##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 or
 o
    
    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)
 California
    
    94-3133088(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3929 Point Eden Way
Hayward, CA 94545  (Address of principal executive offices including zip code)
 (510) 265-9000  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company þ
 o þ
  (Class)
    
    (Outstanding at October 31, 2009)Common
    
    102,376,116




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##### 



ARADIGM CORPORATION
TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Balance Sheets at September 30, 2009 and December 31, 2008 (unaudited)
    
    
    3Condensed Statements of Operations for the three and nine months ended September 30, 2009 and 2008 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited)
    
    
    5Notes to the Unaudited Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    34Signatures
    
    
    35EX-10.1EX-10.2EX-10.3EX-10.4EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    FINANCIAL STATEMENTS
 
 ARADIGM CORPORATION
CONDENSED BALANCE SHEETS

(In thousands, except share data)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,125
    
    
    $
    16,741Short-term investments
    
    
    8,661
    
    
    
    2,399Receivables
    
    
    243
    
    
    
    393Restricted cash
    
    
    225
    
    
    
    225Prepaid and other current assets
    
    
    321
    
    
    
    387Total current assets
    
    
    12,575
    
    
    
    20,145Property and equipment, net
    
    
    2,352
    
    
    
    5,093Notes receivable
    
    
    51
    
    
    
    34Other assets
    
    
    135
    
    
    
    247Total assets
    
    $
    15,113
    
    
    $
    25,519LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    245
    
    
    $
    739Accrued clinical and cost of other studies
    
    
    451
    
    
    
    94Accrued compensation
    
    
    936
    
    
    
    1,051Facility lease exit obligation
    
    
    257
    
    
    
    318Other accrued liabilities
    
    
    390
    
    
    
    630Total current liabilities
    
    
    2,279
    
    
    
    2,832Deferred rent
    
    
    143
    
    
    
    199Facility lease exit obligation, non-current
    
    
    896
    
    
    
    1,056Deferred revenue, non-current
    
    
    
    
    
    
    4,122Other non-current liabilities
    
    
    75
    
    
    
    82Note payable and accrued interest
    
    
    8,787
    
    
    
    8,472Total liabilities
    
    
    12,180
    
    
    
    16,763Commitments and contingenciesShareholders equity:Preferred
stock, 2,950,000 shares authorized, none outstandingCommon stock, no par value; authorized shares: 150,000,000
at September 30, 2009 and December 31, 2008; issued and
outstanding shares: 102,311,671 at September 30, 2009 and
55,029,384 at December 31, 2008
    
    
    348,012
    
    
    
    343,426Accumulated other comprehensive income
    
    
    3
    
    
    
    4Accumulated deficit
    
    
    (345,082
    )
    
    
    (334,674
    )Total shareholders equity
    
    
    2,933
    
    
    
    8,756Total liabilities and shareholders equity
    
    $
    15,113
    
    
    $
    25,519
  3




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##### Table of Contents



ARADIGM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue:Contract revenue
    
    $
    4,883
    
    
    $
    197
    
    
    $
    4,883
    
    
    $
    251Operating expenses:Research and development
    
    
    2,426
    
    
    
    3,199
    
    
    
    9,079
    
    
    
    12,892General and administrative
    
    
    1,323
    
    
    
    1,615
    
    
    
    4,089
    
    
    
    4,989Restructuring and asset impairment
    
    
    1,638
    
    
    
    19
    
    
    
    1,860
    
    
    
    61Total operating expenses
    
    
    5,387
    
    
    
    4,833
    
    
    
    15,028
    
    
    
    17,942Loss from operations
    
    
    (504
    )
    
    
    (4,636
    )
    
    
    (10,145
    )
    
    
    (17,691
    )Interest income
    
    
    16
    
    
    
    146
    
    
    
    58
    
    
    
    709Interest expense
    
    
    (109
    )
    
    
    (105
    )
    
    
    (318
    )
    
    
    (303
    )Other income (expense), net
    
    
    1
    
    
    
    (1
    )
    
    
    (3
    )
    
    
    (1
    )Net loss
    
    $
    (596
    )
    
    $
    (4,596
    )
    
    $
    (10,408
    )
    
    $
    (17,286
    )Basic and diluted net loss per common share
    
    $
    (0.01
    )
    
    $
    (0.08
    )
    
    $
    (0.12
    )
    
    $
    (0.32
    )Shares used in computing basic and diluted net loss per common share
    
    
    99,347
    
    
    
    54,165
    
    
    
    89,888
    
    
    
    54,111
  4




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ARADIGM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (10,408
    )
    
    $
    (17,286
    )Adjustments to reconcile net loss to cash used in operating activities:Impairment loss on property and equipment
    
    
    1,654
    
    
    
    Amortization and accretion of investments
    
    
    6
    
    
    
    1Depreciation
    
    
    899
    
    
    
    590Stock-based compensation
    
    
    622
    
    
    
    638Loss on retirement and sale of property and equipment
    
    
    3
    
    
    
    1Facility lease exit cost
    
    
    158
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    150
    
    
    
    87Prepaid and other current assets
    
    
    66
    
    
    
    469Restricted cash
    
    
    
    
    
    
    (9
    )Other assets
    
    
    (5
    )
    
    
    17Accounts payable
    
    
    (494
    )
    
    
    (563
    )Accrued compensation
    
    
    (115
    )
    
    
    (223
    )Other accrued liabilities
    
    
    425
    
    
    
    (495
    )Deferred rent
    
    
    (56
    )
    
    
    (61
    )Deferred revenue
    
    
    (4,122
    )
    
    
    265Facility lease exit obligation
    
    
    (263
    )
    
    
    (281
    )Net cash used in operating activities
    
    
    (11,480
    )
    
    
    (16,850
    )Cash flows from investing activities:Capital expenditures
    
    
    185
    
    
    
    (2,473
    )Purchases of available-for-sale investments
    
    
    (9,649
    )
    
    
    (1,235
    )Proceeds from sales and maturities of available-for-sale investments
    
    
    3,380
    
    
    
    11,770Notes receivable payments
    
    
    (16
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (6,100
    )
    
    
    8,062Cash flows from financing activities:Proceeds from public offering of common stock, net
    
    
    3,927
    
    
    
    Proceeds from issuance of common stock, net
    
    
    37
    
    
    
    143Net cash provided by financing activities
    
    
    3,964
    
    
    
    143Net decrease in cash and cash equivalents
    
    
    (13,616
    )
    
    
    (8,645
    )Cash and cash equivalents at beginning of period
    
    
    16,741
    
    
    
    29,964Cash and cash equivalents at end of period
    
    $
    3,125
    
    
    $
    21,319
  5




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ARADIGM CORPORATION

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
September 30, 2009
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
 
  Subsequent Events,
 2. Summary of Significant Accounting Policies
 Use of Estimates
  Cash and Cash Equivalents
  Investments
  6




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Property and Equipment
  Impairment of Long-Lived Assets
 Property Plant and Equipment  Overall
 Accounting for Costs Associated with Exit or Disposal Activities
 Exit or Disposal Activities ,
 Revenue Recognition
 Revenue Recognition Revised and Updated Revenue
Recognition-Multiple Element Arrangements
  7




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Research and Development
  Stock-Based Compensation
 Compensation-Stock Compensation and Equity-Equity Based Payments to Non-Employees
 Income Taxes
   Net Loss Per Common Share
  Recently Issued Accounting Pronouncements
  The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No 162 .
 8




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Subsequent Events
 Recognition
and Presentation of Other-Than-Temporary Impairments (
 Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (
 Interim
Disclosures about Fair Value of Financial Instruments
 Effective Date of
FASB Statement No. 157 Fair
Value Measurements
 Business Combinations Business Combinations
 Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property , Collaborative Arrangements
 9




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3. Cash, Cash Equivalents and Short-Term Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gain
    
    
    (Loss)
    
    
    Fair ValueSeptember 30, 2009Cash and cash equivalents
    
    $
    3,125
    
    
    $
    
    
    
    $
    
    
    
    $
    3,125Short-term investments:Commercial paper
    
    $
    2,950
    
    
    $
    
    
    
    $
    
    
    
    $
    2,950Certificates of deposit
    
    
    3,672
    
    
    
    2
    
    
    
    
    
    
    
    3,674U.S. Treasury and agencies
    
    
    2,036
    
    
    
    1
    
    
    
    
    
    
    
    2,037Total
    
    $
    8,658
    
    
    $
    3
    
    
    $
    
    
    
    $
    8,661December 31, 2008Cash and cash equivalents
    
    $
    16,741
    
    
    $
    
    
    
    $
    
    
    
    $
    16,741Short-term investments:Commercial paper
    
    $
    2,395
    
    
    $
    4
    
    
    $
    
    
    
    $
    2,399U.S. Treasury and agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,395
    
    
    $
    4
    
    
    $
    
    
    
    $
    2,399
   4. Fair Value Measurements
 Fair Value Measurement , Fair Value Measurements and Disclosures .
 10




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Fair Value Measurements at Reporting Date UsingQuotedPrices inActive
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantBalance
    
    
    Identical
    
    
    Observable
    
    
    UnobservableSeptember
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    30, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(in thousands)Cash and cash equivalents
    
    $
    3,125
    
    
    $
    3,125
    
    
    $
    
    
    
    $
    Short-term investments
    
    
    8,661
    
    
    
    
    
    
    
    8,661
    
    
    
    Total
    
    $
    11,786
    
    
    $
    3,125
    
    
    $
    8,661
    
    
    $
    
  5. Sublease Agreement and Lease Exit Liability
  Accounting for Costs Associated with Exit or Disposal )
   Nine Months EndedSeptember 30, 2009Balance at January 1, 2009
    
    $
    1,374Accretion expense
    
    
    48Lease payments
    
    
    (311
    )Loss on sublease of additional space
    
    
    42Balance at September 30, 2009
    
    $
    1,153
  6. Notes Payable and Accrued Interest
  11




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7. Shareholders Equity
    8. Collaborations and Licensing Agreements
 Lung Rx
 ®
   Zogenix
  12




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9. Stock-Based Compensation and Stock Options and Awards
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Costs and expenses:Research and development
    
    $
    71
    
    
    $
    66
    
    
    $
    231
    
    
    $
    427General and administrative
    
    
    166
    
    
    
    90
    
    
    
    391
    
    
    
    211Total stock based compensation expense
    
    $
    237
    
    
    $
    156
    
    
    $
    622
    
    
    $
    638
    Stock Option Plans: 1996 Equity Incentive Plan, 2005 Equity Incentive Plan and 1996
Non-Employee Directors Plan
  13




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Stock Option Activity
 
 Options OutstandingWeightedShares Available
    
    
    
    
    
    
     
    
    
    
    
    
    
    Averagefor Grant of
    
    Number of
    
    
    
    
    
    
    
    
    
    ExerciseOption or Award
    
    Shares
    
    Exercise Price Range
    
    PriceBalance at January 1, 2009
    
    
    3,987,599
    
    
    
    4,185,061
    
    
    $
    .39
    
    
    $
    120.63
    
    
    $
    4.14Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (2,068,000
    )
    
    
    2,068,000
    
    
    $
    .16
    
    
    $
    .25
    
    
    $
    .22Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled
    
    
    1,107,542
    
    
    
    (1,107,542
    )
    
    $
    .17
    
    
    $
    112.50
    
    
    $
    4.47Restricted share awards granted
    
    
    (2,413,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share awards cancelled
    
    
    100,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan shares cancelled and not reauthorized
    
    
    (3,407
    )
    
    
    
    
    
    $
    41.25
    
    
    $
    42.19
    
    
    $
    41.78Balance at September 30, 2009
    
    
    711,109
    
    
    
    5,145,519
    
    
    $
    .16
    
    
    $
    120.63
    
    
    $
    2.49
   Number     
of
    
    
    Weighted AverageGrant Date FairShares
    
    
    ValueBalance at January 1, 2009
    
    
    703,535
    
    
    $
    1.60Restricted share awards issued
    
    
    2,413,250
    
    
    
    .19Restricted share awards vested
    
    
    (96,094
    )
    
    
    .53Restricted share awards cancelled
    
    
    (100,625
    )
    
    
    .99Balance at September 30, 2009
    
    
    2,920,066
    
    
    $
    .47
 10. Asset Impairment
   11. Net Loss Per Share
  14




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September 30,2009
    
    2008Outstanding stock options
    
    
    5,146
    
    
    
    4,262Unvested restricted stock
    
    
    2,920
    
    
    
    754Warrants to purchase common stock
    
    
    
    
    
    
    417
 12. Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (596
    )
    
    $
    (4,596
    )
    
    $
    (10,408
    )
    
    $
    (17,286
    )Other comprehensive loss:Change in unrealized gain (loss) on available-for-sale securities
    
    
    7
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (10
    )Comprehensive loss
    
    $
    (589
    )
    
    $
    (4,597
    )
    
    $
    (10,409
    )
    
    $
    (17,296
    )
 13. Subsequent Events
  
 
 Item 2.
    
    MANAGEMENTS 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
beliefs of management, as well as assumptions made by, and information currently available to,
management. Words such as anticipate, expect, intend, plan, believe, may, will,
could, continue, seek, estimate, 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 elsewhere in the 2008 Form 10-K and our other filings with the SEC. Forward-looking statements
include our belief that our cash, cash equivalents and short-term investments as of September 30,
2009 and the anticipated Zogenix milestone payment will be sufficient to enable us to meet our
obligations through at least the second quarter of 2010.
 These forward-looking statements and our business are subject to significant risks including,
but not limited to, our ability to obtain additional financing, 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.
 You 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.
 15




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Overview
   ®
  Pseudomonas aeruginosa
 16




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Pseudomonas
aeruginosa
 Pseudomonas Aeruginosa
     17




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®
     Critical Accounting Policies and Estimates
  18




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Revenue Recognition
 Revenue Recognition Revised and Updated Revenue Recognition -
Multiple Elements
   Impairment of Long-Lived Assets
 Property Plant and Equipment  Overall
 Accounting for Costs Associated with Exit or Disposal Activities
 Exit or Disposal Activities
 19




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Research and Development
  Income Taxes
   Employee Stock Based Compensation
 Compensation-Stock Compensation
  Recent Accounting Pronouncements
  Results of Operations
 Revenue
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    Increase (Decrease)2009
    
    2008
    
    2009
    
    2008
    
    Three Months
    
    Nine Months( in thousands)
    
    ($'s in thousands)Contract revenue
    
    $
    4,883
    
    
    $
    197
    
    
    $
    4,883
    
    
    $
    251
    
    
    $
    4,686
    
    
    
    2,379
    %
    
    $
    4,632
    
    
    
    1,845
    %
  20




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##### Table of Contents



Research and Development Expenses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    Increase (Decrease)2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Three Months
    
    
    Nine Months( in thousands)
    
    
    ($s in thousands)Collaborative
    
    $
    5
    
    
    $
    430
    
    
    $
    1,447
    
    
    $
    1,777
    
    
    $
    (425
    )
    
    
    (99
    )%
    
    $
    (330
    )
    
    
    (19
    )%Self-initiated
    
    
    2,421
    
    
    
    2,769
    
    
    
    7,632
    
    
    
    11,115
    
    
    
    (348
    )
    
    
    (13
    )%
    
    
    (3,483
    )
    
    
    (31
    )%Total research and development expenses
    
    $
    2,426
    
    
    $
    3,199
    
    
    $
    9,079
    
    
    $
    12,892
    
    
    $
    (773
    )
    
    
    (24
    )%
    
    $
    (3,813
    )
    
    
    (30
    )%
    General and Administrative Expenses
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    Increase  (Decrease)2009
    
    2008
    
    2009
    
    2008
    
    Three Months
    
    Nine Months(in thousands)
    
    ($s in thousands)General and administrative expenses
    
    $
    1,323
    
    
    $
    1,615
    
    
    $
    4,089
    
    
    $
    4,989
    
    
    $
    (292
    )
    
    
    (18
    )%
    
    $
    (900
    )
    
    
    (18
    )%
   Restructuring and Asset Impairment
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    Increase  (Decrease)2009
    
    2008
    
    2009
    
    2008
    
    Three Months
    
    Nine Months(in thousands)
    
    ($s in thousands)Restructuring and asset impairment
    
    $
    1,638
    
    
    $
    19
    
    
    $
    1,860
    
    
    $
    61
    
    
    $
    1,619
    
    
    
    8,521
    %
    
    $
    1,799
    
    
    
    2,949
    %
 21




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##### Table of Contents



Interest income, Interest expense and Other Income
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    Increase  (Decrease)2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Three Months
    
    
    Nine Months(in thousands)
    
    
    ($s in thousands)Interest income
    
    $
    16
    
    
    $
    146
    
    
    $
    58
    
    
    $
    709
    
    
    $
    (130
    )
    
    
    (89
    )%
    
    $
    (651
    )
    
    (92
    )%Interest expense
    
    
    (109
    )
    
    
    (105
    )
    
    
    (318
    )
    
    
    (303
    )
    
    
    (4
    )
    
    
    4
    %
    
    
    ( 15
    )
    
    (5
    )%Other income (expense), net
    
    
    1
    
    
    
    (1
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    2
    
    
    
    (200
    )%
    
    
    (2
    )
    
    200
    %Total interest income,
interest expense and
other income (expense)
    
    $
    (92
    )
    
    $
    40
    
    
    $
    (263
    )
    
    $
    405
    
    
    $
    (132
    )
    
    
    (330
    )%
    
    $
    (668
    )
    
    (165
    )%
  Liquidity and Capital Resources
     22




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##### Table of Contents



Off-Balance Sheet Financings and Liabilities
  
 Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Controls over Financial Reporting
  
 PART II: OTHER INFORMATION
 
 Item 1.
    
    LEGAL PROCEEDINGS
  
 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 2008 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 2008
Form 10-K. We have marked with a double asterisk (**) those risk factors that reflect substantive
changes from the risk factors included in the 2008 Form 10-K.
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##### Table of Contents



Risks Related to Our Business
 We are an early-stage company.
  We changed our product development strategy, and if we do not successfully implement this
strategy, our business and reputation will be damaged.
  ** We will need additional capital, and we may not be able to obtain it.
  
    
    our progress in the application of our delivery and formulation technologies, which may
require further refinement of these technologies;
    
    the number of product development programs we pursue and the pace of each program;
    
    our progress with formulation development;
    
    the scope, rate of progress, results and costs of preclinical testing and clinical
trials;
    
    the time and costs associated with seeking regulatory approvals;
    
    our ability to outsource the manufacture of our product candidates and the costs of doing
so;
    
    the time and costs associated with establishing in-house resources to market and sell
certain of our products;
    
    our ability to establish and maintain collaborative arrangements with others and the
terms of those arrangements;
    
    the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims, and
    
    our need to acquire licenses, or other rights for our product candidates.
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##### Table of Contents



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.
  
    
    continue drug product development efforts;
    
    conduct preclinical testing and clinical trials;
    
    pursue additional applications for our existing delivery technologies;
    
    outsource the commercial-scale production of our products; and
    
    establish a sales and marketing force to commercialize certain of our proprietary
products if these products obtain regulatory approval.
  ** Our dependence on collaborators and other contracting parties may delay or terminate certain of
our programs, and any such delay or termination would harm our business prospects and stock price.
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##### Table of Contents



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.
  If our clinical trials are delayed because of patient enrollment or other problems, we would incur
additional costs and postpone the potential receipt of revenues.
  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.
   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.
  26




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##### Table of Contents



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.
  **Because our proprietary liposomal ciprofloxacin programs rely on the FDAs and European
Medicines Agencys 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 USA for up to
seven years or European Union for up to ten years.
  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.
 ®
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##### Table of Contents



We rely on a small number of vendors and contract manufacturers to supply us with specialized
equipment, tools and components; if they do not perform as we need them to, we will not be able to
develop or commercialize products.
  In order to market our proprietary products, we are likely to 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.
  If any products that we or our collaborators may develop do not attain adequate market acceptance
by healthcare professionals and patients, our business prospects and results of operations will
suffer.
  
    
    the demonstration of efficacy and safety in clinical trials;
    
    the existence, prevalence and severity of any side effects;
    
    the potential or perceived advantages or disadvantages compared to alternative
treatments;
    
    the timing of market entry relative to competitive treatments;
 28




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##### Table of Contents




    
    the relative cost, convenience, product dependability and ease of administration;
    
    the strength of marketing and distribution support;
    
    the sufficiency of coverage and reimbursement of our product candidates by governmental
and other third-party payors; and
    
    the product labeling or product insert required by the FDA or regulatory authorities in
other countries.
  We depend upon our proprietary technologies, and we may not be able to protect our potential
competitive proprietary advantage.
    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.
   29




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##### Table of Contents



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.
  If we do not continue to attract and retain key employees, our product development efforts will be
delayed and impaired.
  Acquisition of complementary businesses or technologies could result in operating difficulties and
harm our results of operations.
  
    
    diversion of our management from the development and commercialization of our pipeline
product candidates;
 
    
    difficulty in assimilating and efficiently using the acquired assets or personnel; and
    
    inability to retain key personnel.
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##### Table of Contents



If we market our products in other countries, we will be subject to different laws and we may not
be able to adapt to those laws, which could increase our costs while reducing our revenues.
  We may be exposed to product liability claims, which would hurt our reputation, market position
and operating results.
  If we cannot arrange for adequate third-party reimbursement for our products, our revenues will
suffer.
  Our use of hazardous materials could subject us to liabilities, fines and sanctions.
  31




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##### Table of Contents



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.
  Risks Related to Our Common Stock
 Our stock price is likely to remain volatile.
  
    
    investor perception of us;
    
    market conditions relating to our segment of the industry or the securities markets in
general;
    
    investor perception of the value of the royalty stream from Zogenix and the likelihood
and timing of the launch of the SUMAVEL DosePro products;
    
    sales of our stock by certain large institutional shareholders to meet liquidity concerns
during the current economic climate or bankruptcy of the institutions holding the shares of
investors in our company, resulting in large quantities of our shares being traded at
discount prices;
    
    research analyst recommendations and our ability to meet or exceed quarterly performance
expectations of analysts or investors;
    
    failure to maintain existing or establish new collaborative relationships;
    
    fluctuations in our operating results;
    
    announcements of technological innovations or new commercial products by us or our
competitors;
    
    publicity regarding actual or potential developments relating to products under
development by us or our competitors;
    
    developments or disputes concerning patents or proprietary rights;
    
    delays in the development or approval of our product candidates;
    
    regulatory developments in both the United States and foreign countries;
    
    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;
    
    future sales or expected sales of substantial amounts of common stock by shareholders;
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##### Table of Contents




    
    our ability to raise capital through the sale of securities or non-core assets; and
    
    economic and other external factors.
  Our common stock is quoted on the OTC Bulletin Board, which may provide less liquidity for our
shareholders than the national exchanges.
  We have implemented certain anti-takeover provisions, which may make an acquisition less likely or
might result in costly litigation or proxy battles.
    We have never paid dividends on our capital stock, and we do not anticipate paying cash dividends
for at least the foreseeable future.
  
 Item 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  33




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##### Table of Contents



Item 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5.
    
    OTHER INFORMATION
  
 Item 6.
    
    EXHIBITS
 ExhibitNumber
    
    Description10.1
    
    Amended and Restated Change of Control Agreement, dated as of July 30, 2009, by and between Aradigm Corporation and Igor Gonda10.2
    
    Amended and Restated Change of Control Agreement, dated as of July 30, 2009, by and between Aradigm Corporation and Nancy Pecota10.3
    
    Amended and Restated Change of Control Agreement, dated as of July 30, 2009, by and between Aradigm Corporation and Jeffery Grimes10.4
    
    Security Agreement, dated as of July 30, 2009, by and among Igor Gonda, Jeffery Grimes and Nancy Pecota31.1
    
    Certification by the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by the Companys Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 Aradigm, AERx, AERx Essence, and AERx Strip are registered trademarks of Aradigm Corporation.*
    
    Other names and brands may be claimed as the property of others. 34




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##### Table of Contents



SIGNATURES
  ARADIGM CORPORATION
(Registrant)/s/ Igor GondaDr. Igor GondaPresident and Chief Executive Officer 
(Principal Executive Officer)/s/ Nancy E. PecotaNancy E. PecotaVice President, Finance and Chief Financial Officer
(Principal Financial Officer)  35




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.1
    
    Amended and Restated Change of Control Agreement, dated as of July 30, 2009, by and between Aradigm Corporation and Igor Gonda10.2
    
    Amended and Restated Change of Control Agreement, dated as of July 30, 2009, by and between Aradigm Corporation and Nancy Pecota10.3
    
    Amended and Restated Change of Control Agreement, dated as of July 30, 2009, by and between Aradigm Corporation and Jeffery Grimes10.4
    
    Security Agreement, dated as of July 30, 2009, by and among Igor Gonda, Jeffery Grimes and Nancy Pecota31.1
    
    Certification by the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by the Companys Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 36