##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 Form 10-Q
 
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 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 0-28402
 Aradigm Corporation
 (Exact name of registrant as specified in its charter)
 California(State or other jurisdiction of
incorporation or organization)
    
    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
 (Registrants telephone number, including area code)
 þ o
 o þ
  Common Stock, no par value(Class)
    
    72,590,238(Outstanding at July 31, 2005)




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ARADIGM CORPORATION
INDEX
  
 PageNoPART I. FINANCIAL INFORMATIONITEM 1.
    
    Condensed Financial StatementsCondensed Balance Sheets at June 30, 2005 (unaudited) and December 31, 2004 (audited)
    
    
    2Condensed Statements of Operations for the three months ended June 30, 2005 and 2004 (unaudited)
    
    
    3Condensed Statements of Operations for the six months ended June 30, 2005 and 2004 (unaudited)
    
    
    4Condensed Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (unaudited)
    
    
    5Notes to Condensed Financial Statements (unaudited)
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10ITEM 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    16ITEM 4.
    
    Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18ITEM 6.
    
    Exhibits
    
    
    18SIGNATURES
    
    
    19INDEX TO EXHIBITS
    
    
    20EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  1




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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Financial Statements
 ARADIGM CORPORATION
 
 CONDENSED BALANCE SHEETS
 June 30,
    
    December 31,2005
    
    2004(Unaudited)
    
    (Note 1)(In thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    37,372
    
    
    $
    14,308Short-term investments
    
    
    7,447
    
    
    
    2,455Receivables
    
    
    749
    
    
    
    99Current portion of notes receivable from officers and employees
    
    
    61
    
    
    
    67Prepaid expenses and other current assets
    
    
    1,158
    
    
    
    1,602Total current assets
    
    
    46,787
    
    
    
    18,531Property and equipment, net
    
    
    7,966
    
    
    
    60,555Noncurrent portion of notes receivable from officers and employees
    
    
    192
    
    
    
    216Other assets
    
    
    557
    
    
    
    439Total assets
    
    $
    55,502
    
    
    $
    79,741LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,221
    
    
    $
    2,469Accrued clinical and cost of other studies
    
    
    153
    
    
    
    293Accrued compensation
    
    
    3,131
    
    
    
    2,984Deferred revenue
    
    
    
    
    
    
    7,525Other accrued liabilities
    
    
    389
    
    
    
    1,138Total current liabilities
    
    
    5,894
    
    
    
    14,409Noncurrent portion of deferred revenue
    
    
    
    
    
    
    3,966Noncurrent portion of deferred rent
    
    
    606
    
    
    
    1,943CommitmentsRedeemable convertible preferred stock, no par value; 5,000,000 shares authorized; issued and outstanding
shares: 1,544,626 at June 30, 2005 and at December 31, 2004; liquidation preference of $37,380 at June
30, 2005 and at December 31, 2004
    
    
    23,669
    
    
    
    23,669Shareholders equity:Common stock, no par value; 150,000,000 authorized; issued and outstanding shares: 72,590,238 at June 30,
2005 and 72,295,730 at December 31, 2004
    
    
    281,797
    
    
    
    281,387Accumulated other comprehensive loss
    
    
    (11
    )
    
    
    (10
    )Deferred compensation
    
    
    (14
    )
    
    
    Accumulated deficit
    
    
    (256,439
    )
    
    
    (245,623
    )Total shareholders equity
    
    
    25,333
    
    
    
    35,754Total liabilities,
redeemable
convertible
preferred stock and
shareholders
equity
    
    $
    55,502
    
    
    $
    79,741
  2




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS
 Three Months EndedJune 30,2005
    
    2004(Unaudited)(In thousands, except per share data)Contract revenues (Including amounts from related parties:2005  $0; 2004  $7,006)
    
    $
    1,212
    
    
    $
    7,078Operating expenses:Research and development
    
    
    7,317
    
    
    
    11,412General and administrative
    
    
    2,713
    
    
    
    3,167Total operating expenses
    
    
    10,030
    
    
    
    14,579Loss from operations
    
    
    (8,818
    )
    
    
    (7,501
    )Interest income
    
    
    350
    
    
    
    49Interest and other expense
    
    
    (8
    )
    
    
    (5
    )Net loss
    
    $
    (8,476
    )
    
    $
    (7,457
    )Basic and diluted net loss per share
    
    $
    (0.12
    )
    
    $
    (0.12
    )Shares used in computing basic and diluted net loss per share
    
    
    72,561
    
    
    
    63,531
  3




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ARADIGM CORPORATION
 
 CONDENSED STATEMENTS OF OPERATIONS
 Six Months EndedJune 30,2005
    
    2004(Unaudited)(In thousands, except per share data)Contract revenues (Including amounts from related parties:2005  $7,444; 2004 $13,616)
    
    $
    8,926
    
    
    $
    13,721Operating expenses:Research and development
    
    
    14,387
    
    
    
    23,299General and administrative
    
    
    5,948
    
    
    
    5,703Total operating expenses
    
    
    20,335
    
    
    
    29,002Loss from operations
    
    
    (11,409
    )
    
    
    (15,281
    )Interest income
    
    
    638
    
    
    
    115Interest and other expense
    
    
    (45
    )
    
    
    (15
    )Net loss
    
    $
    (10,816
    )
    
    $
    (15,181
    )Basic and diluted net loss per share
    
    $
    (0.15
    )
    
    $
    (0.24
    )Shares used in computing basic and diluted net loss per share
    
    
    72,429
    
    
    
    63,238
  4




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ARADIGM CORPORATION
 
 STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2005
    
    2004(Unaudited)(In thousands)Cash flows from operating activities:Net loss
    
    $
    (10,816
    )
    
    $
    (15,181
    )Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization
    
    
    743
    
    
    
    2,576Loss on retirement and sale of property and equipment
    
    
    25
    
    
    
    257Cost of warrants and stock options for services
    
    
    93
    
    
    
    75Amortization of deferred compensation
    
    
    7
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    (650
    )
    
    
    5Prepaid expenses and other current assets
    
    
    444
    
    
    
    171Other assets
    
    
    (118
    )
    
    
    (66
    )Accounts payable
    
    
    (248
    )
    
    
    120Accrued compensation
    
    
    147
    
    
    
    1,567Other accrued liabilities
    
    
    (889
    )
    
    
    (30
    )Deferred rent
    
    
    (1,337
    )
    
    
    332Deferred revenue
    
    
    (7,472
    )
    
    
    (251
    )Net cash used in operating activities
    
    
    (20,071
    )
    
    
    (10,425
    )Cash flows from investing activities:Capital expenditures
    
    
    (2,490
    )
    
    
    (849
    )Proceeds
from sale of property and equipment to Novo Nordisk Delivery
Technologies, a related party
    
    
    50,291
    
    
    
    Purchases of available-for-sale investments
    
    
    (5,530
    )
    
    
    (6,376
    )Proceeds from maturities and sales of available-for-sale investments
    
    
    538
    
    
    
    9,468Net cash provided by investing activities
    
    
    42,809
    
    
    
    2,243Cash flows from financing activities:Proceeds from issuance of common stock, net
    
    
    254
    
    
    
    481Proceeds from exercise of options and warrants for common stock
    
    
    42
    
    
    
    305Notes receivable from officers and employees
    
    
    30
    
    
    
    87Payments on lease obligations and equipment loans
    
    
    
    
    
    
    (427
    )Net cash provided by financing activities
    
    
    326
    
    
    
    446Net increase (decrease) in cash and cash equivalents
    
    
    23,064
    
    
    
    (7,736
    )Cash and cash equivalents at beginning of period
    
    
    14,308
    
    
    
    18,327Cash and cash equivalents at end of period
    
    $
    37,372
    
    
    $
    10,591
  5




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ARADIGM CORPORATION
 
 NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
June 30, 2005
 1. Organization and Basis of Presentation
 Organization
  Basis of Presentation
   2. Summary of Significant Accounting Policies
 Stock Based Compensation
  Three Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004Net loss  as reported
    
    $
    (8,476
    )
    
    $
    (7,457
    )
    
    $
    (10,816
    )
    
    $
    (15,181
    )Add:Amortization of deferred
stock-based employee
compensation expense
included in reported net
loss
    
    
    2
    
    
    
    
    
    
    
    7
    
    
    
    Less:Total stock-based
employee compensation
expense determined under
fair value based method
for all awards
    
    
    (867
    )
    
    
    (1,299
    )
    
    
    (1,605
    
    
    
    (2,403
    )Pro forma net loss
applicable to common
shareholders
    
    $
    (9,284
    )
    
    $
    (8,756
    )
    
    $
    (12,414
    )
    
    $
    (17,584
    )Basic and diluted net loss
per share applicable to
common shareholders As reported
    
    $
    (0.12
    )
    
    $
    (0.12
    )
    
    $
    (0.15
    )
    
    $
    (0.24
    )Pro forma
    
    $
    (0.13
    )
    
    $
    (0.14
    )
    
    $
    (0.17
    )
    
    $
    (0.28
    )
 6




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Computation of Net Loss Per Share
  3. Cash Equivalents and Investments
  June 30, 2005
    
    December 31, 2004Cash equivalents:Money market fund
    
    $
    1,448
    
    
    $
    800Commercial paper
    
    
    35,924
    
    
    
    13,508Total cash equivalents
    
    $
    37,372
    
    
    $
    14,308Short-term investments:Certificate of Deposit
    
    $
    200
    
    
    $
    Corporate and
Government notes
    
    
    7,247
    
    
    
    2,455Total short-term investments
    
    $
    7,447
    
    
    $
    2,455
  June 30, 2005
    
    December 31, 2004Investments maturing in less than 1
year:Certificates of deposit
    
    $
    200
    
    
    $
    Corporate notes
    
    
    2,017
    
    
    
    1,016US government agencies
    
    
    5,230
    
    
    
    1,439Total maturing in less than 1 year
    
    $
    7,447
    
    
    $
    2,455
  7




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4. Property and Equipment
  June 30, 2005
    
    December 31,2004Machinery and equipment
    
    $
    3,651
    
    
    $
    14,364Furniture and fixtures
    
    
    1,166
    
    
    
    1,917Lab equipment
    
    
    2,682
    
    
    
    4,086Computer equipment and
software
    
    
    5,517
    
    
    
    6,256Leasehold improvements
    
    
    1,444
    
    
    
    12,225Fixed assets at cost
    
    
    14,460
    
    
    
    38,848Less accumulated
depreciation and
amortization
    
    
    (11,440
    )
    
    
    (27,740
    )Net depreciable assets
    
    
    3,020
    
    
    
    11,108Construction in progress
    
    
    4,946
    
    
    
    49,447Property and equipment, net
    
    $
    7,966
    
    
    $
    60,555
  5. Leases and Commitments
  Payment Due by Period(amounts in thousands)Contractual obligations
    
    Total
    
    20051
    
    2006/2007
    
    2008/2009
    
    2010+Operating lease obligations
    
    $
    24,666
    
    
    $
    1,241
    
    
    $
    3,994
    
    
    $
    4,726
    
    
    $
    14,705Unconditional purchase obligations
    
    
    2,391
    
    
    
    2,391
    
    
    
    
    
    
    
    
    
    
    
    Total contractual commitments
    
    $
    27,057
    
    
    $
    3,632
    
    
    $
    3,994
    
    
    $
    4,726
    
    
    
    14,705
 
 1
    
    For six months ending December 31, 2005. 8




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6. Related Party
  7. Recent Accounting Pronouncements
   9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   AERx
  AERx insulin Diabetes Management System
  10




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
    
    an amended and restated license agreement amending the Development and License Agreement
previously in place with Novo Nordisk, A/S, expanding Novo Nordisks development and
manufacturing rights to the AERx iDMS program and providing for royalties to us on future AERx
iDMS net sales;
    
    a three-year agreement under which NNDT will perform contract manufacturing for us of AERx
iDMS-identical devices and dosage forms filled with compounds provided by us in support of
preclinical and initial clinical development by us of other AERx products; and
    
    we will receive royalties of approximately 6% on net sales of AERx iDMS products, AERx
products containing insulin analogs, and, in certain circumstances, non-AERx products by Novo
Nordisk and its sub licensees.
  Other AERx Applications
  Intraject
   
    
    Pre-filled, fixed dose and ready to use;
    
    Lightweight and pocket-sized; and
    
    Easy to operate.
   Intraject Sumatriptan
  11




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Critical Accounting Policies and Estimates
  Revenue Recognition
  Long-Lived Assets
  Use of Estimates
  Results of Operations
 Three Months Ended June 30, 2005 and 2004
 Contract Revenues.
  Contract Revenues: Three months ended June 30, 2005 and 2004(in thousands)
    
    2005
    
    2004
    
    ChangeDevelopment revenues
    
    $
    1,212
    
    
    $
    6,755
    
    
    $
    (5,543
    )Milestone revenues
    
    
    
    
    
    
    323
    
    
    
    (    323
    )Total contract revenues
    
    $
    1,212
    
    
    $
    7,078
    
    
    $
    (5,866
    )
 12




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Research and Development Expenses:
 Three months ended June 30,Spending for collaborative and self-initiated research and
    
    
    
    
    
    
    
    
    
    Increasedevelopment projects was as follows (in thousands):
    
    2005
    
    2004
    
    (Decrease)Collaborative
    
    $
    1,183
    
    
    $
    6,818
    
    
    $
    (5,635
    )Self initiated
    
    
    6,134
    
    
    
    4,594
    
    
    
    1,540Total research and development expenses
    
    $
    7,317
    
    
    $
    11,412
    
    
    $
    (4,095
    )
   General and Administrative Expenses:
 Interest Income
 Interest and Other Expense
 13




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Six Months Ended June 30, 2005 and 2004
 Contract Revenues:
 Contract Revenues: Six months ended June 30, 2005 and 2004(in thousands)
    
    2005
    
    2004
    
    ChangeDevelopment revenues
    
    $
    3,740
    
    
    $
    13,038
    
    
    $
    (9,298
    )Milestone revenues
    
    
    5,186
    
    
    
    683
    
    
    
    4,503Total contract revenues
    
    $
    8,926
    
    
    $
    13,721
    
    
    $
    (4,795
    )
  Research and Development Expenses:
 Six months ended June 30,Spending for collaborative and self-initiated research and
    
    
    
    
    
    
    
    
    
    Increasedevelopment projects was as follows (in thousands):
    
    2005
    
    2004
    
    (Decrease)Collaborative
    
    $
    3,231
    
    
    $
    14,224
    
    
    $
    (10,993
    )Self initiated
    
    
    11,156
    
    
    
    9,075
    
    
    
    2,081Total research and development expenses
    
    $
    14,387
    
    
    $
    23,299
    
    
    $
    (8,912
    )
   General and Administrative Expenses:
 14




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Interest Income:
 Interest and Other Expense
 Liquidity and Capital Resources
       15




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Off-Balance Sheet Financings and Liabilities
  Contractual Obligations
  Payment Due by Period(amounts in thousands)Contractual obligations
    
    Total

    
    20051
    
    2006/2007
    
    2008/2009
    
    2010+Operating lease obligations
    
    $
    24,666
    
    
    $
    1,241
    
    
    $
    3,994
    
    
    $
    4,726
    
    
    $
    14,705Unconditional purchase obligations
    
    
    2,391
    
    
    
    2,391
    
    
    
    
    
    
    
    
    
    
    
    Total contractual commitments
    
    $
    27,057
    
    
    $
    3,632
    
    
    $
    3,994
    
    
    $
    4,726
    
    
    $
    14,705
 
 1
    
    For six months ending December 31, 2005. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk Disclosures
   16




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  Limitations on the effectiveness of controls.
  17




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PART II. OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders
    (1a) The election of Frank
H. Barker as Director to hold office until
the next Annual Meeting of Shareholders and
until his successor is elected and
qualified:
    
    For:
Withheld:
    
    58,370,458
1,346,486(1b) The election of V.
Bryan Lawlis as Director to hold office
until the next Annual Meeting of
Shareholders and until his successor is
elected and qualified:
    
    For:
Withheld:
    
    58,342,091
1,374,853(1c) The election of Igor
Gonda as Director to hold office until the
next Annual Meeting of Shareholders and
until his successor is elected and
qualified:
    
    For:
Withheld:
    
    56,877,727
2,839,217(1d) The election of
Stephen O. Jaeger as Director to hold
office until the next Annual Meeting of
Shareholders and until his successor is
elected and qualified:
    
    For:
Withheld:
    
    57,013,333
2,703,611(1e) The election of John
M. Nehra as Director to hold office until
the next Annual Meeting of Shareholders and
until his successor is elected and
qualified:
    
    For:
Withheld:
    
    58,377,813
1,339,131(1f) The election of Wayne
I. Roe as Director to hold office until the
next Annual Meeting of Shareholders and
until his successor is elected and
qualified:
    
    For:
Withheld:
    
    58,375,308
1,341,636(1g) The election of
Richard P. Thompson as Director to hold
office until the next Annual Meeting of
Shareholders and until his successor is
elected and qualified:
    
    For:
Withheld:
    
    56,668,418
3,048,526(1h) The election of Virgil
D. Thompson as Director to hold office
until the next Annual Meeting of
Shareholders and until his successor is
elected and qualified:
    
    For:
Withheld:
    
    58,249,823
1,467,121(2) Proposal to approve the
Companys 2005 Equity Incentive Plan,
which amends, restates and retitles
the Companys 1996 Equity Incentive Plan:
    
    For:
Against:
Abstain:
    
    30,719,713
5,072,292
738,876(3) Proposal to approve the
Companys Employee Stock Purchase Plan, as
amended, to increase the aggregate number
of shares of Common Stock authorized for
issuance under such plan by 2,000,000 shares:
    
    For:
Against:
Abstain:
    
    33,915,169
2,194,655
421,057(4) Ratification of the selection
of Ernst & Young LLP as independent auditors of the
Company for the fiscal year ending December
31, 2005:
    
    For:
Against:
Abstain:
    
    59,091,851
493,677
131,416
 
 Item 6. Exhibits
 31.1
    
    Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 18




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SIGNATURES
  ARADIGM CORPORATION(Registrant)/s/ V. BRYAN LAWLISV. Bryan LawlisPresident and Chief Executive Officer/s/ THOMAS C. CHESTERMANThomas C. ChestermanSenior Vice President and Chief Financial OfficerDated: August 11, 2005
 19




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 20