Company considers all
liquid investments purchased with a maturity of three months or less to be cash equivalents. All
short-term investments at June 30, 2011 mature in less than one year.
The Company invests its cash and cash equivalents and short-term investments in money market
funds, commercial paper and corporate and government notes. All of these securities are classified
as available-for-sale with the unrealized gain and loss being recorded in accumulated other
comprehensive income; there were no unrealized gains or losses at June 30, 2011 and December 31,
2010.
4. Fair Value Measurements
Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, (now
referred to as ASC 820) which clarifies the definition of fair value, prescribes methods for
measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair
value and expands disclosures about the use of fair value measurements. The fair value hierarchy
has three levels based on the reliability of the inputs used to determine fair value. Level 1
values are based on quoted prices in active markets. Level 2 values are based on significant other
observable inputs. Level 3 values are based on significant unobservable inputs. The following table
presents the fair value level for the assets that are measured at fair value on a recurring basis
and are categorized using the fair value hierarchy. The Company does not have any liabilities that
are measured at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
Balance |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
June 30, 2011 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Cash and cash equivalents |
|
$ |
8,481 |
|
|
$ |
8,481 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
399 |
|
|
$ |
|
|
|
$ |
399 |
|
|
$ |
|
|
U.S. treasury and agencies |
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
899 |
|
|
$ |
|
|
|
$ |
899 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys cash and cash equivalents at June 30, 2011 consist of cash and money market
funds. Money market funds are valued using quoted market prices. The Companys short-term
investments at June 30, 2011 consisted of commercial paper and U.S agency notes. The Company uses
an independent third party pricing
service to value its commercial paper and other Level 2 investments. The pricing service uses
observable inputs such as new issue money market rates, adjustment spreads, corporate actions
9
and other factors and applies a series of matrices pricing model. The Company performs a
review of prices reported by the pricing service to determine if they are reasonable estimates of
fair value. In addition, the Company performs a review of its securities to determine the proper
classification in accordance with the fair value hierarchy.
5. Sublease Agreement and Lease Exit Liability
On July 18, 2007, the Company entered into a sublease agreement with Mendel Biotechnology,
Inc. (Mendel), under which the Company subleases to Mendel approximately 48,000 square feet of
the 72,000 square foot facility located at 3929 Point Eden Way, Hayward, CA. The Company recorded a
$2.1 million impairment expense related to the sublease for the year ended December, 31, 2007.
The Company recorded this expense and the related lease exit liability because the monthly
payments the Company expects to receive under the sublease are less than the amounts that the
Company will owe the lessor for the sublease space. The fair value of the lease exit liability was
determined using a credit-adjusted risk-free rate to discount the estimated future net cash flows,
consisting of the minimum lease payments to the lessor for the sublease space and payments the
Company will receive under the sublease. The sublease loss and ongoing accretion expense required
to record the lease exit liability at its fair value using the interest method have been recorded
as part of restructuring and asset impairment expense in the statement of operations.
The lease exit liability activity for the six months ended June 30, 2011 is as follows (in
thousands):
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, 2011 |
|
Balance at January 1, 2011 |
|
$ |
828 |
|
Accretion expense |
|
|
20 |
|
Lease payments |
|
|
(63 |
) |
|
|
|
|
Balance at June 30, 2011 |
|
$ |
785 |
|
|
|
|
|
As of June 30, 2011, $108,000 of the $785,000 balance was recorded as a current liability and
$677,000 was recorded as a non-current liability.
6. Other Accrued Liabilities
Other accrued liabilities consist of accrued rent and accrued expenses for legal services,
audit-related services and payroll withholding liabilities.
At June 30, 2011, other accrued liabilities consisted of accrued rent of $410,000, accrued
expenses for services of $335,000 and payroll withholding liabilities of $33,000. At December 31,
2010, other accrued liabilities consisted of accrued rent of $235,000, accrued expenses for
services of $178,000 and payroll withholding liabilities of $37,000. In July 2010, the Company
entered into an agreement with the landlord of the Hayward facility to defer a portion of the
monthly rent payment over a one year period. The repayment period was over 12 months beginning in
September 2011, if not repaid sooner without pre-payment penalty. Deferred amounts accrue interest
at 10% per annum.
7. Collaborations and Royalty Agreements
Zogenix
In August 2006, the Company sold all of its assets related to the Intraject needle-free
injector technology platform and products, including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a privately-held pharmaceutical company. Zogenix is responsible
for further development and commercialization efforts of Intraject (now rebranded under the name
DosePro*). On January 13, 2010, Zogenix announced the U.S. commercial launch of its SUMAVEL*
DosePro product. Under the terms of the asset sale agreement, the Company is entitled to receive
quarterly royalty payments from Zogenix in the amount of 3% of net sales of DosePro products.
Revenue will be recognized from the quarterly royalty payments one quarter in arrears due to the
contractual sixty day lag in royalty reporting under the asset sale agreement. The Company recorded
recurring royalty revenue of $184,000 for the quarter ended June 30, 2011.
8. Note Payable and Accrued Interest
On June 21, 2011, the Company entered into an $8.5 million royalty financing agreement with a
syndicate of lenders. The agreement created a debt obligation (the Term Loan) that will be repaid
through and secured by royalties from net sales of the
10
SUMAVEL DosePro (sumatriptan injection) needle-free delivery system payable to the Company
under its Asset Purchase Agreement (APA) with Zogenix.
Under the terms of the royalty financing agreement, the Company received a loan of $8.5
million, less fees, transaction and legal expenses (estimated to be approximately $473,000) and an
additional $250,000 set aside for an Interest Reserve Account. The lenders will be entitled to
receive 100% of all royalties payable to the Company under the APA until the principal and accrued
interest of the Term Loan are fully repaid, after which time the benefit of any further royalties
made under the APA will accrue to Aradigm. The Term Loan will accrue interest at the rate equal to
the greater of a) LIBOR or b) one-and-a-half percent (1.50%), plus a margin of fourteen-and-a-half
percent (14.5%). To the extent royalty payments are insufficient to pay accrued and unpaid interest
under the financing, the shortfall will be funded from the Interest Reserve Account or, if the
account is insufficient to pay all of the interest due, the shortfall will be capitalized and added
to the principal balance of the Term Loan. The lenders were granted a security interest in the
assets of an Aradigm subsidiary, Aradigm Royalty Financing LLC, which holds Aradigms rights to
receive royalty payments under the APA. The lenders have no recourse to other assets of Aradigm
for repayment of the loan. Amortization of the Term Loan will occur to the extent that royalties
payments received for any quarter exceed accrued interest due for that quarter.
The Company has the right to prepay the Term Loan after June 21, 2012, subject to the payment
of the principal balance plus a prepayment fee of eight percent (8%) of the outstanding balance if
prepaid in months 13-24 following the transaction closing date of June 21, 2011; four percent (4%)
if prepaid in months 25-36; and two percent (2%) if prepaid in months 37-48. There will be no
prepayment fee for prepaying the Term Loan after the forty-eight (48) month anniversary of the
closing date. In addition, the Company has the right to make partial prepayments in an amount no
less than the greater of (i) ten percent (10%) of the principal balance of the Term Loan
outstanding as of the applicable prepayment date or (ii) $1,000,000. Under no circumstances will
the receipt of royalty payments from Zogenix in excess of the accrued interest then due be
considered prepayments under the Term Loan.
In accordance with Accounting Standards Topic 470 Debt, the Company capitalized the fees,
transaction and legal expenses of approximately $473,000 and recorded this amount in other assets.
The capitalized expenses will be amortized to interest expense using the effective interest method
over a period of 48 months.
The Interest Reserve account was recorded in prepaid and other current assets.
In connection with the transaction, Aradigm issued to the lenders warrants to purchase a total
of 2,840,909 shares of Aradigm common stock at a strike price of $0.22 per share, representing a
20% premium above the average closing price of Aradigm common stock for the ten trading days
immediately preceding the closing of the transaction. The warrants expire on December 31, 2016.
In accordance with Accounting Standards Topic 815, the warrants were treated as equity
instruments and their fair value was determined to be approximately $390,000. The fair value of the
warrants is considered a discount against the note and was recorded as a reduction of the note
payable. The fair value of the warrants will be amortized to interest expense using the effective
interest method over a period of 48 months.
9. Stock-Based Compensation and Stock Options, Awards and Units
The following table shows the stock-based compensation expense included in the accompanying
condensed consolidated statements of operations for the three and six months ended June 30, 2011
and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
57 |
|
|
$ |
41 |
|
|
$ |
122 |
|
|
$ |
92 |
|
General and administrative |
|
|
133 |
|
|
|
149 |
|
|
|
256 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
190 |
|
|
$ |
190 |
|
|
$ |
378 |
|
|
$ |
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no capitalized stock-based employee compensation cost for the three and six months
ended June 30, 2011 and 2010. Since the Company incurred net losses during the quarters ended June
30, 2011 and 2010, there was no recognized tax benefit associated with stock-based compensation
expense.
The total amount of unrecognized compensation cost related to non-vested stock options and
stock purchases, net of forfeitures, was $0.5 million as of June 30, 2011. This amount will be
recognized over a weighted average period of 1.25 years.
11
For restricted stock awards, the Company recognizes compensation expense over the vesting
period for the fair value of the stock award on the measurement date. The total fair value of
restricted stock awards that vested during the six months ended June 30, 2011 was $79,000. The
Company retained purchase rights with respect to 2,344,043 shares of unvested restricted stock
awards issued pursuant to stock purchase agreements at no cost per share as of June 30, 2011. As of
June 30, 2011, there was $0.2 million of total unrecognized compensation costs, net of forfeitures,
related to non-vested stock awards which are expected to be recognized over a weighted average
period of 0.56 years.
Stock Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive Plan and 1996 Non-Employee
Directors Plan
The 1996 Equity Incentive Plan (the 1996 Plan) and the 2005 Equity Incentive Plan (the 2005
Plan), which amended, restated and retitled the 1996 Plan, were adopted to provide a means by
which selected officers, directors, scientific advisory board members and employees of and
consultants to the Company and its affiliates could be given an opportunity to acquire an equity
interest in the Company. All employees, directors, officers, scientific advisory board members and
consultants of the Company are eligible to participate in the 2005 Plan. During 2000, the Board of
Directors approved the termination of the 1996 Non-Employee Directors Stock Option Plan (the
Directors Plan). This termination had no effect on options already outstanding under the
Directors Plan.
Stock Option Activity
The following is a summary of activity under the 1996 Plan, the 2005 Plan and the Directors
Plan for the six months ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
Shares Available |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
for Grant of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Option, Award or |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
Unit |
|
|
Shares |
|
|
Exercise Price Range |
|
|
Price |
|
Balance at January 1, 2011 |
|
|
1,959,278 |
|
|
|
6,354,758 |
|
|
$ |
0.12 |
|
|
|
|
|
|
$ |
64.69 |
|
|
$ |
1.32 |
|
Options granted |
|
|
(500,000 |
) |
|
|
500,000 |
|
|
|
0.18 |
|
|
|
|
|
|
|
0.19 |
|
|
|
0.19 |
|
Options cancelled |
|
|
84,898 |
|
|
|
(84,898 |
) |
|
$ |
0.25 |
|
|
|
|
|
|
$ |
64.69 |
|
|
$ |
9.69 |
|
Restricted share awards granted |
|
|
(328,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted share units awarded |
|
|
(78,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011 |
|
|
1,136,281 |
|
|
|
6,769,860 |
|
|
$ |
0.12 |
|
|
|
|
|
|
$ |
24.10 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the
Companys stock exceeded the exercise price of the stock options at June 30, 2011 for those stock
options for which the quoted market price was in excess of the exercise price (in-the-money
options). As of June 30, 2011, options to purchase 4,820,616 shares of common stock were
exercisable and had an aggregate intrinsic value of $52,000. No stock options were exercised during
the six months ended June 30, 2011.
A summary of the Companys unvested restricted stock and performance bonus stock award as of
June 30, 2011 is presented below representing the maximum number of shares that could be earned or
vested under the 2005 Plan:
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted Average |
|
|
|
of |
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value |
|
Balance at December 31, 2010 |
|
|
2,448,273 |
|
|
$ |
0.44 |
|
Restricted share awards issued |
|
|
328,948 |
|
|
|
0.19 |
|
Restricted share awards vested |
|
|
(433,178 |
) |
|
|
0.18 |
|
|
|
|
|
|
|
|
Balance at June 30, 2011 |
|
|
2,344,043 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2011, the Company issued 78,947 shares of restricted
stock units with no exercise price to a non-employee member of its Board of Directors. The units
will vest on the earlier of either a change in control of the Company or upon the grantees
termination of service as a Board member. In 2011, the non-employee members of the Board of
Directors elected to forego all or a portion of their cash compensation in lieu of the
aforementioned restricted stock unit grants and restricted stock awards.
12
10. Net Loss Per Common Share
The Company computes basic net loss per common share using the weighted-average number of
shares of common stock outstanding during the period less the weighted-average number of shares of
common stock subject to repurchase. The effects of including the incremental shares associated with
options, warrants and unvested restricted stock are anti-dilutive, and are not included in the
diluted weighted average number of shares of common stock outstanding for the six month periods
ended June 30, 2011 and 2010.
The Company excluded the following securities from the calculation of diluted net loss per
common share for the six months ended June 30, 2011 and 2010, as their effect would be
anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Outstanding stock options |
|
|
6,770 |
|
|
|
4,962 |
|
Unvested restricted stock |
|
|
2,344 |
|
|
|
2,497 |
|
Unvested restricted stock units |
|
|
412 |
|
|
|
333 |
|
Outstanding common stock warrants |
|
|
3,591 |
|
|
|
7,527 |
|
11. Comprehensive Loss
Comprehensive loss includes net loss and other comprehensive income (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 accompanying condensed consolidated
statements of operations in computing net loss and reported separately in shareholders equity.
Comprehensive loss and its components are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
Net loss |
|
$ |
(5,341 |
) |
|
$ |
(4,332 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available-for-sale securities |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(5,341 |
) |
|
$ |
(4,334 |
) |
|
|
|
|
|
|
|
12. Subsequent Events
July 2011 Private Placement
On July 5, 2011, the Company entered into a definitive agreement for the sale of common stock
to three existing shareholders, including accounts managed by First Eagle Investment Management LLC
and Tavistock Life Sciences, in a private placement for aggregate gross proceeds of $4.75 million.
The closing of the private placement occurred on July 7, 2011. Under the terms of the agreement,
the Company agreed to sell an aggregate of 25,000,000 shares of common stock at a price of $0.19
per share. After deducting for fees and expenses, the net proceeds from the sale of the shares of
common stock are anticipated to be approximately $4.4 million. The Company will be required, among
other things, to file a resale registration statement within 30 days following the closing that
covers the resale by the purchasers of the shares.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on the
current beliefs of management, as well as current assumptions made by, and information currently
available to, management. All statements contained in this Quarterly Report on Form 10-Q, other
than statements that are purely historical, are forward-looking statements. Words such as
anticipate, expect, intend, plan, believe, may, will, could, continue, seek,
estimate, probably, potentially, or the negative thereof and similar expressions also
identify forward-looking statements. These forward-looking statements are subject to risks and
uncertainties that could cause our future actual results, performance or achievements to 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 risks and uncertainties discussed in this
section as well as in the section entitled Risk Factors in this Quarterly Report on Form 10-Q and
other reports filed with the United States Securities and Exchange Commission (the SEC).
Forward-looking statements include our belief that our cash, cash equivalents and short-term
investments as of June 30, 2011 and the proceeds from the July 2011
13
private placement will be sufficient to enable us to fund our operations through at least the
second quarter of 2012, our expectation that we will incur operating losses for the foreseeable
future, our anticipations regarding revenue, collaboration agreements and our longer-term strategy
and our expectations regarding clinical trials and orphan drug designations.
These forward-looking statements and our business are subject to significant risks including,
but not limited to, our ability to obtain additional financing or partnering agreements in order to
fund Phase 3 clinical trials of our inhaled ciprofloxacin product candidates, our ability to obtain
clearance from the FDA for conducting our inhaled ciprofloxacin Phase 3 clinical trials, our
ability to implement our product development strategy, the success of product development efforts,
obtaining and enforcing patents important to our business, clearing the lengthy and expensive
regulatory approval process and possible competition from other products. Even if product
candidates 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, may fail to receive necessary regulatory approvals, may be difficult to manufacture on a
large scale, are uneconomical to market, may be precluded from commercialization by proprietary
rights of third parties or may not gain acceptance from health care professionals and patients.
Investors are cautioned not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date of the filing of this Quarterly Report on Form
10-Q. We undertake no obligation to update these forward-looking statements in light of events or
circumstances occurring after the date of the filing of this Quarterly Report on Form 10-Q or to
reflect the occurrence of unanticipated events.
Overview
We are an emerging specialty pharmaceutical company focused on the development and
commercialization of drugs delivered by inhalation for the treatment of severe respiratory diseases
by pulmonologists. Over the last decade, we invested a large amount of capital to develop drug
delivery technologies, particularly the development of a significant amount of expertise in
pulmonary drug delivery. We also invested considerable effort into the generation of a large volume
of laboratory and clinical data demonstrating the performance of our AERx® pulmonary
drug delivery platform and other proprietary technologies, including our liposomal ciprofloxacin
formulations for inhalation. We have not been profitable since inception and expect to incur
additional operating losses over at least the foreseeable future as we continue product development
efforts, clinical trial activities, and possible sales, marketing and contract manufacturing
efforts. To date, we have not had any significant product sales and do not anticipate receiving
revenues from the sale of any of our products in the near term. As of June 30, 2011, we had an
accumulated deficit of $359.2 million. Historically, we have funded our operations primarily
through public offerings and private placements of our capital stock, license fees and milestone
payments from collaborators, proceeds from the January 2005 restructuring transaction with Novo
Nordisk, borrowings from Novo Nordisk, the milestone and royalty payments associated with the sale
of Intraject-related assets to Zogenix, proceeds from the June 2011 royalty financing transaction
and interest earned on cash equivalents and short-term investments.
Over the last five years, our business has focused on opportunities in the development of
drugs for the treatment of severe respiratory disease that could be developed by us and
commercialized in the United States, or another significant territory such as the European Union
(EU). It is our longer term strategy to commercialize our respiratory product candidates with our
own focused marketing and sales force addressing pulmonary specialty doctors in the United States
or in the EU, where we believe that a proprietary sales force will enhance the return to our
shareholders. Where our products can benefit a broader population of patients in the United States
or in other countries, we may enter into co-development, co-promotion or other marketing
arrangements with collaborators, thereby reducing costs and increasing revenues through license
fees, milestone payments and royalties. In selecting our proprietary development programs, we
primarily seek drugs approved by the United States Food and Drug Administration (FDA) that can be
reformulated for both existing and new indications in respiratory disease. Our intent is to use our
pulmonary delivery methods and formulations to improve their safety, efficacy and convenience of
administration to patients. We believe that this strategy will allow us to reduce cost, development
time and risk of failure, when compared to the discovery and development of new chemical entities.
Our lead development candidates are proprietary inhaled formulations, ARD-3100 (Lipoquin) and
ARD-3150 (Pulmaquin), of the antibiotic ciprofloxacin that are delivered by inhalation for the
management of infections associated with the severe respiratory diseases cystic fibrosis (CF) and
non-cystic fibrosis bronchiectasis (BE). The formulations differ in the proportion of rapidly
available and slow release ciprofloxacin. ARD-3150 uses the slow release liposomal formulation
(ARD-3100) mixed with a small amount of ciprofloxacin dissolved in an aqueous medium. We received
orphan drug designations for ARD-3100 for both of these indications in the U.S. and for cystic
fibrosis in the European Union. We requested orphan drug designation from the FDA for ARD-3150 for
the management of bronchiectasis and in June 2011 we were granted orphan drug designation for
ciprofloxacin for inhalation for this indication. We may seek orphan drug designation for other
eligible product candidates we develop. We have reported the results of one successful Phase 2b
trial with ARD-3100 and one successful Phase 2b trial with ARD-3150 in non-cystic fibrosis
bronchiectasis and two successful Phase 2a trials with ARD-3100 in cystic fibrosis and non-cystic
fibrosis bronchiectasis, respectively.
14
In June 2008, we completed a multi-center 14-day treatment Phase 2a trial in Australia and New
Zealand in 21 CF patients with once daily dosing of 6 mL of inhaled liposomal ciprofloxacin
(ARD-3100). The primary efficacy endpoint in this Phase 2a study was the change from baseline in
the sputum Pseudomonas aeruginosa colony forming units (CFU), an objective measure of the reduction
in pulmonary bacterial load. Data analysis in 21 patients who completed the study demonstrated that
the CFUs decreased by a mean 1.43 log against baseline over the 14-day treatment period
(p<0.0001). Evaluation one week after study treatment was discontinued showed that the
Pseudomonas bacterial density in the lung was still reduced from the baseline without additional
antibiotic use. Pulmonary function testing as measured by the forced expiratory volume in one
second (FEV1) showed a significant mean increase of 6.86% from baseline after 14 days of treatment
(p=0.04). The study drug was well tolerated and there were no serious adverse events reported
during the trial.
In December 2008, we completed an open-label, four week treatment study with once daily
inhaled liposomal ciprofloxacin (ARD-3100) in patients with non-CF bronchiectasis. The study was
conducted at eight leading centers in the United Kingdom and enrolled a total of 36 patients. The
patients were randomized into two equal size groups, one receiving 3 mL of inhaled liposomal
ciprofloxacin and the other receiving 6 mL of inhaled liposomal ciprofloxacin, once-a-day for the
four-week treatment period. The primary efficacy endpoint was the change from baseline in the
sputum Pseudomonas aeruginosa CFU, the standard objective measure of the reduction in pulmonary
bacterial load. The 3 mL and 6 mL doses of inhaled liposomal ciprofloxacin in the evaluable patient
population demonstrated significant mean decreases against baseline in the CFUs over the 28-day
treatment period of 3.5 log (p<0.001) and 4.0 log (p<0.001) units, respectively.
In July 2009, we announced that clearance was received from the U.S. Food and Drug
Administration for the inhaled liposomal ciprofloxacin (ARD-3100) Investigational New Drug (IND)
application for the management of non-cystic fibrosis bronchiectasis.
In August 2009, the European Medicines Agency granted Orphan Drug Designation to our inhaled
liposomal ciprofloxacin drug product candidate ARD-3100 for the treatment of lung infections
associated with cystic fibrosis. Under European guidelines, Orphan Medicinal Product Designation
provides 10 years of potential market exclusivity if the product candidate is the first product
candidate for the indication approved for marketing in the European Union. Orphan drug designation
also allows the candidates sponsor to seek assistance from the European Medicines Agency in
optimizing the candidates clinical development through participation in designing the clinical
protocol and preparing the marketing application. Additionally, a drug candidate designated by the
Commission as an Orphan Medicinal Product may qualify for a reduction in regulatory fees as well as
a European Union-funded research grant. We had previously been granted orphan drug designations by
the U.S. Food and Drug Administration for inhaled liposomal ciprofloxacin ARD-3100 for the
management of CF and for non-cystic fibrosis bronchiectasis.
In November 2009, the first patient was dosed in the ORBIT-2 (Once-daily Respiratory
Bronchiectasis Inhalation Treatment) trial, a 168 day, multicenter, international Phase 2b clinical
trial of inhaled ciprofloxacin with the ARD-3150 (Pulmaquin) formulation in 42 adult patients with
non-cystic fibrosis bronchiectasis. The randomized, double-blind, placebo-controlled trial was
conducted in Australia and New Zealand. Following a 14 day screening period, the patients were
treated once-a-day for 28 days with either the active drug, or placebo, followed by a 28 day
off-treatment period. This on-off sequence was repeated three times. The primary endpoint was
defined as the mean change in Pseudomonas aeruginosa density in sputum (colony forming units CFU
- per gram) from baseline to day 28 of the active treatment group versus placebo. Safety and
tolerability assessments of the treatment versus placebo group were performed and secondary
efficacy endpoints being assessed included long term microbiological responses, time to an
exacerbation, severity of exacerbations, length of time to resolve exacerbations and changes in
lung function and in quality of life measurements. ORBIT-2 explored whether the novel formulation
ARD-3150, which has a different drug release profile than ARD-3100, may have additional therapeutic
benefits.
In October 2010, we announced positive top line data from the ORBIT-2 study. Statistical
significance was achieved in the primary endpoint the mean change in Pseudomonas aeruginosa
density in sputum from baseline to day 28. In the full analysis population (full analysis set
includes all patients who were randomized, received at least one dose and provided samples for at
least two time points), there was a significant mean reduction of 4.2 log10 units in the
ARD-3150 group, reflecting an almost sixteen-thousand fold decrease in bacterial load, versus a
very small mean decrease of 0.1 log10 units in the placebo group (p=0.004). Secondary
endpoint analysis showed that 17 subjects in the placebo group required supplemental antibiotics
for respiratory-related infections versus 8 subjects in the ARD-3150 group (p=0.05). As announced
in January 2011, the Kaplan-Meier analysis showed that the median time to first pulmonary
exacerbation in the per protocol evaluation increased from 58 days in the placebo group to 134 days
in the active treatment group and was statistically significant (p<0.05, log rank test).
ARD-3150 was well tolerated and there were no significant decreases in lung function, as measured
by FEV1 (forced expiratory volume in one second), at 28 days in either group. Overall, the
incidence and severity of adverse events were similar in both the placebo and treatment groups;
however, ARD-3150 had a superior pulmonary safety profile reflected in the number and severity of
pulmonary adverse events. As announced in May 2011, further statistical analysis concluded that the
reduction from baseline in Pseudomonas aeruginosa CFUs with ARD-3150 was rapid and
15
persistent throughout the treatment cycles as exemplified by the statistically
significant reductions of the mean log CFU values in the ARD-3150 group versus the placebo at
day 14 and day 28 during the first treatment cycle, as well as at the end of the second and third
cycles of treatment (days 84 and 140, respectively).
In February 2010, the first patient was dosed in the U.S. as part of the ORBIT-1 trial. This
Phase 2b trial, an international, double-blind, placebo-controlled study being conducted under a
U.S. FDA IND, randomized 95 patients and completed enrollment in March 2011. The ORBIT-1 study
design called for four weeks of once-daily inhaled doses of the active drug or once-daily inhaled
placebo. Two doses of the active drug were included in the study 100 or 150 mg ciprofloxacin
delivered by inhalation as 2 or 3 mL of liposomal dispersion, respectively. The primary efficacy
endpoint was a standard measure of antibacterial activity the change from baseline in sputum
Pseudomonas aeruginosa colony forming units (CFUs). Secondary endpoints included quality of life
measurements and improvement of outcomes with respect to exacerbations. Lung function changes were
monitored for safety.
In June 2011, we announced positive top line data from the ORBIT-1 study. The primary endpoint -
the mean change in Pseudomonas aeruginosa colony forming units per gram of sputum (CFUs) from
baseline to day 28 was met in the full analysis population: The full analysis set included all
patients who were randomized, received at least one dose and provided samples for at least two time
points. There was a significant mean reduction (p<0.001) of 2.942 log10 CFUs in the 3mL ARD-3100
group and a significant mean reduction (p< 0.001) of 3.842 log10 CFUs in the 2mL ARD-3100 group
compared to placebos. Pooled placebo groups had a mean reduction of log10 CFUs of 0.437. There was
no statistically significant difference between the 2 mL and 3 mL ARD-3100 doses. ARD-3100 was
well-tolerated and no bronchodilator treatment was mandated before inhaled study treatments. There
were no statistically significant differences between the active and placebo groups in the number
of patients experiencing at least one respiratory treatment-emergent adverse event. The incidence
of serious adverse events (SAEs) was low; there were a total of 6 SAEs and none of them were
treatment related.
The results from each of these trials will produce an extensive data base of information from
which we hope to select the optimum product and the most appropriate endpoints to test in Phase 3.
In order to expedite anticipated time to market and increase market acceptance, we have elected to
deliver our formulations via an FDA-approved, widely-accepted nebulizer system for each of these
Phase 2b trials.
In August 2006, we sold all of our assets related to the Intraject needle-free injector
technology platform and products, including 12 United States patents along with foreign
counterparts, to Zogenix, Inc., a private company. Zogenix is responsible for further development
and commercialization efforts of Intraject (now rebranded under the name DosePro*). In conjunction
with the sale, we received a $4 million initial payment from Zogenix, with an additional milestone
payment of $4 million and royalty payments payable upon any commercialization of products in the
U.S. and other countries, including the European Union, developed and sold using the DosePro
technology. In July 2009, Zogenix was granted approval by the FDA of the SUMAVEL DosePro
(sumatriptan injection) needle-free delivery system for the treatment of acute migraine and cluster
headache. In August 2009, Zogenix and Astellas Pharma US, Inc. entered into an exclusive
co-promotion agreement in the U.S. for the SUMAVEL DosePro needle-free delivery system. On January
13, 2010, Zogenix announced the U.S. commercial launch of SUMAVEL DosePro. In February 2010, we
received from Zogenix the $4 million milestone payable upon the initial commercialization of
SUMAVEL DosePro. In December 2010, Zogenix was granted approval of the Marketing Authorization
Application (MAA) for SUMAVEL DosePro (sumatriptan injection) needle-free delivery system by the
Danish Medicines Agency of Denmark. Denmark is the first country in Europe to grant marketing
authorization for SUMAVEL DosePro. Five weeks later, the Federal Institute for Drugs and Medical
Devices of Germany (BrArM) and the Medicines and Healthcare products Regulatory Agency of the
United Kingdom (MHRA) granted approval of the MAA for SUMAVEL DosePro (sumatriptan injection)
needle-free delivery system for the acute treatment of migraine attacks, with or without aura, and
the acute treatment of cluster headache. Germany and the United Kingdom are two of the largest
pharmaceutical markets in Europe. We are entitled to 3% royalty on net sales of SUMAVEL DosePro in
all territories.
On June 21, 2011, we entered into an $8.5 million royalty financing agreement (the
Transaction) with a syndicate of lenders arranged by PBS Capital Management LLC (PBS Capital).
The agreement created a debt obligation (the Term Loan) that will be repaid through and secured
by royalties from net sales of the SUMAVEL® DosePro (sumatriptan injection) needle-free delivery
system payable to Aradigm under its Asset Purchase Agreement (APA) with Zogenix.
Under the terms of the royalty financing agreement, we received a loan of $8.5 million, less
fees, transaction and legal expenses (estimated to be approximately $473,000) and an additional
$250,000 set aside for an Interest Reserve Account. The lenders will be entitled to receive 100% of
all royalties payable to us under the APA until the principal and accrued interest of the Term Loan
are fully repaid, after which time the benefit of any further royalties made under the APA will
accrue to Aradigm. The Term Loan will accrue interest at the rate equal to the greater of a) LIBOR
or b) one-and-a-half percent (1.50%), plus a margin of fourteen-and-a-half percent (14.5%). To the
extent royalty payments are insufficient to pay accrued and unpaid interest under the financing,
the shortfall will be funded from the Interest Reserve Account or, if the account is insufficient
to pay all of the interest due, the shortfall will be
16
capitalized and added to the principal balance of the Term Loan. The lenders were granted a
security interest in the assets of an Aradigm subsidiary that holds Aradigms rights to receive
royalty payments under the APA. The lenders have no recourse to other assets of Aradigm for
repayment of the loan. Amortization of the Term Loan will occur to the extent that royalties
payments received for any quarter exceed accrued interest due for that quarter.
We have the right to prepay the Term Loan after June 21, 2012, subject to the payment of the
principal balance plus a prepayment fee of eight percent (8%) of the outstanding balance if prepaid
in months 13-24 following the Transaction closing date of June 21, 2011; four percent (4%) if
prepaid in months 25-36; and two percent (2%) if prepaid in months 37-48. There will be no
prepayment fee for prepaying the Term Loan after the forty-eight (48) month anniversary of the
closing date. In addition, we have the right to make partial prepayments in an amount no less than
the greater of (i) ten percent (10%) of the principal balance of the Term Loan outstanding as of
the applicable prepayment date or (ii) $1,000,000. Under no circumstances will the receipt of
royalty payments from Zogenix in excess of the accrued interest then due be considered prepayments
under the Term Loan.
In connection with the Transaction, Aradigm issued to the lenders warrants to purchase a total
of 2,840,909 shares of Aradigm common stock at a strike price of $0.22 per share, representing a
20% premium above the average closing price of Aradigm common stock for the ten trading days
immediately preceding the closing of the Transaction. The warrants expire on December 31, 2016.
On July 5, 2011, we entered into a definitive agreement for the sale of common stock to three
existing shareholders, including accounts managed by First Eagle Investment Management LLC and
Tavistock Life Sciences, in a private placement for aggregate gross proceeds of $4.75 million. The
closing of the private placement occurred on July 7, 2011. Under the terms of the agreement, we
agreed to sell an aggregate of 25,000,000 shares of common stock at a price of $0.19 per share.
After deducting for fees and expenses, the net proceeds from the sale of the shares of common stock
are anticipated to be approximately $4.4 million. We will be required, among other things, to file
a resale registration statement within 30 days following the closing that covers the resale by the
purchasers of the shares.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, impairment of
long-lived assets, exit/disposal activities, research and development, income taxes and stock-based
compensation 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 United States 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 periods for payments
received from product development and license agreements as they relate to the revenue recognition,
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 revenues from grants, collaboration agreements and feasibility
studies. We recognize revenue under the provisions of the Securities and Exchange Commission
issued Staff Accounting Bulletin 104, Topic 13, Revenue Recognition Revised and Updated (SAB 104)
and Accounting Standards Codification (ASC) 605-25, Revenue Arrangements-Multiple Element
Arrangements (ASC 605-25). Revenue for arrangements not having multiple deliverables, as outlined
in ASC 605-25, is recognized once costs are incurred and collectability is reasonably assured.
Collaborative license and development agreements often require us to provide multiple
deliverables, such as a license, research and development, product steering committee services and
other performance obligations. These agreements are accounted for in accordance with ASC 605-25.
Under this standard, delivered items are evaluated to determine whether such items have value to
our collaborators on a stand-alone basis and whether objective reliable evidence of fair value of
the undelivered items exist.
Deliverables that meet these criteria are considered a separate unit of accounting.
Deliverables that do not meet these criteria are combined and accounted for as a single unit of
accounting. The appropriate revenue recognition criteria are identified and applied to each
separate unit of accounting.
Royalty revenue will be earned under the terms of the asset sale agreement with Zogenix. We
will recognize revenue when the amounts under this agreement can be determined and when
collectability is probable. We have no performance obligations under this agreement. We anticipate
recognizing revenue from quarterly royalty payments one quarter in arrears since we believe that we
will not be able to determine quarterly royalty earnings until we receive our royalty statements
and payments from Zogenix.
17
Impairment of Long-Lived Assets
In accordance with ASC 360-10, Property Plant and Equipment Overall, we review for
impairment whenever events or changes in circumstances indicate that the carrying amount of
property and equipment may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset and its eventual
disposition. In the event that such cash flows are not expected to be sufficient to recover the
carrying amount of the assets, we write down the assets to their estimated fair values and
recognize the loss in the statements of operations.
Accounting for Costs Associated with Exit or Disposal Activities
In accordance with ASC 420, Exit or Disposal Cost Obligations (ASC 420), we recognize a
liability for the cost associated with an exit or disposal activity that is measured initially at
its fair value in the period in which the liability is incurred, except for a liability for
one-time termination benefits that is incurred over time. According to this guidance, costs to
terminate an operating lease or other contracts are (a) costs to terminate the contract before the
end of its term or (b) costs that will continue to be incurred under the contract for its remaining
term without economic benefit to the entity. In periods subsequent to initial measurement, changes
to the liability are measured using the risk-free interest rate that was used to measure the
liability initially. We recorded losses under this standard for the Mendel sublease in 2007 and for
the sublease of additional space in 2009 since the sublease rate was less than the rental rate that
we are paying.
Research and Development
Research and development expenses consist of costs incurred for company-sponsored,
collaborative and contracted research and development activities. These costs include direct and
research-related overhead expenses. Research and development expenses that are reimbursed under
collaborative and government grants approximate the revenue recognized under such agreements. We
expense research and development costs as such costs are incurred.
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of certain tax assets
and liabilities, which arise from differences in the timing of recognition of revenue and expense
for tax and financial statement purposes. As part of the process of preparing our financial
statements, we are required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our current tax exposure under the most recent tax
laws and assessing temporary differences resulting from differing treatment of items for tax and
accounting purposes. In addition, we evaluate our tax positions to ensure that a minimum
recognition threshold is met before we recognize the tax position in the financial statements. The
aforementioned differences result in deferred tax assets and liabilities, which are included in our
balance sheets.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider
all available evidence, both positive and negative, including our historical levels of income and
losses, expectations and risks associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we
do not consider it more likely than not that we will recover our deferred tax assets, we will
record a valuation allowance against the deferred tax assets that we estimate will not ultimately
be recoverable. At June 30, 2011 and December 31, 2010, we believed that the amount of our deferred
income taxes would not be ultimately recovered. Accordingly, we recorded a full valuation allowance
for deferred tax assets. However, should there be a change in our ability to recover our deferred
tax assets, we would recognize a benefit to our tax provision in the period in which we determine
that it is more likely than not that we will recover our deferred tax assets. We regularly analyze
the status of our deferred tax assets and our ability to utilize them to offset future taxable
income, such as income received from collaboration or partnering transactions, and such
availability cannot be assured.
Stock-Based Compensation
We account for stock-based payment arrangements in accordance with ASC 718, Compensation -
Stock Compensation and ASC 505-50 Equity-Equity Based Payments to Non-Employees which requires the
recognition of compensation expense, using a fair-value based method, for all costs related to
stock-based payments including stock options, restricted stock awards and stock issued under the
employee stock purchase plan. These ASC topics require companies to estimate the fair value of
stock-based payment awards on the date of the grant using an option pricing model.
18
Stock-based compensation expense is recorded to research and development and general and
administrative expenses based on the function of the related employee. This charge had no impact on
our cash flows for the periods presented.
We use the Black-Scholes option-pricing model to estimate the fair value of stock-based awards
as of the grant date. The Black-Scholes model is complex and dependent upon key data input
estimates. The primary data inputs with the greatest degree of judgment are the estimated lives of
the stock options and the estimated volatility of our stock price. The Black-Scholes model is
highly sensitive to changes in these two inputs. The expected term of the options represents the
period of time that options granted are expected to be outstanding. We use the simplified method to
estimate the expected term as an input into the Black-Scholes option pricing model. We determine
expected volatility using the historical method, which is based on the historical daily trading
data of our common stock over the expected term of the option. For more information about our
accounting for stock-based compensation, see Note 9 to the audited financial statements included in
our Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 2 to the accompanying unaudited condensed consolidated financial statements included
in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on recent accounting
pronouncements.
Results of Operations
Three and six months ended June 30, 2011 and 2010
We reduced our net loss by approximately $1.2 million for the three months ended June 30, 2011
as compared with the three months ended June 30, 2010. This favorable result occurred because of
lower research and development costs and the receipt of quarterly royalty payments from Zogenix in
the three months ended June 30, 2011. Our net loss increased by approximately $1.0 million for the
six months ended June 30, 2011 as compared with the six months ended June 30, 2010. This
unfavorable result was due to the one-time receipt of the $4.0 million milestone from Zogenix
recorded as royalty revenue in the first quarter of 2010 partially offset by significantly lower
research and development expenses during the six month period ended June 30, 2011 as compared with
the comparable period in the prior year. Research and development expenses were lower despite our
continued investment in our inhaled ciprofloxacin program, including the expenses related to our
two Phase 2b clinical trials.
We recorded revenue in the three months ended June 30, 2011 for the Zogenix quarterly royalty
receipts of approximately $0.2 million as compared to zero revenue for the three months ended June
30, 2010. Total revenue was approximately $0.4 million for the six months ended June 30, 2011 as
compared with $4.0 million in revenue for the six months ended June 30, 2010. The $4.0 million in
royalty revenue related to the milestone payment that was due upon the initial commercialization of
Zogenixs SUMAVEL DosePro product.
Operating expenses were approximately $3.0 million for the three months ended June 30, 2011
which represented an approximately $1.1 million decrease from the three months ended June 30, 2010.
Research and development expenses decreased approximately $1.2 million and general and
administrative expenses increased by approximately $0.1 million as compared with the three months
ended June 30, 2010. Operating expenses were approximately $5.7 million for the six months ended
June 30, 2011, which represented an approximately $2.6 million decrease as compared with the six
months ended June 30, 2010. Research and development expenses decreased approximately $2.5 million
and general and administrative expenses decreased approximately $0.1 million as compared with the
six months ended June 30, 2010.
The decrease in research and development expenses was due to slightly lower headcount, lower
depreciation expense and lower clinical trials costs. For the quarter ended June 30, 2011, lower
clinical trials costs were mainly due to lower contract manufacturing costs related to the
production of inhaled ciprofloxacin for the Phase 2b trials and lower clinical costs due to the
ramp up of the Phase 2b trials that occurred in the prior year period.
Liquidity and Capital Resources
As of June 30, 2011, we had cash, cash equivalents and short-term investments of approximately
$9.4 million and total working capital of approximately $7.2 million. We believe that cash, cash
equivalents and short-term investments at June 30, 2011, as well as the proceeds from the July 2011
private placement, will be sufficient to enable us to fund our operations through at least the
second quarter of 2012.
Since inception, we have funded our operations primarily through public offerings and private
placements of our capital stock, license fees and milestone payments from collaborators, proceeds
from the January 2005 restructuring transaction with Novo Nordisk,
19
borrowings from Novo Nordisk, the milestone and royalty payments associated with the sale of
Intraject-related assets to Zogenix, proceeds from the June 2011 royalty financing transaction and
interest earned on investments. We have incurred significant losses and negative cash flows from
operations since our inception. At June 30, 2011, we had an accumulated deficit of approximately
$359.2 million and shareholders equity of approximately $0.2 million.
We are currently focusing primarily on establishing funded partnering agreements and sale or
out-licensing of non-strategic assets as the means to generate the capital resources needed to fund
the further development and commercialization of inhaled ciprofloxacin for the bronchiectasis and
cystic fibrosis indications. If we are unable to find financing on acceptable terms, we may be
required to defer our product development activities.
Six months ended June 30, 2011
Total cash and cash equivalents increased by approximately $3.2 million for the six months
ended June 30, 2011, compared to December 31, 2010. The increase in cash and cash equivalents was
primarily due to the net proceeds of approximately $8.1 million from the royalty financing
transaction in June 2011. This increase was offset by cash used in operations of approximately $4.3
million, as well as cash used for the net purchase of securities of approximately $0.7 million.
Six months ended June 30, 2010
Total cash and cash equivalents increased by approximately $5.7 million for the six months
ended June 30, 2010, compared to December 31, 2009. The increase in cash and cash equivalents was
primarily due to the net proceeds of approximately $3.7 million from the sale of common stock in
the June 2010 Private Placement and the net proceeds from the sale of short-term investments of
approximately $5.2 million. This increase was partially offset by cash used in operations of
approximately $3.3 million. Cash used in operations was favorably impacted by the receipt of the
$4.0 million milestone payment from Zogenix.
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 have one active, wholly-owned subsidiary incorporated in
Delaware, Aradigm Royalty Financing LLC, and one inactive, wholly-owned subsidiary domiciled in the
United Kingdom.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures in this section are not required since the Company qualifies as a smaller
reporting company.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the, Exchange Act)) were effective as of the end of the period covered by this report
to ensure that information that we are required to disclose in reports that management files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.
Our disclosure controls and procedures are designed to provide reasonable assurance of
achieving their objectives, and our Chief Executive Officer and Chief Financial Officer have
concluded that these controls and procedures are effective at the reasonable assurance level. We
believe that a control system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control 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.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
our most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 1A. RISK FACTORS
In addition to the other information contained in this Quarterly Report on Form 10-Q, and risk
factors set forth in the 2010 Annual Report on Form 10-K and our other filings with the SEC, the
following risk factors should be considered carefully before you decide whether to buy, hold or
sell our common stock. Our business, financial condition, results of operations and stock price
could be materially adversely affected by any of these risks. Additional risks not presently known
to us or that we currently deem immaterial may also impair our business, financial conditions,
results of operations and stock price.
The risk factors included herein include any material changes to and supersede the risk
factors associated with our business previously disclosed in Part I, Item 1A, Risk Factors of the
2010 Annual Report on Form 10-K. We have marked with a double asterisk (**) those risk factors that
reflect substantive changes from the risk factors included in the 2010 Annual Report on Form 10-K.
Risks Related to Our Business
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We are an early-stage company. |
You must evaluate us in light of the uncertainties and complexities present in an early-stage
company. All of our potential products are in an early stage of research or development. Our
potential drug products require extensive research, development and pre-clinical and clinical
testing. Our potential products also may involve lengthy regulatory reviews before they can be
sold. Because none of our product candidates has yet received approval by the FDA, we cannot assure
you that our research and development efforts will be successful, any of our potential products
will be proven safe and effective or regulatory clearance or approval to sell any of our potential
products will be obtained. We cannot assure you that any of our potential products can be
manufactured in commercial quantities or at an acceptable cost or marketed successfully. We may
abandon the development of some or all of our product candidates at any time and without prior
notice. We must incur substantial up-front expenses to develop and commercialize products and
failure to achieve commercial feasibility, demonstrate safety, achieve clinical efficacy, obtain
regulatory approval or successfully manufacture and market products will negatively impact our
business.
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**We will need to raise additional capital and we may not be able to raise additional capital on a
timely basis, on reasonable terms or at all. |
We believe our cash, cash equivalents and short-term investments as of June 30, 2011 and the
proceeds from the July 2011 private placement will be sufficient to enable us to fund our
operations through at least the second quarter of 2012. We currently have fewer than 2 million
authorized unallocated common shares available for future equity financings and we may not be able
to use common shares for future equity financings without shareholder approval. We will need to
commit substantial funds to develop our product candidates and we may not be able to obtain
sufficient funds on acceptable terms or at all, especially in light of the current difficult
financing environment. If we are unable to obtain capital on acceptable terms, we may be required
to defer our product development activities. Our operations to date have consumed substantial
amounts of cash and have generated no significant direct product revenues. We expect negative
operating cash flows to continue for at least the foreseeable future. Our future capital
requirements will depend on many factors, including:
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our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies; |
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the number of product development programs we pursue and the pace of each program; |
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our progress with formulation development; |
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the scope, rate of progress, results and costs of preclinical testing and clinical
trials; |
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the time and costs associated with seeking and maintaining regulatory approvals; |
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our ability to outsource the manufacture of our product candidates and the costs of doing
so; |
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the time and costs associated with establishing in-house resources to market and sell
certain of our products; |
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our ability to establish collaborative arrangements with others and the terms of those
arrangements; |
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the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and |
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our need to acquire licenses, or other rights for our product candidates. |
Since inception, we have financed our operations primarily through private placements and
public offerings of our capital stock, contract research funding and interest earned on
investments. Our estimates of future capital use are uncertain and changing circumstances,
including those related to implementation of, or further changes to, our development strategy,
could cause us to consume capital significantly faster than currently expected, and our expected
sources of funding may not be sufficient. If adequate funds are not available, we will be required
to delay, reduce the scope of, or eliminate one or more of our product development programs or to
obtain funds through arrangements with collaborators or other sources that may require us to
relinquish rights to or sell certain of our technologies or products that we would not otherwise
relinquish or sell. If we are able to obtain funds through the issuance of equity securities, our
shareholders may suffer significant dilution and our stock price may drop.
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**We have a history of losses, we expect to incur losses for at least the foreseeable future, and
we may never attain or maintain profitability. |
We have never been profitable and have incurred significant losses in each year since our
inception. As of June 30, 2011, we have an accumulated deficit of approximately $359.2 million. We
have not had any significant direct product sales and do not anticipate receiving revenues from the
sale of any of our products for at least the next few years, if ever. While our shift in
development strategy has resulted in reduced operating expenses and capital expenditures, we expect
to continue to incur substantial losses for the foreseeable future as we:
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continue drug product development efforts; |
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conduct preclinical testing and clinical trials; |
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pursue additional applications for our existing delivery technologies; |
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outsource the commercial-scale production of our products; and |
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establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval. |
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To achieve and sustain profitability, we must, alone or with others, successfully develop,
obtain regulatory approval for, manufacture, market and sell our products. We expect to incur
substantial expenses in our efforts to develop and commercialize products and we may never generate
sufficient product or contract research revenues to become profitable or to sustain profitability.
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**Our dependence on future collaborators may delay or terminate certain of our programs, and
any such delay or termination would harm our business prospects and stock price. |
Our commercialization strategy for certain of our product candidates depends on our ability to
enter into agreements with collaborators to obtain assistance and funding for the development and
potential commercialization of our product candidates. Supporting diligence activities conducted by
potential collaborators and negotiating the financial and other terms of a collaboration agreement
are long and complex processes with uncertain results. Even if we are successful in entering into
one or more collaboration agreements, collaborations may involve greater uncertainty for us, as we
have less control over certain aspects of our collaborative programs than we do over our
proprietary development and commercialization programs. We may determine that continuing a
collaboration under the terms provided is not in our best interest, and we may terminate the
collaboration. Our collaborators could delay or terminate their agreements, and our products
subject to collaborative arrangements may never be successfully commercialized.
Further, our future collaborators may pursue alternative technologies or develop alternative
products either on their own or in collaboration with others, including our competitors, and the
priorities or focus of our collaborators may shift such that our programs receive less attention or
resources than we would like, or they may be terminated altogether. Any such actions by our
collaborators may adversely affect our business prospects and ability to earn revenues. In
addition, we could have disputes with our future
collaborators, such as the interpretation of terms in our agreements. Any such disagreements
could lead to delays in the development or commercialization of any potential products or could
result in time-consuming and expensive litigation or arbitration, which may not be resolved in our
favor.
Even with respect to certain other programs that we intend to commercialize ourselves, we may
enter into agreements with collaborators to share in the burden of conducting clinical trials,
manufacturing and marketing our product candidates or products. In addition, our ability to apply
our proprietary technologies to develop proprietary drugs will depend on our ability to establish
and maintain licensing arrangements or other collaborative arrangements with the holders of
proprietary rights to such drugs. We may not be able to establish such arrangements on favorable
terms or at all, and our future collaborative arrangements may not be successful.
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**We are dependent upon Zogenix and its partners to successfully market and sell the SUMAVEL
DosePro needle-free delivery system in order to continue to realize value from this asset. |
We have no control over decisions made by Zogenix and/or its partners and collaborators on the
marketing, sale or continued development of the SUMAVEL DosePro product and any subsequent products
utilizing the DosePro technology. Any delay in, or failure to receive royalties could adversely
affect our wholly-owned subsidiarys ability to repay the term loan entered into in June 2011.
While the term loan is non-recourse to the assets of Aradigm Corporation, the term loan agreement
contains a minimum royalty covenant. If the minimum royalty covenant is breached and the subsidiary
does not cure the breach through a cash contribution to pay down the accrued principal and
interest, then the lenders have the right to declare the agreement in default and obtain the right
to all future royalties and payments due to Aradigm under the Zogenix asset purchase agreement.
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**The results of later stage clinical trials of our product candidates may not be as favorable as
earlier trials and that could result in additional costs and delay or prevent commercialization of
our products. |
Although we believe the limited and preliminary data we have regarding our potential products
are encouraging, the results of initial preclinical safety testing and clinical trials do not
necessarily predict the results that we will get from subsequent or more extensive preclinical
safety testing and clinical trials. Pre-clinical safety testing and clinical trials of our product
candidates may not demonstrate that they are safe and effective to the extent necessary to obtain
collaborative partnerships and/or regulatory approvals. Many companies in the biopharmaceutical
industry have suffered significant setbacks in advanced clinical trials, even after receiving
promising results in earlier trials. If we cannot adequately demonstrate through pre-clinical
studies and the clinical trial process that a therapeutic product we are developing is safe and
effective, regulatory approval of that product would be delayed or prevented, which would impair
our reputation, increase our costs and prevent us from earning revenues. For example, while both of
our Phase 2b clinical trials (ORBIT-1 and ORBIT-2) with inhaled ciprofloxacin showed promising
initial efficacy and safety results in patients with non-cystic fibrosis bronchiectasis and our
Phase 2a clinical trials showed promising results in both patients with cystic fibrosis and
non-cystic fibrosis bronchiectasis, there is no guarantee that longer term studies in larger
patient populations will confirm these results or that we will be able to conduct studies that will
provide satisfactory evidence of all efficacy and safety endpoints required by the regulatory
authorities.
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**The results of animal toxicology (preclinical safety) studies of our product candidates
required for late stage clinical development and product approval may not be as favorable as the
results from earlier experiments. Adverse toxicology findings may necessitate additional animal
safety studies, or lead to more extensive requirements for safety information from human studies.
These factors could result in additional costs and delays or prevent commercialization of our
products. |
Although we typically select drugs for development that already have a substantial amount of
safety data associated with them, and we also conduct a variety of preclinical studies, including
animal inhalation toxicology studies, to support our product development, longer term safety
studies in animals may be required before late stage clinical trials and product approval. For
example, the regulatory authorities may request that we conduct two year carcinogenicity studies if
they think that there are grounds to believe that our product could cause cancer. Longer term
animal safety studies may produce toxicity findings that were not found in the shorter earlier
studies, which could prevent commercialization of our products or could necessitate the conduct of
further animal safety studies, leading to delays and additional costs. Toxicology findings from
animal studies may also be the reason for more extensive safety monitoring and longer and larger
human clinical trials than we originally anticipated, further adding to the cost and time prior to
product commercialization.
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**If our future clinical trials are delayed because of delays in obtaining FDA clearance to
initiate the trials, delays in patient enrollment or other problems, we would incur additional
costs and delay the potential receipt of revenues. |
Before we or any future collaborators can file for regulatory approval for the commercial sale
of our potential products, the FDA will require extensive preclinical safety testing and clinical
trials to demonstrate their safety and efficacy. Completing clinical trials in a timely manner
depends on, among other factors, obtaining FDA clearance to initiate the trials and the timely
enrollment of patients. Our ability to initiate future clinical trials is dependent upon obtaining
clearance from the FDA following their review of extensive preclinical safety testing data and the
results of previous human clinical trials. Our ability to recruit patients depends on a number of
factors, including the size of the patient population, the proximity of patients to clinical
sites, the eligibility criteria for the study and the existence of competing clinical trials.
Delays in our future clinical trials because of delays in obtaining FDA clearance, delays in
planned patient enrollment or other problems may result in increased costs, program delays, or
both, and the loss of potential revenues.
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We are subject to extensive regulation, including the requirement of approval before any of our
product candidates can be marketed. We may not obtain regulatory approval for our product
candidates on a timely basis, or at all. |
We and our products are subject to extensive and rigorous regulation by the federal
government, principally the FDA, and by state and local government agencies. Both before and after
regulatory approval, the development, testing, manufacture, quality control, labeling, storage,
approval, advertising, promotion, sale, distribution and export of our potential products are
subject to regulation. Pharmaceutical products that are marketed abroad are also subject to
regulation by foreign governments. Our products cannot be marketed in the United States without FDA
approval. The process for obtaining FDA approval for drug products is generally lengthy, expensive
and uncertain. To date, we have not sought or received approval from the FDA or any corresponding
foreign authority for any of our product candidates.
Even though we intend to apply for approval of most of our products in the United States under
Section 505(b)(2) of the United States Food, Drug and Cosmetic Act, which applies to reformulations
of approved drugs and which may require smaller and shorter safety and efficacy testing than that
for entirely new drugs, the approval process will still be costly, time-consuming and uncertain.
We, or our collaborators, may not be able to obtain necessary regulatory approvals on a timely
basis, if at all, for any of our potential products. Even if granted, regulatory approvals may
include significant limitations on the uses for which products may be marketed. Failure to comply
with applicable regulatory requirements can, among other things, result in warning letters,
imposition of civil penalties or other monetary payments, delay in approving or refusal to approve
a product candidate, suspension or withdrawal of regulatory approval, product recall or seizure,
operating restrictions, interruption of clinical trials or manufacturing, injunctions and criminal
prosecution.
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Regulatory authorities may delay or not approve our product candidates even if the product
candidates meet safety and efficacy endpoints in clinical trials or the approvals may be too
limited for us to earn sufficient revenues. |
The FDA and other foreign regulatory agencies can delay approval of, or refuse to approve, our
product candidates for a variety of reasons, including failure to meet safety and/or efficacy
endpoints in our clinical trials. Our product candidates may not be approved even if they achieve
their endpoints in clinical trials. Regulatory agencies, including the FDA, may disagree with our
trial design and our interpretations of data from preclinical studies and clinical trials. Even if
a product candidate is approved, it may be approved for fewer or more limited indications than
requested or the approval may be subject to the performance of significant post-marketing studies
that can be long and costly. In addition, regulatory agencies may not approve the labeling claims
that are necessary or desirable for the successful commercialization of our product candidates. Any
limitation, condition or denial of approval would have an adverse affect on our business,
reputation and results of operations.
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Even if we are granted initial FDA approval for any of our product candidates, we may not be able
to maintain such approval, which would reduce our revenues. |
Even if we are granted initial regulatory approval for a product candidate, the FDA and
similar foreign regulatory agencies can limit or withdraw product approvals for a variety of
reasons, including failure to comply with regulatory requirements, changes in regulatory
requirements, problems with manufacturing facilities or processes or the occurrence of unforeseen
problems, such as the discovery of previously undiscovered side effects. If we are able to obtain
any product approvals, they may be limited or withdrawn or we may be unable to remain in compliance
with regulatory requirements. Both before and after approval we, our future collaborators and our
products are subject to a number of additional requirements. For example, certain changes to the
approved product, such as adding new indications, certain manufacturing changes and additional
labeling claims are subject to additional FDA review and approval. Advertising and other
promotional material must comply with FDA requirements and established requirements applicable to
drug samples. We, our future collaborators and our manufacturers will be subject to continuing
review and periodic inspections by the FDA and other authorities, where applicable, and must comply
with ongoing requirements, including the FDAs Good Manufacturing Practices, or GMP, requirements.
Once the FDA approves a product, a manufacturer must provide certain updated safety and efficacy
information, submit copies of promotional materials to the FDA and make certain other required
reports. Product approvals may be withdrawn if regulatory requirements are not complied with or if
problems concerning safety or efficacy of the product occur following approval. Any limitation or
withdrawal of approval of any of our products could delay or prevent sales of our products, which
would adversely affect our revenues. Further continuing regulatory requirements may involve
expensive ongoing monitoring and testing requirements.
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**Because our proprietary inhaled ciprofloxacin programs rely on the FDAs and European Medicines
Agencys grant of orphan drug designation for potential market exclusivity, the product may not be
able to obtain market exclusivity and could be barred from the market in the US for up to seven
years or European Union for up to ten years. |
The FDA has granted orphan drug designation for our proprietary liposomal ciprofloxacin drug
product candidate for the management of cystic fibrosis and bronchiectasis and to our ciprofloxacin
for inhalation for the management of bronchiectasis. Orphan drug designation is intended to
encourage research and development of new therapies for diseases that affect fewer than 200,000
patients in the United States. The designation provides the opportunity to obtain market
exclusivity for seven years from the date of the FDAs approval of a new drug application, or NDA.
However, the market exclusivity is granted only to the first chemical entity to be approved by the
FDA for a given indication. Therefore, if another similar inhaled ciprofloxacin product were to be
approved by the FDA for a cystic fibrosis or bronchiectasis indication before our product, then we
may be blocked from launching our product in the United States for seven years, unless we are able
to demonstrate to the FDA clinical superiority of our product on the basis of safety or efficacy.
For example, Bayer HealthCare is developing an inhaled powder formulation of ciprofloxacin for the
treatment of respiratory infections in cystic fibrosis and bronchiectasis. Bayer has obtained
orphan drug status for their inhaled powder formulation of ciprofloxacin in the United States and
European Union for the treatment of cystic fibrosis.
In August 2009, the European Medicines Agency granted orphan drug designation to our inhaled
liposomal ciprofloxacin drug product candidate ARD-3100 for the treatment of lung infections
associated with cystic fibrosis. Under European guidelines, Orphan Medicinal Product Designation
provides 10 years of potential market exclusivity if the product candidate is the first product
candidate for the indication approved for marketing in the European Union. We may seek to develop
additional products that incorporate drugs that have received orphan drug designations for specific
indications. In each case, if our product is not the first to be approved by the FDA or European
Medicines Agency for a given indication, we may not be able to access the target market in the
United States and/or the European Union, which would adversely affect our ability to earn revenues.
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We have limited manufacturing capacity and will have to depend on contract manufacturers and
collaborators; if they do not perform as expected, our revenues and customer relations will
suffer. |
We have limited capacity to manufacture our requirements for the development and
commercialization of our product candidates. We intend to use contract manufacturers to produce our
products. We may not be able to enter into or maintain satisfactory contract manufacturing
arrangements. For example, our agreement with Sigma-Tau Group to manufacture inhaled ciprofloxacin
may be terminated for unforeseen reasons, or we may not be able to reach mutually satisfactory
agreements with Sigma-Tau Group to manufacture these at a commercial scale. There may be a
significant delay before we find an alternative contract manufacturer or we may not find an
alternative contract manufacturer at all.
Further, we, our contract manufacturers and our future collaborators are required to comply
with the FDAs GMP requirements that relate to product testing, quality assurance, manufacturing
and maintaining records and documentation. We and our contract manufacturers or our future
collaborators may not be able to comply with the applicable GMP and other FDA regulatory
requirements
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for manufacturing, which could result in an enforcement or other action, prevent
commercialization of our product candidates and impair our reputation and results of operations.
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**In order to market certain of our proprietary products, we may establish our own sales,
marketing and distribution capabilities. We have no experience in these areas, and if we have
problems establishing these capabilities, the commercialization of our products would be impaired. |
We may establish our own sales, marketing and distribution capabilities to market certain
products to concentrated, easily addressable prescriber markets. We have no experience in these
areas, and developing these capabilities will require significant expenditures on personnel and
infrastructure. While we may market products that are aimed at a small patient population, we may
not be able to create an effective sales force around even a niche market. In addition, some of our
product candidates will require a large sales force to call on, educate and support physicians and
patients. While we intend to enter into collaborations with one or more pharmaceutical companies to
sell, market and distribute such products, we may not be able to enter into any such arrangement on
acceptable terms, if at all. Any collaboration we do enter into may not be effective in generating
meaningful product royalties or other revenues for us.
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If any products that we or our future collaborators may develop do not attain adequate market
acceptance by healthcare professionals and patients, our business prospects and results of
operations will suffer. |
Even if we or our future collaborators successfully develop one or more products, such
products may not be commercially acceptable to healthcare professionals and patients, who will have
to choose our products over alternative products for the same
disease indications, and many of these alternative products will be more established than
ours. For our products to be commercially viable we will need to demonstrate to healthcare
professionals and patients that our products afford benefits to the patients that are
cost-effective as compared to the benefits of alternative therapies. Our ability to demonstrate
this depends on a variety of factors, including:
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the demonstration of efficacy and safety in clinical trials; |
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the existence, prevalence and severity of any side effects; |
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the potential or perceived advantages or disadvantages compared to alternative
treatments; |
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the timing of market entry relative to competitive treatments; |
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the relative cost, convenience, product dependability and ease of administration; |
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the strength of marketing and distribution support; |
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the sufficiency of coverage and reimbursement of our product candidates by governmental
and other third-party payors; and |
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the product labeling or product insert required by the FDA or regulatory authorities in
other countries. |
Our product revenues will be adversely affected if, due to these or other factors, the
products we or our future collaborators are able to commercialize do not gain significant market
acceptance.
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We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage. |
Our business and competitive position is dependent upon our and our future collaborators
ability to protect our proprietary technologies related to various aspects of pulmonary drug
delivery and drug formulation. While our intellectual property rights may not provide a significant
commercial advantage for us, our patents and know-how are intended to provide protection for
important aspects of our technology, including methods for aerosol generation, devices used to
generate aerosols, breath control, compliance monitoring, certain pharmaceutical formulations,
design of dosage forms and their manufacturing and testing methods. In addition, we are maintaining
as non-patented trade secrets some of the key elements of our manufacturing technologies, for
example, those associated with the production of inhaled ciprofloxacin.
Our ability to compete effectively will also depend to a significant extent on our and our
future collaborators ability to obtain and enforce patents and maintain trade secret protection
over our proprietary technologies. The coverage claimed in a patent application
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typically is
significantly reduced before a patent is issued, either in the United States or abroad.
Consequently, any of our pending or future patent applications may not result in the issuance of
patents and any patents issued may be subjected to further proceedings limiting their scope and may
in any event not contain claims broad enough to provide meaningful protection. Any patents that are
issued to us or our future collaborators may not provide significant proprietary protection or
competitive advantage, and may be circumvented or invalidated. In addition, unpatented proprietary
rights, including trade secrets and know-how, can be difficult to protect and may lose their value
if they are independently developed by a third party or if their secrecy is lost. Further, because
development and commercialization of pharmaceutical products can be subject to substantial delays,
patents may expire and provide only a short period of protection, if any, following
commercialization of products.
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We may infringe on the intellectual property rights of others, and any litigation could force us
to stop developing or selling potential products and could be costly, divert management attention
and harm our business. |
We must be able to develop products without infringing the proprietary rights of other
parties. Because the markets in which we operate involve established competitors with significant
patent portfolios, including patents relating to compositions of matter, methods of use and methods
of drug delivery, it could be difficult for us to use our technologies or develop products without
infringing the proprietary rights of others. We may not be able to design around the patented
technologies or inventions of others and we may not be able to obtain licenses to use patented
technologies on acceptable terms, or at all. If we cannot operate without infringing on the
proprietary rights of others, we will not earn product revenues.
If we are required to defend ourselves in a lawsuit, we could incur substantial costs and the
lawsuit could divert managements attention, regardless of the lawsuits merit or outcome. These
legal actions could seek damages and seek to enjoin testing,
manufacturing and marketing of the accused product or process. In addition to potential
liability for significant damages, we could be required to obtain a license to continue to
manufacture or market the accused product or process and any license required under any such patent
may not be made available to us on acceptable terms, if at all.
Periodically, we review publicly available information regarding the development efforts of
others in order to determine whether these efforts may violate our proprietary rights. We may
determine that litigation is necessary to enforce our proprietary rights against others. Such
litigation could result in substantial expense, regardless of its outcome, and may not be resolved
in our favor.
Furthermore, patents already issued to us or our pending patent applications may become
subject to dispute, and any disputes could be resolved against us. For example, Eli Lilly and
Company brought an action against us seeking to have one or more employees of Eli Lilly named as
co-inventors on one of our patents. This case was determined in our favor in 2004, but we may face
other similar claims in the future and we may lose or settle cases at significant loss to us. In
addition, because patent applications in the United States are currently maintained in secrecy for
a period of time prior to issuance, patent applications in certain other countries generally are
not published until more than 18 months after they are first filed, and publication of discoveries
in scientific or patent literature often lags behind actual discoveries, we cannot be certain that
we were the first creator of inventions covered by our pending patent applications or that we were
the first to file patent applications on such inventions.
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We are in a highly competitive market, and our competitors have developed or may develop
alternative therapies for our target indications, which would limit the revenue potential of any
product we may develop. |
We are in competition with pharmaceutical, biotechnology and drug delivery companies,
hospitals, research organizations, individual scientists and nonprofit organizations engaged in the
development of drugs and therapies for the disease indications we are targeting. Our competitors
may succeed before we can, and many already have succeeded, in developing competing technologies
for the same disease indications, obtaining FDA approval for products or gaining acceptance for the
same markets that we are targeting. If we are not first to market, it may be more difficult for
us and our future collaborators to enter markets as second or subsequent competitors and become
commercially successful. We are aware of a number of companies that are developing or have
developed therapies to address indications we are targeting, including major pharmaceutical
companies such as Bayer, Genentech (now a part of Roche), Gilead Sciences, GlaxoSmith Kline,
Johnson & Johnson, Novartis and Pfizer. Certain of these companies are addressing these target
markets with pulmonary products that are similar to ours. These companies and many other potential
competitors have greater research and development, manufacturing, marketing, sales, distribution,
financial and managerial resources and experience than we have and many of these companies may have
products and product candidates that are on the market or in a more advanced stage of development
than our product candidates. Our ability to earn product revenues and our market share would be
substantially harmed if any existing or potential competitors brought a product to market before we
or our future collaborators were able to, or if a competitor introduced at any time a product
superior to or more cost-effective than ours.
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If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired. |
We depend on a small number of key management and technical personnel. Our success also
depends on our ability to attract and retain additional highly qualified management, clinical,
regulatory and development personnel. There is a shortage of skilled personnel in our industry, we
face competition in our recruiting activities, and we may not be able to attract or retain
qualified personnel. Losing any of our key employees, particularly our President and Chief
Executive Officer, Dr. Igor Gonda, could impair our product development efforts and otherwise harm
our business. Any of our employees may terminate their employment with us at will.
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If we market our products in other countries, we will be subject to different laws and regulations
and we may not be able to adapt to those laws and regulations, which could increase our costs
while reducing our revenues. |
If we market any approved products in foreign countries, we will be subject to different laws
and regulations, particularly with respect to intellectual property rights and regulatory approval.
To maintain a proprietary market position in foreign countries, we may seek to protect some of our
proprietary inventions through foreign counterpart patent applications. Statutory differences in
patentable subject matter may limit the protection we can obtain on some of our inventions outside
of the United States. The diversity of patent laws may make our expenses associated with the
development and maintenance of intellectual property in foreign jurisdictions more expensive than
we anticipate. We probably will not obtain the same patent protection in every market in which we
may otherwise be able to potentially generate revenues. In addition, in order to market our
products in foreign jurisdictions, we and our future collaborators must obtain required regulatory
approvals from foreign regulatory agencies and comply with extensive regulations regarding safety
and quality. We may not be able to obtain regulatory approvals in such jurisdictions and we may
have to incur significant costs in obtaining or maintaining any foreign regulatory approvals. If
approvals to market our products are delayed, if we fail to receive these approvals, or if we lose
previously received approvals, our business would be impaired as we could not earn revenues from
sales in those countries.
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We may be exposed to product liability claims, which would hurt our reputation, market position
and operating results. |
We face an inherent risk of product liability as a result of the clinical testing of our
product candidates in humans and will face an even greater risk upon commercialization of any
products. These claims may be made directly by consumers or by pharmaceutical companies or others
selling such products. We may be held liable if any product we develop causes injury or is found
otherwise unsuitable during product testing, manufacturing or sale. Regardless of merit or eventual
outcome, liability claims would likely result in negative publicity, decreased demand for any
products that we may develop, injury to our reputation and suspension or withdrawal of clinical
trials. Any such claim will be very costly to defend and also may result in substantial monetary
awards to clinical trial participants or customers, loss of revenues and the inability to
commercialize products that we develop. Although we currently have product liability insurance, we
may not be able to maintain such insurance or obtain additional insurance on acceptable terms, in
amounts sufficient to protect our business, or at all. A successful claim brought against us in
excess of our insurance coverage would have a material adverse effect on our results of operations.
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If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer. |
In both domestic and foreign markets, sales of our potential products will depend in
substantial part on the availability of adequate reimbursement from third-party payors such as
government health administration authorities, private health insurers and other organizations.
Third-party payors often challenge the price and cost-effectiveness of medical products and
services. Significant uncertainty exists as to the adequate reimbursement status of newly approved
health care products. Any products we are able to successfully develop may not be reimbursable by
third-party payors. In addition, our products may not be considered cost-effective and adequate
third-party reimbursement may not be available to enable us to maintain price levels sufficient to
realize a profit. Legislation and regulations affecting the pricing of pharmaceuticals may change
before our products are approved for marketing and any such changes could further limit
reimbursement. If any products we develop do not receive adequate reimbursement, our revenues will
be severely limited.
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Our use of hazardous materials could subject us to liabilities, fines and sanctions. |
Our laboratory and clinical testing sometimes involves the use of hazardous and toxic
materials. We are subject to federal, state and local laws and regulations governing how we use,
manufacture, handle, store and dispose of these materials. Although we believe that our safety
procedures for handling and disposing of such materials comply in all material respects with all
federal, state and local regulations and standards, there is always the risk of accidental
contamination or injury from these materials. In the event of an accident, we could be held liable
for any damages that result and such liability could exceed our financial resources. Compliance
with environmental and other laws may be expensive and current or future regulations may impair our
development or commercialization efforts.
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If we are unable to effectively implement or maintain a system of internal control over financial
reporting, we may not be able to accurately or timely report our financial results and our stock
price could be adversely affected. |
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal control over financial reporting as of the end of each fiscal year, and to include a
management report assessing the effectiveness of our internal control over financial reporting in
our Annual Report on Form 10-K for that fiscal year. Our ability to comply with the annual internal
control report requirements will depend on the effectiveness of our financial reporting and data
systems and controls across our company. We
expect these systems and controls to involve significant expenditures and to become
increasingly complex as our business grows. To effectively manage this complexity, we will need to
continue to improve our operational, financial and management controls and our reporting systems
and procedures. Any failure to implement required new or improved controls, or difficulties
encountered in the implementation or operation of these controls, could harm our operating results
and cause us to fail to meet our financial reporting obligations, which could adversely affect our
business and reduce our stock price.
Risks Related to Our Common Stock
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Our stock price is likely to remain volatile. |
The market prices for securities of many companies in the drug delivery and pharmaceutical
industries, including ours, have historically been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations unrelated to the operating
performance of particular companies. The market prices for our common stock may continue to be
highly volatile in the future. The market prices for our common stock may be influenced by many
factors, including:
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investor perception of us; |
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our available cash; |
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market conditions relating to our segment of the industry or the securities markets in
general; |
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investor perception of the future royalty stream from Zogenix; |
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sales of our stock by certain large institutional shareholders; |
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research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors; |
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failure to establish or delays in establishing new collaborative relationships; |
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fluctuations in our operating results; |
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announcements of technological innovations or new commercial products by us or our
competitors; |
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publicity regarding actual or potential developments relating to products under
development by us or our competitors; |
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developments or disputes concerning patents or proprietary rights; |
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delays in the development or approval of our product candidates; |
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regulatory developments in both the United States and foreign countries; |
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concern of the public or the medical community as to the safety or efficacy of our
products, or products deemed to have similar safety risk factors or other similar
characteristics to our products; |
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future sales or expected sales of substantial amounts of common stock by shareholders; |
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our ability to raise capital; and |
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economic and other external factors. |
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In the past, class action securities litigation has often been instituted against companies
promptly following volatility in the market price of their securities. Any such litigation
instigated against us would, regardless of its merit, result in substantial costs and a diversion
of managements attention and resources.
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Our common stock is quoted on the OTC Bulletin Board, which may provide less liquidity for our
shareholders than the national exchanges. |
On November 10, 2006, our common stock was delisted from the Nasdaq Capital Market due to
non-compliance with Nasdaqs continued listing standards. Our common stock is currently quoted on
the OTC Bulletin Board. As compared to being listed on a national exchange, being quoted on the OTC
Bulletin Board may result in reduced liquidity for our shareholders, may cause investors not to
trade in our stock and may result in a lower stock price. In addition, investors may find it more
difficult to obtain accurate quotations of the share price of our common stock. Trading of our
common stock through the OTC Bulletin Board is frequently thin and highly volatile, and there is no
assurance that a sufficient market will develop in our common stock, in which case it could be
difficult for our shareholders to sell their stock.
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Our common stock may be considered penny stock and may be difficult to sell. |
The SEC has adopted regulations which generally define penny stock to include an equity
security that has a market price of less than $5.00 per share, subject to specific exemptions. The
market price of our common stock is currently less than $5.00 per share and therefore may be
designated as a penny stock according to SEC rules. This designation requires any broker or
dealer selling these securities to disclose some information concerning the transaction, obtain a
written agreement from the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities. These rules may restrict the ability of brokers or dealers to sell the
common stock and may affect the ability of investors to sell their shares. These regulations may
likely have the effect of limiting the trading activity of our common stock and reducing the
liquidity of an investment in our common stock.
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We have implemented certain anti-takeover provisions, which may make an acquisition less likely or
might result in costly litigation or proxy battles. |
Certain provisions of our articles of incorporation and the California Corporations Code could
discourage a party from acquiring, or make it more difficult for a party to acquire, control of our
company without approval of our Board of Directors. These provisions could also limit the price
that certain investors might be willing to pay in the future for shares of our common stock.
Certain provisions allow our Board of Directors to authorize the issuance, without shareholder
approval, of preferred stock with rights superior to those of the common stock. We are also subject
to the provisions of Section 1203 of the California Corporations Code, which requires us to provide
a fairness opinion to our shareholders in connection with their consideration of any proposed
interested party reorganization transaction.
We have adopted a shareholder rights plan, commonly known as a poison pill. We have also
adopted an executive officer severance plan and entered into change of control agreements with our
executive officers, both of which may provide for the payment of benefits to our officers and other
key employees in connection with an acquisition. The provisions of our articles of incorporation,
our poison pill, our severance plan and our change of control agreements, and provisions of the
California Corporations Code may discourage, delay or prevent another party from acquiring us or
reduce the price that a buyer is willing to pay for our common stock.
One of our shareholders may choose to pursue a lawsuit or engage in a proxy battle with
management to limit our use of one or more of these anti-takeover protections. Any such lawsuit or
proxy battle would, regardless of its merit or outcome, result in substantial costs and a diversion
of managements attention and resources.
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We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future. |
We have never declared or paid cash dividends on our capital stock. We do not anticipate
paying any cash dividends on our common stock for at least the foreseeable future. We currently
intend to retain all available funds and future earnings, if any, to fund the development and
growth of our business. Therefore, our shareholders will not receive any funds absent a sale of
their shares. We cannot assure shareholders of a positive return on their investment if they sell
their shares, nor can we assure that shareholders will not lose the entire amount of their
investment.
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A small number of shareholders own a large percentage of our common stock and can influence the
outcome of matters submitted to our shareholders for approval. |
A small number of our shareholders own a large percentage of our common stock and can,
therefore, influence the outcome of matters submitted to our shareholders for approval. Based on
information known to us as of July 5, 2011, our three largest investors, collectively, control in
excess of a majority of our outstanding common stock. As a result, these shareholders have the
ability to influence the outcome of matters submitted to our shareholders for approval, including
certain proposed amendments to our amended and restated articles of incorporation (for example,
amendments to increase the number of our authorized shares) and any proposed merger, consolidation
or sale of all or substantially all of our assets. These shareholders may support proposals and
actions with which
you may disagree. The concentration of ownership could delay or prevent a change in control of
our company or otherwise discourage a potential acquirer from attempting to obtain control of our
company, which in turn could reduce the price of our common stock.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On
July 7, 2011, we closed a private placement, which we refer to in
this Quarterly Report on Form 10-Q as the July 2011 private placement, in
which we sold 25,000,000 shares of our common stock to accredited
investors (which included a few then-existing significant
shareholders) under the terms of a securities purchase agreement that
we entered into with the accredited investors on July 5, 2011. At the
closing of the July 2011 private placement, we received approximately
$4.75 million in aggregate gross proceeds from the sale of the common
stock. After deducting fees and expenses, the aggregate net proceeds
from the sale of the common stock were approximately $4.4 million.
The common stock was offered and sold to the accredited investors
without registration under the Securities Act, or any state
securities laws in reliance on the exemption from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof
and rule 506 of Regulation D promulgated thereunder.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. (REMOVED AND RESERVED)
Item 5. OTHER INFORMATION
Not applicable.
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Item 6. EXHIBITS
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Exhibit |
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Number |
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Description |
10.1(1)
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Amended and Restated Executive Officer Severance Benefit Plan |
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10.2(1)
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Amended and Restated Change of Control Agreement, dated as of April 15, 2011 by and between the
Company and
Igor Gonda |
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10.3(1)
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Amended and Restated Change of Control Agreement, dated as of April 15, 2011 by and between the
Company and
Nancy Pecota |
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10.4(1)
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Form of Indemnification Agreement between the Company and each of its directors and senior officers |
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31.1
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Certification of the Principal Executive Officer required by Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
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31.2
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Certification of the Principal Financial Officer required by Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
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32.1
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Certification of the Principal Executive Officer and Principal Financial Officer required by Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.1(2)
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The following materials from the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2011 are formatted in XBRL (eXtensible Business
Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated
Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv)
Notes to Condensed Consolidated Financial Statements.
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(1)
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Incorporated by reference to the Companys Form 8-K filed on April 18, 2011.
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(2)
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Rule 406T of Regulation S-T, the XBRL files on
Exhibit 101 hereto are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as
amended, are deemed not filed for purposes of Section 18 of the Securities and
Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
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Aradigm and AERx are registered trademarks of Aradigm Corporation |
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Other names and brands may be claimed as the property of others. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ARADIGM CORPORATION
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/s/ Igor Gonda
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Igor Gonda |
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President and Chief Executive Officer
(Principal Executive Officer) |
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/s/ Nancy E. Pecota
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Nancy E. Pecota |
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Vice President, Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer) |
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Dated: August 8, 2011
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INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
10.1(1)
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Amended and Restated Executive Officer Severance Benefit Plan |
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10.2(1)
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Amended and Restated Change of Control Agreement, dated as of April 15, 2011, by and between the
Company and Igor Gonda |
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10.3(1)
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Amended and Restated Change of Control Agreement, dated as of April 15, 2011, by and between the
Company and Nancy Pecota |
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10.4(1)
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Form of Indemnification Agreement between the Company and each of its directors and senior officers |
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31.1
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Certification of the Principal Executive Officer required by Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
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31.2
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Certification of the Principal Financial Officer required by Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
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32.1
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Certification of the Principal Executive Officer and Principal Financial Officer required by Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.1(2)
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The following materials from the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2011 are formatted in XBRL (eXtensible Business
Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated
Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv)
Notes to Condensed Consolidated Financial Statements.
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(1)
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Incorporated by reference to the Companys Form 8-K filed on April 18, 2011. |
(2)
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Pursuant to Rule 406T of Regulation S-T, the XBRL files on
Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed
for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise
are not subject to liability under those sections.
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