Arrowhead Pharmaceuticals, Inc.
ARROWHEAD RESEARCH CORP (Form: 10-Q, Received: 08/04/2015 16:07:09)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2015

¨

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

Commission file number 000-21898

 

ARROWHEAD RESEARCH CORPORATION

(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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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

 

Large accelerated

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

The number of shares of the registrant’s common stock outstanding as of July 31, 2015 was 59,500,862.

 

 

 

 

 

 


 

Page(s)

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS (unaudited)

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Operations

2

 

 

Consolidated Statement of Stockholders’ Equity

3

 

 

Consolidated Statements of Cash Flows

4

 

 

Notes to Consolidated Financial Statements

5

 

 

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

18

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

27

 

 

ITEM 4. CONTROLS AND PROCEDURES

27

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

28

 

 

ITEM 1A. RISK FACTORS

28

 

 

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

28

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

28

 

 

ITEM 4. MINE SAFETY DISCLOSURES

28

 

 

ITEM 5. OTHER INFORMATION

28

 

 

ITEM 6. EXHIBITS

29

 

 

SIGNATURE

30

 

 

 

 


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Arrowhead Research Corporation

Consolidated Balance Sheets

 

 

(unaudited)

 

 

 

 

 

 

June 30, 2015

 

 

September 30, 2014

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

87,252,813

 

 

$

132,510,610

 

Prepaid expenses

 

3,499,324

 

 

 

588,626

 

Other current assets

 

654,924

 

 

 

48,502

 

Short term investments

 

23,280,640

 

 

 

21,653,032

 

TOTAL CURRENT ASSETS

 

114,687,701

 

 

 

154,800,770

 

Property and equipment, net

 

4,108,667

 

 

 

3,872,753

 

Intangible assets, net

 

25,262,886

 

 

 

1,013,473

 

Investments

 

1,085,282

 

 

 

23,088,346

 

Other assets

 

45,789

 

 

 

41,414

 

TOTAL ASSETS

$

145,190,325

 

 

$

182,816,756

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

$

4,862,263

 

 

$

2,579,478

 

Accrued expenses

 

1,726,449

 

 

 

1,399,486

 

Accrued payroll and benefits

 

884,373

 

 

 

3,268,506

 

Deferred revenue

 

71,875

 

 

 

103,125

 

Derivative liabilities

 

1,724,468

 

 

 

4,173,943

 

Capital lease obligation

 

216,653

 

 

 

213,991

 

Notes payable

 

-

 

 

 

50,000

 

Other current liabilities

 

46,407

 

 

 

58,495

 

TOTAL CURRENT LIABILITIES

 

9,532,488

 

 

 

11,847,024

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

Capital lease obligation, net of current portion

 

595,516

 

 

 

758,340

 

Contingent consideration obligations

 

3,970,931

 

 

 

3,970,931

 

Other non-current liabilities

 

346,996

 

 

 

255,206

 

TOTAL LONG-TERM LIABILITIES

 

4,913,443

 

 

 

4,984,477

 

Commitments and contingencies

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Arrowhead Research Corporation stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; 15,652 and 18,300 shares issued and

   outstanding as of June 30, 2015 and September 30, 2014, respectively

 

16

 

 

 

18

 

Common stock, $0.001 par value; 145,000,000 shares authorized; 59,498,362 and 54,656,936 shares

   issued and outstanding as of June 30, 2015 and September 30, 2014, respectively

 

151,868

 

 

 

147,026

 

Additional paid-in capital

 

423,182,550

 

 

 

391,164,558

 

Accumulated other comprehensive income (loss)

 

(65,947

)

 

 

-

 

Accumulated deficit

 

(291,968,905

)

 

 

(224,771,159

)

Total Arrowhead Research Corporation stockholders' equity

 

131,299,582

 

 

 

166,540,443

 

Noncontrolling interest

 

(555,188

)

 

 

(555,188

)

TOTAL STOCKHOLDERS’ EQUITY

 

130,744,394

 

 

 

165,985,255

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

145,190,325

 

 

$

182,816,756

 

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

 

 

 

1


Arrowhead Research Corporation

Consolidated Statements of Operations

(unaudited)

 

 

 

Three Months ended

 

 

Three Months ended

 

 

Nine Months ended

 

 

Nine Months ended

 

 

 

June 30, 2015

 

 

June 30, 2014

 

 

June 30, 2015

 

 

June 30, 2014

 

REVENUE

 

$

123,750

 

 

$

43,750

 

 

$

338,250

 

 

$

131,250

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,490,400

 

 

 

6,392,200

 

 

 

36,877,925

 

 

 

14,719,739

 

Acquired in-process research and development

 

 

-

 

 

 

-

 

 

 

10,142,786

 

 

 

-

 

Salaries and payroll-related costs

 

 

3,570,531

 

 

 

2,454,449

 

 

 

10,262,799

 

 

 

7,634,142

 

General and administrative expenses

 

 

1,829,393

 

 

 

1,582,465

 

 

 

5,612,219

 

 

 

3,865,845

 

Stock-based compensation

 

 

2,486,074

 

 

 

2,038,682

 

 

 

6,706,009

 

 

 

3,758,264

 

Depreciation and amortization

 

 

741,058

 

 

 

276,054

 

 

 

1,480,656

 

 

 

1,075,238

 

TOTAL OPERATING EXPENSES

 

 

16,117,456

 

 

 

12,743,850

 

 

 

71,082,394

 

 

 

31,053,228

 

OPERATING LOSS

 

 

(15,993,706

)

 

 

(12,700,100

)

 

 

(70,744,144

)

 

 

(30,921,978

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in income (loss) of unconsolidated affiliates

 

 

-

 

 

 

78,702

 

 

 

-

 

 

 

(69,350

)

Gain (loss) on sale of fixed assets, net

 

 

-

 

 

 

-

 

 

 

19,195

 

 

 

(58,878

)

Interest income (expense), net

 

 

162,366

 

 

 

226,424

 

 

 

597,896

 

 

 

386,392

 

Change in value of derivatives

 

 

(104,713

)

 

 

758,469

 

 

 

2,446,403

 

 

 

(5,712,335

)

Other income (expense)

 

 

-

 

 

 

10,054

 

 

 

482,904

 

 

 

81,269

 

TOTAL OTHER INCOME (EXPENSE)

 

 

57,653

 

 

 

1,073,649

 

 

 

3,546,398

 

 

 

(5,372,902

)

LOSS BEFORE INCOME TAXES

 

 

(15,936,053

)

 

 

(11,626,451

)

 

 

(67,197,746

)

 

 

(36,294,880

)

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

NET LOSS

 

 

(15,936,053

)

 

 

(11,626,451

)

 

 

(67,197,746

)

 

 

(36,294,880

)

Net loss attributable to noncontrolling interests

 

 

-

 

 

 

(2,468

)

 

 

-

 

 

 

95,132

 

NET LOSS ATTRIBUTABLE TO ARROWHEAD

 

$

(15,936,053

)

 

$

(11,628,919

)

 

$

(67,197,746

)

 

$

(36,199,748

)

NET LOSS PER SHARE ATTRIBUTABLE TO ARROWHEAD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   SHAREHOLDERS - BASIC & DILUTED:

 

$

(0.27

)

 

$

(0.22

)

 

$

(1.19

)

 

$

(0.81

)

Weighted average shares outstanding - basic and diluted

 

 

59,492,867

 

 

 

51,931,989

 

 

 

56,631,297

 

 

 

44,565,008

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustments

 

 

(1,982

)

 

 

-

 

 

 

(65,947

)

 

 

-

 

COMPREHENSIVE LOSS ATTRIBUTABLE TO

   ARROWHEAD

 

$

(15,938,035

)

 

$

(11,628,919

)

 

$

(67,263,693

)

 

$

(36,199,748

)

 

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

 

 

 

2


Arrowhead Research Corporation

Consolidated Statement of Stockholders’ Equity

(unaudited)

 

 

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount ($)

 

 

Shares

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Other Comprehensive Income (loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at September 30, 2013

 

9,900

 

 

$

10

 

 

 

32,489,444

 

 

$

124,859

 

 

$

193,514,766

 

 

$

-

 

 

$

(166,140,969

)

 

$

(1,763,877

)

 

$

25,734,789

 

Exercise of warrants

 

-

 

 

 

-

 

 

 

2,911,919

 

 

 

2,911

 

 

 

10,145,133

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,148,044

 

Exercise of stock options

 

-

 

 

 

-

 

 

 

454,863

 

 

 

455

 

 

 

2,729,545

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,730,000

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,696,173

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,696,173

 

Common stock issued @ $5.86

 

-

 

 

 

-

 

 

 

3,071,672

 

 

 

3,072

 

 

 

14,057,040

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,060,112

 

Common stock issued @ $18.95

 

-

 

 

 

-

 

 

 

6,325,000

 

 

 

6,325

 

 

 

112,575,234

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

112,581,559

 

Preferred stock issued @ $1,000 per

   share

 

46,000

 

 

 

46

 

 

 

-

 

 

 

-

 

 

 

45,999,954

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

46,000,000

 

Common stock issued to Galloway

 

-

 

 

 

-

 

 

 

131,579

 

 

 

132

 

 

 

499,868

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

500,000

 

Settlements related to derivative

   liability

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,956,079

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,956,079

 

Preferred stock converted to common

   stock

 

(37,600

)

 

 

(38

)

 

 

9,272,459

 

 

 

9,272

 

 

 

(9,234

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Deconsolidation of Calando

   Pharmaceuticals, Inc.

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,303,911

 

 

 

1,303,911

 

Net loss for the year ended

   September 30, 2014

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(58,630,190

)

 

 

(95,222

)

 

 

(58,725,412

)

Balance at September 30, 2014

 

18,300

 

 

$

18

 

 

 

54,656,936

 

 

$

147,026

 

 

$

391,164,558

 

 

$

-

 

 

$

(224,771,159

)

 

$

(555,188

)

 

$

165,985,255

 

Exercise of warrants

 

-

 

 

 

-

 

 

 

53,578

 

 

 

54

 

 

 

270,571

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

270,625

 

Exercise of stock options

 

-

 

 

 

-

 

 

 

17,500

 

 

 

18

 

 

 

43,108

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

43,126

 

Stock-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,706,009

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,706,009

 

Exercise of exchange rights

 

-

 

 

 

-

 

 

 

5,250

 

 

 

5

 

 

 

3,067

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,072

 

Preferred stock converted to common

   stock

 

(2,648

)

 

 

(2

)

 

 

1,316,215

 

 

 

1,316

 

 

 

(1,314

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock-RSU vesting

 

-

 

 

 

-

 

 

 

127,500

 

 

 

128

 

 

 

(128

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock issued to Novartis

   @ $7.53

 

-

 

 

 

-

 

 

 

3,321,383

 

 

 

3,321

 

 

 

24,996,679

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

25,000,000

 

Foreign currency translation

   adjustments

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(65,947

)

 

 

-

 

 

 

-

 

 

 

(65,947

)

Net loss for the nine months ended

   June 30, 2015

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(67,197,746

)

 

 

-

 

 

 

(67,197,746

)

Balance at June 30, 2015

 

15,652

 

 

$

16

 

 

 

59,498,362

 

 

$

151,868

 

 

$

423,182,550

 

 

$

(65,947

)

 

$

(291,968,905

)

 

$

(555,188

)

 

$

130,744,394

 

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

 

 

 

3


Arrowhead Research Corporation

Consolidated Statements of Cash Flows

(unaudited)

 

 

Nine months ended

 

 

Nine months ended

 

 

June 30, 2015

 

 

June 30, 2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

$

(67,197,746

)

 

$

(36,294,880

)

Net loss attributable to non-controlling interests

 

-

 

 

 

95,132

 

Net loss attributable to Arrowhead

 

(67,197,746

)

 

 

(36,199,748

)

(Gain) loss on disposal of fixed assets

 

-

 

 

 

58,878

 

Change in value of derivatives

 

(2,446,403

)

 

 

5,712,335

 

Acquired in-process research and development

 

10,142,786

 

 

 

-

 

Stock-based compensation

 

6,706,009

 

 

 

3,758,264

 

Depreciation and amortization

 

1,480,656

 

 

 

1,075,238

 

Amortization of note premiums

 

945,114

 

 

 

416,291

 

Noncash gain in equity investment

 

 

 

 

 

(87,197

)

Non-controlling interest

 

-

 

 

 

(95,132

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

-

 

 

 

75,000

 

Other receivables

 

(620,395

)

 

 

(517,986

)

Other current assets

 

(2,902,368

)

 

 

(138,650

)

Accounts payable

 

2,328,360

 

 

 

990,929

 

Accrued expenses

 

(2,155,033

)

 

 

459,691

 

Other

 

31,639

 

 

 

(4,480

)

NET CASH USED IN OPERATING ACTIVITIES

 

(53,687,381

)

 

 

(24,496,567

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Cash paid for acquisitions

 

(10,000,000

)

 

 

-

 

Purchases of property and equipment

 

(1,135,651

)

 

 

(1,251,987

)

Proceeds from sale of fixed assets

 

500

 

 

 

-

 

Purchase of marketable securities

 

-

 

 

 

(46,365,528

)

Proceeds from sale of marketable securities

 

19,411,146

 

 

 

6,590,824

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

8,275,995

 

 

 

(41,026,691

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Principal payments on capital leases and notes payable

 

(160,162

)

 

 

(257,178

)

Proceeds from issuance of common stock and preferred stock, net

 

-

 

 

 

172,641,720

 

Proceeds from the exercise of warrants and stock options

 

313,751

 

 

 

12,374,005

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

153,589

 

 

 

184,758,547

 

NET INCREASE (DECREASE) IN CASH

 

(45,257,797

)

 

 

119,235,289

 

CASH AT BEGINNING OF PERIOD

 

132,510,610

 

 

 

19,114,444

 

CASH AT END OF PERIOD

$

87,252,813

 

 

$

138,349,733

 

Supplementary disclosures:

 

 

 

 

 

 

 

Interest paid

$

11,153

 

 

$

21,478

 

Common stock issued to Novartis for asset acquisition

$

25,000,000

 

 

$

-

 

 

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

 

 

 

4


Arrowhead Research Corporation

Notes to Consolidated Financial Statements

(unaudited)

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Research Corporation, a Delaware corporation, (2) the terms the “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. (“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 the term “Stockholder(s)” refers to the holders of Arrowhead Common Stock.

 

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Arrowhead Research Corporation develops novel drugs to treat intractable diseases by silencing the genes that cause them.  Using the broadest 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. Arrowhead’s most advanced drug candidate in clinical development is ARC-520, which is designed to treat chronic hepatitis B infection by inhibiting the production of all HBV gene products.  The goal is to reverse the immune suppression that prevents the body from controlling the virus and clearing the disease. Arrowhead’s second clinical candidate is ARC-AAT, a treatment for a rare liver disease associated with a genetic disorder that causes alpha-1 antitrypsin deficiency.

Liquidity

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. We expect our operations to continue to require cash investment to pursue our research and development goals, including clinical trials and related drug manufacturing.  Based upon the Company’s current cash resources and operating plan, the Company expects to have sufficient liquidity to fund operations for at least the next twelve months.   

At June 30, 2015, the Company had $87.3 million in cash to fund operations. In addition to its cash resources, the Company has invested excess cash in investment grade commercial bonds maturing in less than 24 months.  These bonds provide a source of liquidity, though the Company plans to hold them until maturity.  At June 30, 2015, the Company had invested $24.4 million in bonds.  During the nine months ended June 30, 2015, the Company’s cash position decreased by $ 45.3 million which was primarily the result of cash outflows related to operating activities of $53.7 million, cash paid for the acquisition of certain RNAi assets from Novartis Institutes for Biomedical Research Inc. of $10.0 million (see footnote 2) and capital expenditures of $1.1 million, partially offset by maturities of fixed income investments totaling $19.4 million and proceeds from the exercise of warrants and options of $0.3 million.  

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. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

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 no restricted cash at June 30, 2015 and September 30, 2014.

Concentration of Credit Risk—The Company maintains several bank accounts for its operations at two financial institutions. 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.

5


Investments —T he Company may invest excess cash balances in short-term and long-term marketable debt securities. Investments may consist of certificates of deposits, money market accounts, government-sponsored enterprise securi ties, 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 certain securities to be classified into thre e categories:

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

Trading Securities—Debt and equity 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 and equity 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. At June 30, 2015 , the Company classified all of its investments 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—At June 30, 2015 , 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.

In-Process Research & Development (IPR&D)—IPR&D assets represent capitalized on-going research projects that were acquired through business combinations. Such assets are initially measured at their acquisition date fair values. The amounts capitalized are being accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of R&D efforts associated with the project. Upon successful completion of a project, Arrowhead will make a determination as to the then remaining useful life of the intangible asset and begin amortization. Arrowhead tests its indefinite-lived assets for impairment at least annually, through a two-step process. The first step is a qualitative assessment to determine if it is more likely than not that the indefinite lived assets are impaired. Arrowhead considers relevant events and circumstances that could affect the inputs used to determine the fair value of the intangible assets. If the qualitative assessment indicates that it is more likely than not that the intangible assets are impaired, a second step is performed which is a quantitative test to determine the fair value of the intangible asset. If the carrying amount of the intangible assets exceeds its fair value, an impairment loss is recorded in the amount of that excess. If circumstances determine that it is appropriate, the Company may also elect to bypass step one, and proceed directly to the second step.

Contingent Consideration - The consideration for the Company’s acquisitions often includes 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 estimated fair value at the balance sheet date. Changes in the fair value of our contingent consideration obligations are recognized within the Company’s Consolidated Statements of Operations. 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.

6


Revenue Recognition—Revenue from license fees are recorded when persuasive evidence of an arrangement exists, title has passed or services have been rendered, a price is fixed and determinable, and colle ction is reasonably assured. The Company may generate revenue from product sales, technology licenses, collaborative research and development arrangements, and research grants. Revenue under technology licenses and collaborative agreements typically consis ts of nonrefundable and/or guaranteed technology license fees, collaborative research funding and various milestone and future product royalty or profit-sharing payments.

Payments under collaborative research and development agreements are recognized as revenue ratably over the relevant periods specified in the agreement, generally the period during which research and development is conducted. Revenue from up-front license fees, milestones and product royalties are recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements. Payments received in advance of recognition as revenue are recorded as deferred revenue.

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.

Earnings (Loss) per Share—Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (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 and warrants to purchase Common Stock of the Company.  All outstanding stock options, restricted stock units and warrants for the three and nine months ended June 30, 2015 and 2014 have been excluded from the calculation of Diluted earnings (loss) per share 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. The Company uses historical data and other information to estimate the expected price volatility and the expected forfeiture rate. For performance-based stock awards, the value of the awards is measured at the grant date.   Expense is recognized over the vesting period, commencing at the time the Company determines the achievement of such performance conditions is probable.  This determination requires significant judgment by management.

Derivative Assets and Liabilities – The Company accounts for warrants and other derivative financial instruments as either equity or assets/liabilities based upon the characteristics and provisions of each instrument. Warrants classified as equity are recorded as additional paid-in capital on the Company’s Consolidated Balance Sheet. Some of the Company’s warrants were determined to be ineligible for equity classification because of provisions that may result in an adjustment to their exercise price. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as assets or liabilities are recorded on the Company’s Consolidated Balance Sheet at their fair value on the date of issuance and are revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. The Company estimates the fair value of these assets/liabilities using option pricing models that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for expected volatility, expected life and risk-free interest rate.

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.

7


NOTE 2. ACQUISITIONS

On March 3, 2015, the Company entered into an Asset Purchase and Exclusive License Agreement (the “RNAi Purchase Agreement”) with Novartis Institutes for BioMedical Research, Inc., a Delaware corporation (“Novartis”), pursuant to which the Company acquired Novartis’ RNAi assets and rights thereunder. Pursuant to the RNAi Purchase Agreement, the Company acquired or licensed certain patents and patent applications owned or controlled by Novartis related to RNAi therapeutics, assignment of a third-party license, rights to three pre-clinical RNAi candidates, and other related assets (collectively, the “Purchased Assets”). The acquisition of the Purchased Assets closed on March 3, 2015, concurrent with execution of the RNAi Purchase Agreement (the “Closing”).

In consideration for the Purchased Assets, the Company made certain payments to Novartis, including: (a) an initial payment of $10,000,000 in cash of which $7,000,000 was paid during the Company’s first fiscal quarter of 2015 to secure an exclusivity period whereby the Company was able to exclusively examine the Novartis RNAi assets prior to finalizing the purchase, and the remaining $3,000,000 was paid in April 2015, and 3,321,383 shares of the Company’s common stock (the “Shares”) which were issued during the Company’s second fiscal quarter; (b) escalating royalties in the single digits based upon annual net sales thresholds for certain RNAi products sold by the Company; and (c) milestone payments tied to the achievement of certain development and sales milestones for each target being developed by the Company.

Pursuant to the RNAi Purchase Agreement, prior to initiation of a phase 2 Clinical Trial for a given RNAi Product or Arrowhead RNAi Product directed to an Initial Target , Novartis has an exclusive right to negotiate a license under any Intellectual Property Rights owned or exclusively licensed to the Company to make, sell or otherwise commercially exploit such RNAi Product or Arrowhead RNAi Product (as such italicized terms are defined in the RNAi Purchase Agreement).  After initiation of a phase 2 Clinical Trial for a given Arrowhead RNAi Product (“ROFN Candidate”), Novartis shall have a right of first negotiation on the ROFN Candidate developed by the Company and its affiliates relating to the purchased assets. If the Company proposes to out-license, or enters into substantive negotiations to out-license, any ROFN Candidate, the Company must give notice of the ROFN Candidate it proposes to out-license and negotiate exclusively and in good faith with Novartis for a period of time regarding the applicable out-license.

In addition to the consideration paid by the Company at the closing of the Transaction, the Company is obligated to make certain royalty and milestone payments to Novartis upon the occurrence of certain events. For sales of any RNAi Products for which Novartis and the Company do not enter into a licensing arrangement, the Company will be obligated to pay royalty rates ranging in the low to mid-single digits on Net Sales depending upon the type of RNAi Product provided that the royalty rate may be reduced or offset in certain circumstances. The obligation to pay royalties on such candidates will last until the later of (i) the expiration of the last to Valid Claim Covering such RNAi Product in such country and (ii) 11 years after the first commercial sale of such RNAi Product (as such italicized terms are defined in the RNAi Purchase Agreement).

The Company will also be obligated to make cash payments to Novartis upon the achievement of various milestones for any RNAi Products for which Novartis and the Company do not enter into a licensing arrangement.  These milestones include the initiation of a phase 2 and 3 clinical trials, US and other regulatory approvals, and annual sales milestones.  These milestone payments could amount to the mid to upper double digit millions of dollars.  

The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:

 

Intangible assets - patents

  

$

21,728,334

 

Intangible assets – license

  

 

3,128,880

 

Acquired in-process research and development - Pre-Clinical Candidates

  

 

10,142,786

  

Total purchase consideration

  

$

     35,000,000

  

The purchase consideration was composed of the following:

 

 

 

 

 

 

Cash Paid

  

$

10,000,000

  

Value of Shares Issued

  

 

25,000,000

  

Total purchase consideration

  

$

35,000,000

  

The Company accounted for this transaction as an acquisition of RNAi assets, including patents, a third-party license and in process research and development for the pre-clinical candidates.  The allocation of the purchase price to each asset was determined by estimating the relative fair value of each asset acquired and applying that to the total cost of the acquisition for the Company.  The Company capitalized the patents and license acquired as Intangible Assets as they require no future development and will have alternative future uses as the Company expands its RNAi capabilities (see footnote 5 for additional discussion of the useful lives and amortization of these Intangible Assets).  The Company expensed the portion of the purchase consideration allocated to the pre-clinical candidates as they will require future development in order to be commercialized. This expense is recorded in the “Acquired in-process research and development” line item of the Consolidated Statements of Operations.

8


 

NOTE 3. PROPERTY AND EQUIPMENT

The following table summarizes our major classes of property and equipment:

 

 

 

 

 

June 30,

2015

 

 

September 30, 2014

 

Computers, office equipment and furniture

$

372,401

 

 

$

334,162

 

Research equipment

 

5,552,187

 

 

 

4,614,176

 

Software

 

110,428

 

 

 

69,623

 

Leasehold improvements

 

3,117,537

 

 

 

3,045,022

 

Total gross fixed assets

 

9,152,553

 

 

 

8,062,983

 

Less:   Accumulated depreciation and amortization

 

(5,043,886

)

 

 

(4,190,230

)

Property and equipment, net

$

4,108,667

 

 

$

3,872,753

 

 

NOTE 4. INVESTMENTS

The Company invests a portion of its excess cash balances in short-term and long-term debt securities.  Investments at June 30, 2015 consisted of corporate bonds with maturities remaining of less than two years.  The Company may also invest excess cash balances in certificates of deposit, money market accounts, US Treasuries, US government agency obligations, corporate debt securities, and/or commercial paper.  The Company accounts for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities.  At June 30, 2015 , all investments were classified as held-to-maturity securities.

The following tables summarize the Company’s short- and long-term investments as of June 30, 2015, and September 30, 2014.

 

 

As of June 30, 2015

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Commercial notes (due within one year)

$

23,280,640

 

 

$

 

 

$

(207,165

)

 

$

23,073,475

 

Commercial notes (due after one year through two years)

$

1,085,282

 

 

 

 

 

$

(30,412

)

 

$

1,054,870

 

Total

$

24,365,922

 

 

$

 

 

$

(237,577

)

 

$

24,128,345

 

 

 

As of September 30, 2014

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

Commercial notes (due within one year)

$

21,653,032

 

 

$

 

 

$

(189,830

)

 

$

21,463,202

 

Commercial notes (due after one year through two years)

$

23,088,346

 

 

 

 

 

$

(217,693

)

 

$

22,870,653

 

Total

$

44,741,378

 

 

$

 

 

$

(407,523

)

 

$

44,333,855

 

 

 

NOTE 5. INTANGIBLE ASSETS

Intangible assets consist of in-process research and development (“IPR&D”) not subject to amortization, and patents and license agreements subject to amortization, which were capitalized as a part of an asset acquisition or business combination.

IPR&D represents projects that have not yet received regulatory approval and are required to be classified as indefinite assets until the successful completion or the abandonment of the associated R&D efforts. Accordingly, during the development period after the date of acquisition, these assets will not be amortized until approval is obtained in one or more jurisdictions which, individually or combined, are expected to generate a significant portion of the total revenue expected to be earned by an IPR&D project. At that time, the Company will determine the useful life of the asset, reclassify the asset out of IPR&D and begin amortization. If the associated R&D effort is abandoned the related IPR&D assets will likely be written off and the Company would record an impairment loss.   Intangible assets not subject to amortization include IPR&D capitalized as part of a business combination from the acquisition of Roche Madison.

9


Intangible assets subject to amortization include patents and a license agreement capitalized as part of the Novartis RNAi asset acquisition and a business combination from the acquisition of Roche Madison. The license agreement associated with the Novarti s 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 $ 49 , 468 .  The license agreements associated with the acquisition of Roche Madison are being amortized over the estimated life remaining at the time of acquisition , which was 4 years, and the accumulated amortization of the assets is approximately $ 202 , 453 . 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 $ 517 , 341 .   Amortization expense for the three and nine months ended June 30 , 2015 was $ 438 , 770 and $ 607 , 80 1 , respectively.   Amortizati on expense for the three and nine months ended June 30 , 2014 was $13,663 and $ 40 , 990 , respectively.   Amortization expense is expected to be approximately $ 438 , 771 for the remainder of fiscal year 201 5 , $ 1,714,313 in 2016, $1,700,429 in 2017, $1,700,429 in 2018, $1,700,429 in 2019, $1,700,429 in 2020, and $ 15,363,15 1 thereafter .

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

 

 

Intangible assets
not subject to
amortization

 

  

Intangible assets
subject to
amortization

 

 

Total
Intangible assets

 

Balance at September 30, 2013

$

3,117,322

 

 

$

123,191

 

 

$

3,240,513

 

Impairment

 

(2,172,387

)

 

 

-

 

 

 

(2,172,387

)

Amortization

 

-

 

 

 

(54,653

)

 

 

(54,653

)

Balance at September 30, 2014

$

944,935

 

 

$

68,538

 

 

$

1,013,473

 

Acquisition of Novartis RNAi Assets

 

-

 

 

 

24,857,214

 

 

 

24,857,214

 

Amortization

 

-

 

 

 

(607,801

)

 

 

(607,801

)

Balance at June 30, 2015

$

944,935

 

 

$

24,317,951

 

 

$

25,262,886

 

 

NOTE 6. STOCKHOLDERS’ EQUITY

At June 30, 2015, the Company had a total of 150,000,000 shares of capital stock authorized for issuance, consisting of 145,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share.

At June 30, 2015, 59,498,362 shares of Common Stock were outstanding.  Additionally, 15,652 shares of Series C Preferred Stock were outstanding, which are convertible into 2,670,990 shares of Common Stock. At June 30, 2015, 8,127,404 shares of Common Stock were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under Arrowhead’s 2004 Equity Incentive Plan and 2013 Incentive Plan, as well as for inducement grants made to new employees.

The Preferred Stock is convertible to Common Stock by its holder at its stated conversion price, though it is not convertible to the extent the holder would beneficially own more than 9.99% of the number of shares of outstanding Common Stock immediately after the conversion.  The holders of Preferred Stock are eligible to vote with the Common Stock of the Company on an as-converted basis, but only to the extent they are eligible for conversion without exceeding the 9.99% ownership limitation. The Preferred Stock does not carry a coupon, but it is entitled to receive dividends on a pari passu basis with Common Stock, when and if declared.  In any liquidation or dissolution of the Company, the holders of Preferred Stock are entitled to participate in the distribution of the assets, to the extent legally available for distribution, on a pari passu basis with the Common Stock.

On October 11, 2013, the Company sold 3,071,672 shares of Common Stock, at a price of $5.86 per share, and 46,000 shares of Series C Preferred Stock, at a price of $1,000 per share. The Preferred Shares are convertible into shares of common stock at a conversion price of $5.86. The aggregate purchase price paid by the purchasers for the Common Stock and Series C Preferred Stock was $64,000,000 and the Company received net proceeds of approximately $60,000,000, after advisory fees and offering expenses.

On February 24, 2014, the Company sold 6,325,000 shares of Common Stock, at a public offering price of $18.95 per share.  Net proceeds were approximately $112.6 million after underwriting commissions and discounts and other offering expenses.

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The following table summarizes information about warrants outstanding at June 30 , 2015 :

 

Exercise prices

 

Number of 
Warrants

 

 

Remaining
Life in Years

 

$

70.60

 

 

94,897

 

 

 

1.9

 

$

5.00

 

 

390,625

 

 

 

1.0

 

$

5.09

 

 

239,534

 

 

 

1.0

 

$

1.38

 

 

24,324

 

 

 

0.5

 

$

4.16

 

 

1,000

 

 

 

1.5

 

$

3.25

 

 

334,347

 

 

 

1.1

 

$

2.12

 

 

75,000

 

 

 

2.5

 

$

1.83

 

 

277,284

 

 

 

2.5

 

Total warrants outstanding