arwr-10q_20190630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-38042

 

ARROWHEAD PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-0408024

(State of incorporation)

 

(I.R.S. Employer Identification No.)

225 S. Lake Avenue, Suite 1050

Pasadena, California 91101

(626) 304-3400

(Address and telephone number of principal executive offices)

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, Par Value $0.001 per share

 

ARWR

 

The Nasdaq Global Select Market

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 


The number of shares of the registrant’s common stock outstanding as of August 2, 2019 was 95,300,992.

 

 

 

 

 

Page(s)

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS (unaudited)

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)

2

 

 

Consolidated Statement of Stockholders’ Equity

3

 

 

Consolidated Statements of Cash Flows

5

 

 

Notes to Consolidated Financial Statements

6

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

19

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30

 

 

ITEM 4. CONTROLS AND PROCEDURES

30

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

31

 

 

ITEM 1A. RISK FACTORS

31

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

31

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

31

 

 

ITEM 4. MINE SAFETY DISCLOSURES

31

 

 

ITEM 5. OTHER INFORMATION

31

 

 

ITEM 6. EXHIBITS

32

 

 

SIGNATURE

33

 

 

 

 


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Arrowhead Pharmaceuticals, Inc.

Consolidated Balance Sheets

 

 

(unaudited)

June 30, 2019

 

 

September 30, 2018

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

188,331,747

 

 

$

30,133,213

 

Restricted cash

 

1,000,000

 

 

 

-

 

Accounts receivable

 

2,044,111

 

 

 

327,375

 

Prepaid expenses

 

3,103,476

 

 

 

1,267,717

 

Other current assets

 

1,492,175

 

 

 

640,117

 

Short term investments

 

48,567,215

 

 

 

46,400,176

 

TOTAL CURRENT ASSETS

 

244,538,724

 

 

 

78,768,598

 

Property and equipment, net

 

17,074,613

 

 

 

13,935,425

 

Intangible assets, net

 

17,488,688

 

 

 

18,764,010

 

Long term investments

 

57,555,499

 

 

 

-

 

Other assets

 

170,921

 

 

 

141,918

 

TOTAL ASSETS

$

336,828,445

 

 

$

111,609,951

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

$

4,630,244

 

 

$

2,806,098

 

Accrued expenses

 

5,173,146

 

 

 

5,043,087

 

Accrued payroll and benefits

 

1,427,855

 

 

 

3,937,605

 

Deferred rent

 

173,952

 

 

 

307,334

 

Deferred revenue

 

75,681,868

 

 

 

600

 

Note payable

 

-

 

 

 

223,820

 

Other current liabilities

 

-

 

 

 

46,407

 

TOTAL CURRENT LIABILITIES

 

87,087,065

 

 

 

12,364,951

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

Deferred rent, net of current portion

 

1,812,346

 

 

 

1,702,801

 

Deferred revenue, net of current portion

 

22,258,994

 

 

 

-

 

Note payable, net of current portion

 

-

 

 

 

2,101,198

 

Other non-current liabilities

 

-

 

 

 

200,000

 

TOTAL LONG-TERM LIABILITIES

 

24,071,340

 

 

 

4,003,999

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Arrowhead Pharmaceuticals, Inc. stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 145,000,000 shares authorized; 95,207,637 and 88,505,302 shares

   issued and outstanding as of June 30, 2019 and September 30, 2018, respectively

 

187,577

 

 

 

180,875

 

Additional paid-in capital

 

657,136,601

 

 

 

582,902,694

 

Accumulated other comprehensive income (loss)

 

(103,078

)

 

 

(21,564

)

Accumulated deficit

 

(430,995,872

)

 

 

(487,265,816

)

Total Arrowhead Pharmaceuticals, Inc. stockholders' equity

 

226,225,228

 

 

 

95,796,189

 

Noncontrolling interest

 

(555,188

)

 

 

(555,188

)

TOTAL STOCKHOLDERS’ EQUITY

 

225,670,040

 

 

 

95,241,001

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

336,828,445

 

 

$

111,609,951

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

1


Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

REVENUE

 

$

42,696,636

 

 

$

727,375

 

 

$

125,502,807

 

 

$

4,887,321

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

19,291,710

 

 

 

12,052,653

 

 

 

57,662,381

 

 

 

36,974,625

 

General and administrative expenses

 

 

4,809,177

 

 

 

4,594,441

 

 

 

16,287,841

 

 

 

12,679,822

 

TOTAL OPERATING EXPENSES

 

 

24,100,887

 

 

 

16,647,094

 

 

 

73,950,222

 

 

 

49,654,447

 

OPERATING INCOME (LOSS)

 

 

18,595,749

 

 

 

(15,919,719

)

 

 

51,552,585

 

 

 

(44,767,126

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

1,739,959

 

 

 

313,702

 

 

 

4,717,359

 

 

 

645,778

 

Change in value of derivatives

 

 

-

 

 

 

-

 

 

 

-

 

 

 

432,141

 

TOTAL OTHER INCOME (EXPENSE)

 

 

1,739,959

 

 

 

313,702

 

 

 

4,717,359

 

 

 

1,077,919

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

20,335,708

 

 

 

(15,606,017

)

 

 

56,269,944

 

 

 

(43,689,207

)

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

NET INCOME (LOSS)

 

 

20,335,708

 

 

 

(15,606,017

)

 

 

56,269,944

 

 

 

(43,689,207

)

NET INCOME (LOSS) PER SHARE - BASIC

 

$

0.21

 

 

$

(0.18

)

 

$

0.60

 

 

$

(0.53

)

NET INCOME (LOSS) PER SHARE - DILUTED

 

$

0.21

 

 

$

(0.18

)

 

$

0.58

 

 

$

(0.53

)

Weighted average shares outstanding - basic

 

 

94,935,471

 

 

 

87,634,435

 

 

 

93,364,102

 

 

 

82,149,381

 

Weighted average shares outstanding - diluted

 

 

98,884,744

 

 

 

87,634,435

 

 

 

97,814,019

 

 

 

82,149,381

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(31,172

)

 

 

(28,603

)

 

 

(81,514

)

 

 

(36,570

)

COMPREHENSIVE INCOME (LOSS)

 

$

20,304,536

 

 

$

(15,634,620

)

 

$

56,188,430

 

 

$

(43,725,777

)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

2


Arrowhead Pharmaceuticals, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at March 31, 2018

 

 

87,570,398

 

 

$

179,940

 

 

$

574,963,592

 

 

$

25,265

 

 

$

(460,898,528

)

 

$

(555,188

)

 

$

113,715,081

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,268,765

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,268,765

 

Exercise of stock options

 

 

204,253

 

 

 

204

 

 

 

838,729

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

838,933

 

Exercise of warrants

 

 

80,000

 

 

 

80

 

 

 

571,120

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

571,200

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(28,603

)

 

 

-

 

 

 

-

 

 

 

(28,603

)

Net income (loss) for the three months ended June 30, 2018

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15,606,017

)

 

 

-

 

 

 

(15,606,017

)

Balance at June 30, 2018

 

 

87,854,651

 

 

$

180,224

 

 

$

578,642,206

 

 

$

(3,338

)

 

$

(476,504,545

)

 

$

(555,188

)

 

$

101,759,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at March 31, 2019

 

 

94,665,718

 

 

$

187,035

 

 

$

652,411,876

 

 

$

(71,906

)

 

$

(451,331,580

)

 

$

(555,188

)

 

$

200,640,237

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

1,957,993

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,957,993

 

Exercise of stock options

 

 

541,919

 

 

 

542

 

 

 

2,766,732

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,767,274

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(31,172

)

 

 

-

 

 

 

-

 

 

 

(31,172

)

Net income (loss) for the three months ended June 30, 2019

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20,335,708

 

 

 

-

 

 

 

20,335,708

 

Balance at June 30, 2019

 

 

95,207,637

 

 

$

187,577

 

 

$

657,136,601

 

 

$

(103,078

)

 

$

(430,995,872

)

 

$

(555,188

)

 

$

225,670,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at September 30, 2017

 

 

74,785,426

 

 

$

167,155

 

 

$

514,037,301

 

 

$

33,232

 

 

$

(432,815,338

)

 

$

(555,188

)

 

$

80,867,162

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

5,818,119

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,818,119

 

Exercise of stock options

 

 

283,627

 

 

 

283

 

 

 

1,031,775

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,032,058

 

Exercise of warrants

 

 

288,473

 

 

 

289

 

 

 

1,237,141

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,237,430

 

Common stock- restricted stock units vesting

 

 

997,125

 

 

 

997

 

 

 

(55,665

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(54,668

)

Common stock issued for cash at $5.25 per share, net of offering costs

 

 

11,500,000

 

 

 

11,500

 

 

 

56,573,535

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

56,585,035

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(36,570

)

 

 

-

 

 

 

-

 

 

 

(36,570

)

Net income (loss) for the nine months ended June 30, 2018

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(43,689,207

)

 

 

-

 

 

 

(43,689,207

)

Balance at June 30, 2018

 

 

87,854,651

 

 

$

180,224

 

 

$

578,642,206

 

 

$

(3,338

)

 

$

(476,504,545

)

 

$

(555,188

)

 

$

101,759,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at September 30, 2018

 

 

88,505,302

 

 

$

180,875

 

 

$

582,902,694

 

 

$

(21,564

)

 

$

(487,265,816

)

 

$

(555,188

)

 

$

95,241,001

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

7,276,875

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,276,875

 

Exercise of stock options

 

 

1,244,161

 

 

 

1,244

 

 

 

6,440,761

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,442,005

 

Common stock- restricted stock units vesting

 

 

2,197,305

 

 

 

2,197

 

 

 

(2,197

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

3


Common stock issued for cash

 

 

3,260,869

 

 

 

3,261

 

 

 

60,518,468

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

60,521,729

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(81,514

)

 

 

-

 

 

 

-

 

 

 

(81,514

)

Net income (loss) for the nine months ended June 30, 2019

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

56,269,944

 

 

 

-

 

 

 

56,269,944

 

Balance at June 30, 2019

 

 

95,207,637

 

 

$

187,577

 

 

$

657,136,601

 

 

$

(103,078

)

 

$

(430,995,872

)

 

$

(555,188

)

 

$

225,670,040

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

4


Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Nine Months Ended June 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

56,269,944

 

 

$

(43,689,207

)

Change in value of derivatives

 

 

-

 

 

 

(432,141

)

Stock-based compensation

 

 

7,276,875

 

 

 

5,818,119

 

Depreciation and amortization

 

 

3,356,769

 

 

 

3,470,880

 

Amortization/(accretion) of note premiums

 

 

682,243

 

 

 

582,373

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,716,736

)

 

 

52,822

 

Prepaid expenses and other current assets

 

 

(2,393,230

)

 

 

856,253

 

Deferred revenue

 

 

97,940,261

 

 

 

(4,326,540

)

Accounts payable

 

 

1,824,146

 

 

 

(1,910,782

)

Accrued expenses

 

 

(3,477,235

)

 

 

(4,652,873

)

Other

 

 

(538,020

)

 

 

(312,003

)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

159,225,017

 

 

 

(44,543,099

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(4,170,285

)

 

 

(711,779

)

Purchases of marketable securities

 

 

(90,266,001

)

 

 

(47,174,620

)

Proceeds from sale of marketable securities

 

 

29,861,219

 

 

 

37,204,420

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

(64,575,067

)

 

 

(10,681,979

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Principal payments on notes payable

 

 

(2,415,150

)

 

 

(154,986

)

Payments of taxes for net share settled restricted stock unit issuances

 

 

-

 

 

 

(54,667

)

Proceeds from the exercises of warrants and stock options

 

 

6,442,005

 

 

 

2,006,515

 

Proceeds from the issuance of common stock

 

 

60,521,729

 

 

 

56,585,035

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

64,548,584

 

 

 

58,381,897

 

NET INCREASE (DECREASE) IN CASH

 

 

159,198,534

 

 

 

3,156,819

 

CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

30,133,213

 

 

 

24,838,567

 

CASH AND RESTRICTED CASH AT END OF PERIOD

 

$

189,331,747

 

 

$

27,995,386

 

Supplementary disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

(27,437

)

 

$

(131,429

)

Income taxes paid

 

$

(2,400

)

 

$

(2,400

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5


Arrowhead Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Pharmaceuticals, Inc., a Delaware corporation and its Subsidiaries, (2) the terms “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term “Subsidiaries” refers collectively to Arrowhead Madison Inc. (“Arrowhead Madison”), Arrowhead Australia Pty Ltd (“Arrowhead Australia”) and Ablaris Therapeutics, Inc. (“Ablaris”), (4) the term “Common Stock” refers to Arrowhead’s Common Stock, (5) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock  and (6) the term “Stockholder(s)” refers to the holders of Arrowhead Common Stock.

                         

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business and Recent Developments

Arrowhead Pharmaceuticals, Inc. develops medicines that treat intractable diseases by silencing the genes that cause them.  Using a broad portfolio of RNA chemistries and efficient modes of delivery, Arrowhead therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes. RNA interference, or RNAi, is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. Arrowhead’s RNAi-based therapeutics leverage this natural pathway of gene silencing. The Company's pipeline includes ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency (AATD), ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-ENaC for cystic fibrosis, and ARO-HIF2 for renal cell carcinoma. AMG-890 (ARO-LPA) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016. JNJ-3989 (ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen Pharmaceuticals, Inc. in October 2018.

Arrowhead operates a lab facility in Madison, Wisconsin, where the Company’s research and development activities, including the development of RNAi therapeutics, are based. The Company’s principal executive offices are located in Pasadena, California.

During fiscal 2019, the Company has continued to develop its pipeline and partnered candidates.  In April 2019, the Company presented clinical data for JNJ-3989 (ARO-HBV) and ARO-AAT at the International Liver Congress, and in April 2019, the Company received FDA clearance to commence a Phase 2/3 study of ARO-AAT that has the potential to serve as a pivotal registrational study.  In June 2019, the Company received the Fast Track Designation for ARO-AAT from the FDA.  In December 2018 and January 2019, Clinical Trial Applications (CTAs) were filed for ARO-ANG3 and ARO-APOC3, respectively, and dosing has commenced for both trials.  In June 2019 and July 2019, the Company received the Orphan Drug Designations for ARO-APOC3 and ARO-ANG3, respectively, from the FDA.  The Company also continues to work on optimizing its other extra-hepatic preclinical pipeline candidates including ARO-ENaC and ARO-HIF2.  Amgen is currently progressing its phase 1 clinical study of AMG-890 (ARO-LPA).  

The Company also made significant progress on the business development and partnership front.  In October 2018, the Company entered into a License Agreement (“Janssen License Agreement”) and a Research Collaboration and Option Agreement (“Janssen Collaboration Agreement”) with Janssen Pharmaceuticals, Inc. (“Janssen”) part of the Janssen Pharmaceutical Companies of Johnson & Johnson.  The Company also entered into a Stock Purchase Agreement (“JJDC Stock Purchase Agreement”) with Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”), a New Jersey corporation.  Under the Janssen License Agreement, Janssen has received a worldwide, exclusive license to the Company’s JNJ-3989 (ARO-HBV) program, the Company’s third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potentially curative therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV), Janssen will be wholly responsible for clinical development and commercialization.  Under the Janssen Collaboration Agreement, Janssen will be able to select three new targets against which Arrowhead will develop clinical candidates.  These candidates are subject to certain restrictions and will not include candidates in the Company’s current pipeline.  The Company will perform discovery, optimization and preclinical development, entirely funded by Janssen, sufficient to allow the filing of a U.S. Investigational New Drug application or equivalent, at which time Janssen will have the option to take an exclusive license. If the option is exercised, Janssen will be wholly responsible for clinical development and commercialization.  Under the JJDC Stock Purchase Agreement, in October 2018 the Company sold 3,260,869 shares of common stock to JJDC at a price of $23.00 per share.  Under the terms of the agreements taken together, the Company has received $175 million as an upfront payment, $75 million in the form of an equity investment by JJDC in Arrowhead common stock, and may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in development and sales milestone payments for the three additional targets covered under the Janssen Collaboration Agreement.  The Company is further eligible to receive tiered royalties up to mid teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales.  In April 2019, the Company earned a $25 million milestone payment from Janssen following the initiation of dosing in a new triple combination cohort (cohort 12) in the Company’s ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV).  The revenue recognition for this milestone payment and the Janssen License Agreement and the Janssen Collaboration Agreement are discussed further in Note 2 below.

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The Company’s collaboration agreement with Amgen for AMG 890 (ARO-LPA) continues to progress.  The Company has received $35 million in upfront payments and $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock.  Upon signing the collaboration agreements with Amgen, the Company was eligible to receive up to $617 million in option payments and development, regulatory and sales milestone payments. The Company was further eligible to receive single-digit royalties for sales of products under the ARO-AMG1 agreement and is further eligible to receive up to low double-digit royalties for sales of products under the AMG 890 (ARO-LPA) Agreement.  On August 1, 2018, the Company announced that it had earned a $10 million milestone payment from Amgen following the administration of the first dose of AMG 890 (ARO-LPA) in a phase 1 clinical study.  This milestone payment was recognized as revenue during the year ended September 30, 2018.  In July 2019, Amgen informed the Company that it would not be exercising its option to an exclusive license for ARO-AMG1, and as such, there will be no further milestone or royalty payments under the ARO-AMG1 Agreement.

Liquidity

The Consolidated Financial Statements have been prepared in conformity with the accounting principles generally accepted in the United States of America, which contemplate the continuation of the Company as a going concern.  Historically, the Company’s primary source of financing has been through the sale of its securities. Research and development activities have required significant capital investment since the Company’s inception. The Company expects its operations to continue to require cash investment to pursue its research and development goals, including clinical trials and related drug manufacturing. 

At June 30, 2019, the Company had $188.3 million in cash and cash equivalents, $1.0 million in restricted cash, $48.6 million in short-term investments, and $57.6 million in long-term investments to fund operations.  During the nine months ended June 30, 2019, the Company’s cash and investments balance increased by $218.9 million, which was primarily the result of the $75 million equity investment from JJDC and the $175 million upfront payment and $25 million milestone payment from Janssen, respectively, as discussed further in Note 2 below.  These cash inflows were partially offset by cash outflows related to operating activities.        

Summary of Significant Accounting Policies

Principles of Consolidation—The Consolidated Financial Statements include the accounts of Arrowhead and its Subsidiaries.  Arrowhead’s primary operating subsidiary is Arrowhead Madison, which is located in Madison, Wisconsin, where the Company’s research and development facility is located.  All significant intercompany accounts and transactions are eliminated in consolidation.

Basis of Presentation and Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.  Actual results could materially differ from those estimates. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended September 30, 2018.

Cash and Cash Equivalents—The Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.  The Company had $1.0 million and $0 in restricted cash at June 30, 2019 and September 30, 2018, respectively.  Amounts included in restricted cash are primarily held as collateral associated with a letter of credit for the Company’s new lease for its corporate headquarters in Pasadena, California.  

Concentration of Credit Risk—The Company maintains several bank accounts primarily at two financial institutions for its operations. These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per institution. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held.

Investments—The Company may invest excess cash balances in short-term and long-term marketable debt securities. Investments may consist of certificates of deposit, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. The Company accounts for its investment in marketable securities in accordance with FASB ASC 320, Investments – Debt and Equity Securities. This statement requires debt securities to be classified into three categories:

Held-to-maturity—Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost.

7


Trading Securities—Debt securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings.

Available-for-Sale—Debt securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity.

The Company classifies its investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. During the three and nine months ended June 30, 2019 and 2018, respectively, all the Company’s investments were classified as held-to-maturity.

Held-to-maturity investments are measured and recorded at amortized cost on the Company’s Consolidated Balance Sheet. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities are realized until they are sold or a decline in fair value is determined to be other-than-temporary.

Property and Equipment—Property and equipment are recorded at cost, which may equal fair market value in the case of property and equipment acquired in conjunction with a business acquisition. Depreciation of property and equipment is recorded using the straight-line method over the respective useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the lesser of the expected useful life or the remaining lease term. Long-lived assets, including property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.

Intangible Assets Subject to Amortization—Intangible assets subject to amortization include certain patents and license agreements. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.

Contingent Consideration - The consideration for the Company’s acquisitions may include future payments that are contingent upon the occurrence of a particular event.  For example, milestone payments might be based on the achievement of various regulatory approvals or future sales milestones, and royalty payments might be based on drug product sales levels. The Company records a contingent consideration obligation for such contingent payments at fair value on the acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models designed to estimate the probability of such contingent payments based on various assumptions and incorporating estimated success rates.  Estimated payments are discounted using present value techniques to arrive at an estimated fair value at the balance sheet date. Changes in the fair value of the contingent consideration obligations are recognized within the Company’s Consolidated Statements of Operations and Comprehensive Loss. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates, changes in the amount or timing of expected expenditures associated with product development, changes in the amount or timing of cash flows from products upon commercialization, changes in the assumed achievement or timing of any development milestones, changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. These fair value measurements are based on significant inputs not observable in the market. Substantial judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period.  The Company determined the fair value of its contingent consideration obligation to be $0 at June 30, 2019 and September 30, 2018.

Revenue Recognition— On October 1, 2018, the Company adopted FASB Topic 606 – Revenue for Contracts from Customers which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries. The Company’s adoption of the new revenue standard did not have a material impact on its Consolidated Financial Statements.  The Company has not yet achieved commercial sales of its drug candidates to date, however, the new standard is applicable to the Company’s ongoing licensing and collaboration agreements, including those with Amgen and Janssen, and the analysis of the impact of this guidance on those agreements is discussed further in Note 2 below.    

The new revenue standard provides a five-step framework for recognizing revenue as control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of the new revenue standard, the Company performs the following five steps: (i) identify the contract; (ii) identify the performance obligations; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.  At contract inception, the Company assesses whether the goods or services promised within each contract are distinct and, therefore, represent a separate performance obligation, or whether they are not distinct and are combined with other goods and services until a distinct bundle is identified.  The Company then determines the transaction price, which typically includes upfront payments and any variable consideration that the Company determines is probable

8


to not cause a significant reversal in the amount of cumulative revenue recognized when the uncertainty associated with the variable consideration is resolved.  The Company then allocates the transaction price to each performance obligation and recognizes the associated revenue when (or as) each performance obligation is satisfied.

The Company recognizes the transaction price allocated to upfront license payments as revenue upon delivery of the license to the customer and resulting ability of the customer to use and benefit from the license, if the license is determined to be distinct from the other performance obligations identified in the contract.  These other performance obligations are typically to perform research and development services for the customer, often times relating to the candidate that the customer is licensing.  If the license is not considered to be distinct from other performance obligations, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied at a point in time or over time. If the performance obligation is satisfied over time, the Company then determines the appropriate method of measuring progress for purposes of recognizing revenue from license payments.  The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the related revenue recognition.  

Typically, the Company’s collaboration agreements entitle it to additional payments upon the achievement of milestones or royalties on sales. The milestones are generally categorized into three types: development milestones, generally based on the initiation of toxicity studies or clinical trials; regulatory milestones, generally based on the submission, filing or approval of regulatory applications such as a Clinical Trial Application (CTA) or a New Drug Application (NDA) in the United States; and sales-based milestones, generally based on meeting specific thresholds of sales in certain geographic areas. The Company evaluates whether it is probable that the consideration associated with each milestone or royalty will not be subject to a significant reversal in the cumulative amount of revenue recognized. Amounts that meet this threshold are included in the transaction price using the most likely amount method, whereas amounts that do not meet this threshold are excluded from the transaction price until they meet this threshold. At the end of each subsequent reporting period, the Company re-evaluates the probability of a significant reversal of the cumulative revenue recognized for our milestones and royalties, and, if necessary, adjusts its estimate of the overall transaction price.  Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and net income in our Consolidated Statement of Operations and Comprehensive Income (Loss).  Typically, milestone payments and royalties are achieved after the Company’s performance obligations associated with the collaboration agreements have been completed and after the customer has assumed responsibility for the respective clinical or pre-clinical program.  Thus, the milestone or royalty payments are recognized as revenue in the period the milestone or royalty was achieved. If a milestone payment is achieved during the performance period, the milestone payment would be recognized as revenue to the extent performance had been completed at that point, and the remaining balance would be recorded as deferred revenue.  

The new revenue standard requires the Company to assess whether a significant financing component exists in determining the transaction price.  The Company performs this assessment at the onset of its licensing or collaboration agreements.  Typically, a significant financing component does not exist because the customer is paying for a license or services in advance with an upfront payment.  Additionally, future royalty payments are not substantially within the control of the Company or the customer.  

The new revenue standard requires the Company to allocate the arrangement consideration on a relative standalone selling price basis for each performance obligation after determining the transaction price of the contract and identifying the performance obligations to which that amount should be allocated. The relative standalone selling price is defined in the new revenue standard as the price at which an entity would sell a promised good or service separately to a customer. If other observable transactions in which the Company has sold the same performance obligation separately are not available, the Company estimates the standalone selling price of each performance obligation. Key assumptions to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Whenever the Company determines that goods or services promised in a contract should be accounted for as a combined performance obligation over time, the Company determines the period over which the performance obligations will be performed and revenue will be recognized. Revenue is recognized using the proportional performance method. Labor hours are typically used as the measure of performance. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations.  If the Company determines that the performance obligation is satisfied over time, any upfront payment received is initially recorded as deferred revenue on the Company’s Consolidated Balance Sheets.  

Certain judgments affect the application of the Company’s revenue recognition policy. For example, the Company records short-term and long-term deferred revenue based on its best estimate of when such revenue will be recognized. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months, and long-term deferred revenue consists of amounts that the Company does not expect will be recognized in the next 12 months. This estimate is based on the Company’s current operating plan and, if the Company’s operating plan should change in the future, the Company may recognize a different amount of deferred revenue over the next 12-month period.

9


Allowance for Doubtful Accounts—The Company accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing historical collections, accounts receivable aging and other factors. Accounts receivable are written off when all collection attempts have failed.

Research and Development—Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB ASC 730-10.  Included in research and development costs are operating costs, facilities, supplies, external services, clinical trial and manufacturing costs, overhead directly related to the Company’s research and development operations, and costs to acquire technology licenses.

Net Income (Loss) per Share—Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share are computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options and restricted stock units issued to employees.  During the three months ended June 30, 2019 and 2018, the calculation of the effect of dilutive stock options and restricted stock units was 3,949,273 shares and 0 shares, respectively.  During the nine months ended June 30, 2019 and 2018, the calculation of the effect of dilutive stock options and restricted stock units was 4,449,917 shares and 0 shares, respectively.  During the three months ended June 30, 2019, the calculation of the effect of dilutive stock options and restricted stock units excluded 867,175 stock options and 0 restricted stock units due to their anti-dilutive effect.  During the nine months ended June 30, 2019 the calculation of the effect of dilutive stock options and restricted stock units excluded 967,175 stock options and 0 restricted stock units due to their anti-dilutive effect.  During the three and nine months ended June 30, 2018, the calculation of the effect of dilutive stock options and restricted stock units excluded all stock options and restricted stock units granted and outstanding during the period due to their anti-dilutive effect.

Stock-Based Compensation—The Company accounts for share-based compensation arrangements in accordance with FASB ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards to be based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of its stock options at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock options. For restricted stock units, the value of the award is based on the Company’s stock price at the grant date.  For performance-based restricted stock unit awards, the value of the award is based on the Company’s stock price at the grant date, with consideration given to the probability of the performance condition being achieved.  The Company uses historical data and other information to estimate the expected price volatility for stock option awards and the expected forfeiture rate for all awards.  Expense is recognized over the vesting period for all awards and commences at the grant date for time-based awards and upon the Company’s determination that the achievement of such performance conditions is probable for performance-based awards. This determination requires significant judgment by management.

Income Taxes—The Company accounts for income taxes under the liability method, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change in deferred income tax assets and liabilities during the period.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 provides that an entity recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for either full retrospective or modified retrospective adoption and will become effective for the Company in the first quarter of fiscal 2019. In April 2016, the FASB issued an amendment to ASU No. 2014-09 with update ASU No. 2016-10 which provided more specific guidance around the identification of performance obligations and licensing arrangements.  On October 1, 2018, the Company adopted this standard using the modified retrospective method. The Company’s implementation approach included reviewing the status of each of its ongoing collaboration agreements and designing appropriate internal controls to enable the preparation of financial information.  The Company has completed its assessment of the impact of the new revenue recognition guidance and determined that there will be no material impact.  The Company’s existing performance obligations under its ongoing licensing and collaboration agreements as of October 1, 2018 were substantially completed prior to September 30, 2018.  Any future option, milestone or royalty payments received will be accounted for under the sales-based royalty exception provided for under this new revenue recognition guidance.  Additionally, there

10


will be no impact to cash from or used in operating, financing or investing activities on the Company’s Consolidated Statement of Cash Flows as a result of the adoption of the new standard.  

In March 2016, the FASB issued ASU No. 2016-02, Leases.  Under ASU 2016-02, lessees will be required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). ASU 2016-02 becomes effective for the Company in the first quarter of fiscal 2020. The Company expects the adoption of this update to have a material effect on the classification and disclosure of its leased facilities.  

In May 2017, the FASB issued ASU No. 2017-09, which is an update to Topic 718, Compensation - Stock Compensation. The update provides guidance on determining which changes to the terms and conditions of share-based payment awards, including stock options, require an entity to apply modification accounting under Topic 718. ASU 2017-09 becomes effective for the Company in the first quarter of fiscal 2019.  The adoption of this update has not had a material impact on the Company's results of operations and Consolidated Financial Statements.

In November 2018, the FASB issued ASU No. 2018-18 Collaborative Arrangements (Topic 808).  This update provides clarification on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808) including the alignment of unit of account guidance between the two topics. ASU 2018-18 becomes effective for the Company in the first quarter of fiscal 2021 with early adoption permitted.  The Company does not expect the adoption of this update to have a material effect on its Consolidated Financial Statements.

NOTE 2. COLLABORATION AND LICENSE AGREEMENTS

Amgen Inc.

On September 28, 2016, the Company entered into two Collaboration and License agreements, and a Common Stock Purchase Agreement with Amgen Inc., a Delaware corporation (“Amgen”). Under one of the license agreements (the “Second Collaboration and License Agreement” or “AMG 890 (ARO-LPA) Agreement”), Amgen has received a worldwide, exclusive license to Arrowhead’s novel, RNAi ARO-LPA program. These RNAi molecules are designed to reduce elevated lipoprotein(a), which is a genetically validated, independent risk factor for atherosclerotic cardiovascular disease. Under the other license agreement (the “First Collaboration and License Agreement” or “ARO-AMG1 Agreement”), Amgen received an option to a worldwide, exclusive license for ARO-AMG1, an RNAi therapy for an undisclosed genetically validated cardiovascular target. In both agreements, Amgen is wholly responsible for clinical development and commercialization. Under the Common Stock Purchase Agreement, the Company has sold 3,002,793 shares of Common Stock to Amgen at a price of $7.16 per share. Under the terms of the agreements taken together, the Company has received $35 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock.  Upon signing the collaboration agreements with Amgen, the Company was eligible to receive up to $617 million in Option payments, and development, regulatory and sales milestone payments. The Company was further eligible to receive single-digit royalties for sales of products under the ARO-AMG1 Agreement and is eligible to receive up to low double-digit royalties for sales of products under the AMG 890 (ARO-LPA) Agreement.

The Company has evaluated these agreements in accordance with the new revenue recognition standard that became effective for the Company on October 1, 2018. The adoption of the new revenue standard did not have a material impact on the balances reported when evaluated under the superseded revenue standard.  During the year ended September 30, 2018, the Company substantially completed its performance obligations under the AMG 890 (ARO-LPA) Agreement and the ARO-AMG1 Agreement.  Future milestones and royalties achieved will be recognized in their entirety when earned.  During the three months ended June 30, 2019 and 2018, the Company recognized $0 and $0.7 million of Revenue associated with its agreements with Amgen, respectively.  During the nine months ended June 30, 2019 and 2018, the Company recognized $0.3 million and $4.9 million of Revenue associated with its agreements with Amgen, respectively.  As of June 30, 2019, there were $0 contract assets, and $0 contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

In July 2019, Amgen informed the Company that it would not be exercising its option for an exclusive license for ARO-AMG1, and as such, there will be no further milestone or royalty payments under the ARO-AMG1 Agreement.  

Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into a License Agreement (“Janssen License Agreement”) and a Research Collaboration and Option Agreement (“Janssen Collaboration Agreement”) with Janssen Pharmaceuticals, Inc. (“Janssen”) part of the Janssen Pharmaceutical Companies of Johnson & Johnson.  The Company also entered into a Stock Purchase Agreement (“JJDC Stock Purchase Agreement”) with Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”), a New Jersey corporation.  Under the Janssen

11


License Agreement, Janssen has received a worldwide, exclusive license to the Company’s JNJ-3989 (ARO-HBV) program, the Company’s third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potentially curative therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV), Janssen will be wholly responsible for clinical development and commercialization.  Under the Janssen Collaboration Agreement, Janssen will be able to select three new targets against which Arrowhead will develop clinical candidates.  These candidates are subject to certain restrictions and will not include candidates in the Company’s current pipeline.  The Company will perform discovery, optimization and preclinical development, entirely funded by Janssen, sufficient to allow the filing of a U.S. Investigational New Drug application or equivalent, at which time Janssen will have the option to take an exclusive license. If the option is exercised, Janssen will be wholly responsible for clinical development and commercialization of each optioned candidate.  Under the JJDC Stock Purchase Agreement, in October 2018 the Company sold 3,260,869 shares of common stock to JJDC at a price of $23.00 per share.  Under the terms of the agreements taken together, the Company has received $175 million as an upfront payment, $75 million in the form of an equity investment by JJDC in Arrowhead common stock, and may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in development and sales milestone payments for the three additional targets covered under the Janssen Collaboration Agreement.  The Company is further eligible to receive tiered royalties up to mid teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales.   In April 2019, the Company earned a $25 million milestone payment from Janssen following the initiation of dosing in a new triple combination cohort (cohort 12) in the Company’s ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV).  

The Company has evaluated these agreements in accordance with the new revenue recognition standard that became effective for the Company on October 1, 2018.  The adoption of the new revenue standard did not have a material impact on the balances reported when evaluated under the superseded revenue standard.  At the inception of these agreements, the Company has identified one distinct performance obligation.  Regarding the Janssen License Agreement, the Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibility to complete the ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV) and the Company’s responsibility to ensure certain manufacturing of JNJ-3989 (ARO-HBV) drug product is completed and delivered to Janssen (the “Janssen R&D Services”).  Due to the specialized and unique nature of these Janssen R&D services, and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and thus, one performance obligation.  The Company also determined that Janssen’s option to require the Company to develop up to three new targets is not a material right, and thus, not a performance obligation at the onset of the agreement.  The consideration for this option will be accounted for if and when it is exercised.

The Company determined the transaction price totaled approximately $227.4 million which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, the first $25 million milestone payment earned and estimated payments for reimbursable Janssen R&D services to be performed.  The Company has allocated the total $227.4 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services.  This revenue will be recognized using a proportional performance method (based on actual labor hours versus estimated total labor hours) beginning in October 2018 and ending as the Company’s efforts in overseeing the ongoing phase 1 / 2 clinical trial are completed.  During the three and nine months ended June 30, 2019, the Company recognized approximately $42.7 million and $125.2 million of Revenue associated with its agreements with Janssen and JJDC, respectively.  As of June 30, 2019 there were $2.0 million of contract assets recorded as accounts receivable, and $97.9 million of contract liabilities recorded as current deferred revenue and long-term deferred revenue on the Company’s Consolidated Balance Sheets.  The $2.0 million of accounts receivable is driven by reimbursable costs incurred for the Janssen R&D Services, and the $97.9 million of current and long-term deferred revenue is driven by the upfront payment and premium paid by JJDC for its equity investment in the Company as well as the $25 million milestone paid by Janssen, net of revenue recognized in the period.                              

 

NOTE 3. PROPERTY AND EQUIPMENT

The following table summarizes the Company’s major classes of property and equipment:

 

 

 

June 30, 2019

 

 

September 30, 2018

 

Computers, office equipment and furniture

 

$

588,044

 

 

$

600,334

 

Research equipment

 

 

12,563,670

 

 

 

10,751,627

 

Software

 

 

145,802

 

 

 

152,676

 

Leasehold improvements

 

 

15,201,480

 

 

 

12,236,150

 

Total gross fixed assets

 

 

28,498,996

 

 

 

23,740,787

 

Less:   Accumulated depreciation and amortization

 

 

(11,424,383

)

 

 

(9,805,362

)

Property and equipment, net

 

$

17,074,613

 

 

$

13,935,425

 

12


 

Depreciation and amortization expense for Property and Equipment for the three months ended June 30, 2019 and 2018 and was $578,342 and $751,134, respectively.  Depreciation and amortization expense for Property and Equipment for the nine months ended June 30, 2019 and 2018 and was $2,081,447 and $2,195,558, respectively. 

 

NOTE 4. INVESTMENTS

The Company invests a portion of its excess cash balances in short-term debt securities and may, from time to time, also invest in long-term debt securities.  Investments at June 30, 2019 consisted of corporate bonds with maturities remaining of less than 36 months.  The Company may also invest excess cash balances in certificates of deposits, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper.  The Company accounts for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities.  At June 30, 2019, all investments were classified as held-to-maturity securities.

The following tables summarize the Company’s short-term and long-term investments as of June 30, 2019, and September 30, 2018.

 

 

 

As of June 30, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Commercial notes (due within one year)

 

$

48,567,215

 

 

$

155,327

 

 

$

(84,678

)

 

$

48,637,864

 

Commercial notes (due within three years)

 

$

57,555,499

 

 

$

990,610

 

 

$

 

 

$

58,546,109

 

Total

 

$

106,122,714

 

 

$

1,145,937

 

 

$

(84,678

)

 

$

107,183,973

 

 

 

 

As of September 30, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Commercial notes (due within one year)

 

$

46,400,176

 

 

$

 

 

$

(429,050

)

 

$

45,971,126

 

Commercial notes (due within three years)

 

$

 

 

$

 

 

$

 

 

$

 

Total

 

$

46,400,176

 

 

$

 

 

$

(429,050

)

 

$

45,971,126

 

 

NOTE 5. INTANGIBLE ASSETS

Intangible assets subject to amortization include patents and a license agreement capitalized as part of the Novartis RNAi asset acquisition in March 2015. The license agreement associated with the Novartis RNAi asset acquisition is being amortized over the estimated life remaining at the time of acquisition, which was 21 years, and the accumulated amortization of the asset is approximately $643,090.  The patents associated with the Novartis RNAi asset acquisition are being amortized over the estimated life remaining at the time of acquisition, which was 14 years, and the accumulated amortization of the assets is approximately $6,725,437.  Amortization expense for the three months ended June 30, 2019 and 2018 was $425,107 and $425,107, respectively.  Amortization expense for the nine months ended June 30, 2019 and 2018 was $1,275,322 and $1,275,322, respectively.  Amortization expense is expected to be $425,107 for the remainder of fiscal 2019, $1,700,429 in 2020, $1,700,429 in 2021, $1,700,429 in 2022, $1,700,429 in 2023, and $10,261,865 thereafter.

The following table provides details on the Company’s intangible asset balances:

 

 

 

Intangible assets

subject to

amortization

 

Balance at September 30, 2018

 

$

18,764,010

 

Impairment

 

 

 

Amortization

 

 

(1,275,322

)

Balance at June 30, 2019

 

$

17,488,688

 

13