10-Q
Table of Contents

 

 

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 March 31, 2013

 

¨ 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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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 May 7, 2013 was 31,305,317.

 

 

 


Table of Contents
     Page(s)  

PART I — FINANCIAL INFORMATION

  

ITEM 1. FINANCIAL STATEMENTS (unaudited)

  

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

     7   

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

     18   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     25   

ITEM 4. CONTROLS AND PROCEDURES

     25   

PART II — OTHER INFORMATION

  

ITEM 1. LEGAL PROCEEDINGS

     25   

ITEM 1A. RISK FACTORS

     25   

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

     25   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     25   

ITEM 4. MINE SAFETY DISCLOSURES

     25   

ITEM 5. OTHER INFORMATION

     26   

ITEM 6. EXHIBITS

     26   

SIGNATURE

     27   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Balance Sheets

 

     March 31, 2013     September 30, 2012  
ASSETS     

CURRENT ASSETS

    

Cash and cash equivalents

   $ 3,313,483      $ 3,377,288   

Trade receivable

     —          9,375   

Other receivables

     —          9,930   

Prepaid expenses and other current assets

     426,398        618,130   

Marketable securities

     —          106,500   

Note receivable, net

     —          2,446,113   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     3,739,881        6,567,336   

PROPERTY AND EQUIPMENT

    

Computers, office equipment and furniture

     323,376        323,376   

Research equipment

     3,186,601        3,319,027   

Software

     69,623        69,623   

Leasehold improvements

     2,749,409        2,749,409   
  

 

 

   

 

 

 
     6,329,009        6,461,435   

Less: Accumulated depreciation and amortization

     (2,315,915     (1,565,783
  

 

 

   

 

 

 

PROPERTY AND EQUIPMENT, NET

     4,013,094        4,895,652   

OTHER ASSETS

    

Patents and other intangible assets, net

     4,636,339        4,784,569   

Derivative asset and other non-current assets

     30,011        280,261   
  

 

 

   

 

 

 

TOTAL OTHER ASSETS

     4,666,350        5,064,830   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 12,419,325      $ 16,527,818   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES

    

Accounts payable

   $ 871,707      $ 877,986   

Accrued expenses

     823,517        730,775   

Accrued payroll and benefits

     1,222,573        1,127,219   

Deferred revenue

     65,625        37,500   

Derivative liabilities

     2,535,910        647,213   

Capital lease obligation

     218,048        214,801   

Notes payable

     880,239        100,000   

Other current liabilities

     546,407        1,592,394   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     7,164,026        5,327,888   
  

 

 

   

 

 

 

LONG-TERM LIABILITIES

    

Notes payable, net of current portion

     50,000        839,421   

Capital lease obligation, net of current portion

     1,172,616        1,282,458   

Other non-current liabilities

     272,179        269,142   
  

 

 

   

 

 

 

TOTAL LONG-TERM LIABILITIES

     1,494,795        2,391,021   
  

 

 

   

 

 

 

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

Arrowhead Research Corporation stockholders’ equity:

    

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding

     —          —     

Common stock, $0.001 par value; 145,000,000 shares authorized; 17,042,764 and 13,579,185 shares issued and outstanding as of March 31, 2013 and September 30, 2012, respectively

     109,402        108,354   

Additional paid-in capital

     151,573,260        145,917,968   

Subscription receivable

     —          (1,016,000

Accumulated deficit during the development stage

     (146,369,775     (134,997,680
  

 

 

   

 

 

 

Total Arrowhead Research Corporation stockholders’ equity

     5,312,887        10,012,642   

Noncontrolling interest

     (1,552,383     (1,203,733
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     3,760,504        8,808,909   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 12,419,325      $ 16,527,818   
  

 

 

   

 

 

 

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

 

1


Table of Contents

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Operations

(unaudited)

 

    Three Months Ended
March 31, 2013
    Three Months Ended
March 31, 2012
    Six Months Ended
March 31, 2013
    Six Months Ended
March 31, 2012
    May 7, 2003  (Inception)
to

March 31, 2013
 

REVENUE

  $ 43,750      $ 31,250      $ 202,766      $ 55,208      $ 4,341,600   

OPERATING EXPENSES

         

Salaries and payroll-related costs

    1,725,176        2,017,064        3,354,599        3,337,757        29,746,729   

General and administrative expenses

    779,970        930,914        1,697,646        2,197,824        33,050,861   

Research and development

    2,125,019        1,358,691        3,701,685        2,127,765        46,320,433   

Stock-based compensation

    355,108        169,390        750,782        421,268        14,332,250   

Depreciation and amortization

    448,765        423,948        898,362        878,391        8,307,648   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OPERATING EXPENSES

    5,434,038        4,900,007        10,403,074        8,963,005        131,757,921   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING LOSS

    (5,390,288     (4,868,757     (10,200,308     (8,907,797     (127,416,321

OTHER INCOME (EXPENSE)

         

Equity in income (loss) of unconsolidated affiliates

    (157,612     (64,261     (221,169     (170,788     (1,184,576

Impairment of investment in unconsolidated affiliates

    —          —          —          —          (1,642,775

Gain on purchase of Roche Madison

    —          —          —          1,576,107        1,576,107   

Gain (loss) on sale of fixed assets, net

    (54,932     (33,484     (36,440     (33,484     (1,242,905

Realized and unrealized gain (loss) in marketable securities

    —          —          —          (58,091     62,954   

Interest income (expense), net

    (27,567     5,015        (20,151     12,890        2,730,293   

Change in value of derivatives

    (29,403     (622,145     14,873        (689,048     3,296,277   

Gain on sale of stock in subsidiary

    —          —          —          —          2,292,800   

Other income (expense)

    (1,279,881     —          (1,257,196     —          (1,007,196
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OTHER INCOME (EXPENSE)

    (1,549,395     (714,875     (1,520,083     637,586        4,880,979   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

    (6,939,683     (5,583,632     (11,720,391     (8,270,211     (122,535,342

Provision for income taxes

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS FROM CONTINUING OPERATIONS

    (6,939,683     (5,583,632     (11,720,391     (8,270,211     (122,535,342

Income (loss) from discontinued operations

    (336     (483     (354     (702     (47,546,996

Gain on disposal of discontinued operations

    —          —          —          —          4,708,588   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS

    (336     (483     (354     (702     (42,838,408
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

    (6,940,019     (5,584,115     (11,720,745     (8,270,913     (165,373,750

Net (income) loss attributable to noncontrolling interests

    182,082        248,882        348,650        450,176        19,167,935   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS ATTRIBUTABLE TO ARROWHEAD

  $ (6,757,937   $ (5,335,233   $ (11,372,095   $ (7,820,737   $ (146,205,815
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share - basic and diluted:

         

Loss from continuing operations attributable to Arrowhead common shareholders

  $ (0.41   $ (0.50   $ (0.74   $ (0.75  

Income from discontinued operations attributable to Arrowhead common shareholders

    —          —          —          —       
 

 

 

   

 

 

   

 

 

   

 

 

   

Net loss attributable to Arrowhead shareholders

  $ (0.41   $ (0.50   $ (0.74   $ (0.75  
 

 

 

   

 

 

   

 

 

   

 

 

   

Weighted average shares outstanding - basic and diluted

    16,461,693        10,663,869        15,272,703        10,390,986     
 

 

 

   

 

 

   

 

 

   

 

 

   

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

 

2


Table of Contents

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Statement of Stockholders’ Equity

from inception through March 31, 2013

(unaudited)

 

    Common Stock     Preferred
Stock
    Additional
Paid-in
    Subscription     Accumulated
Deficit during
the Development
    Noncontrolling        
    Shares     Amount     Shares     Amount     Capital     Receivable     Stage     interest     Totals  

Initial Issuance of Stock:

                 

Common stock & warrants issued for cash @ $0.01 per unit

    300,000        3,000        —          —          —          —          —          —          3,000   

Common stock & warrants issued for cash @ $10.00 per unit

    168,000        1,680        —          —          1,678,320        —          —          —          1,680,000   

Stock issuance cost charged to additional paid-in capital

    —          —          —          —          (168,000     —          —          —          (168,000

Net loss for period from inception to September 30, 2003

    —          —          —          —          —          —          (95,238     —          (95,238
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2003

    468,000        4,680        —          —          1,510,320        —          (95,238     —          1,419,762   

Exercise of stock options

    7,500        75        —          —          14,925        —          —          —          15,000   

Common stock & warrants issued for cash @ $10.00 per unit

    47,500        475        —          —          474,525        —          —          —          475,000   

Common stock & warrants issued for marketable securities @ $10.00 per unit

    50,000        500        —          —          499,500        —          —          —          500,000   

Stock issuance cost charged to additional paid-in capital

    —          —          —          —          (96,500     —          —          —          (96,500

Common stock and warrants issued for cash @ $15.00 per unit

    660,879        6,609        —          —          9,906,573        —          —          —          9,913,182   

Common stock issued in reverse acquisition

    70,553        706        —          —          (151,175     —          —          —          (150,469

Common stock issued as a gift for $10.90 per share

    15,000        163        —          —          162,587        —          —          —          162,750   

Common stock and warrants issued as stock issuance cost @ $15.00 per unit

    35,623        356        —          —          533,988        —          —          —          534,344   

Stock issuance cost charged to additional paid-in capital

    —          —          —          —          (991,318     —          —          —          (991,318

Exercise of stock option @ $2.00 per share

    7,500        75        —          —          14,925        —          —          —          15,000   

Exercise of stock options @ $10.00 per share

    600        6        —          —          5,994        —          —          —          6,000   

Stock-based compensation

    —          —          —          —          175,653        —          —          —          175,653   

Net loss for the year ended September 30, 2004

    —          —          —          —          —          —          (2,528,954     1,777,699        (751,255
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2004

    1,363,155        13,645        —          —          12,059,997        —          (2,624,192     1,777,699        11,227,149   

Exercise of warrants @ $15.00 per share

    1,381,289        13,813        —          —          20,705,522        —          —          —          20,719,335   

Exercise of stock options @ $10.00 per share

    2,500        25        —          —          24,975        —          —          —          25,000   

Common stock issued to purchase Insert Therapeutics share @ $39.80 per share

    50,226        502        —          —          1,999,498        —          —            2,000,000   

Common stock issued for services

    1,250        12        —          —          49,988        —          —          —          50,000   

Stock-based compensation

    —          —          —          —          508,513        —          —          —          508,513   

Change in percentage of ownership in subsidiary

    —          —          —          —          230,087        —          —          —          230,087   

Net loss for the year ended September 30, 2005

    —          —          —          —          —          —          (6,854,918     121,491        (6,733,427
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2005

    2,798,419        27,997        —          —          35,578,580        —          (9,479,110     1,899,190        28,026,657   

Exercise of stock options

    11,579        116        —          —          341,421        —          —          —          341,537   

Common stock issued @ $48.80 per share

    20,485        205        —          —          999,795        —          —          —          1,000,000   

Common stock issued @ $38.40 per share

    1,500        15        —          —          57,585        —          —          —          57,600   

Common stock and warrants issued @ $35.00 per unit

    559,000        5,590        —          —          19,539,410        —          —          —          19,545,000   

Common stock issued @ $59.10 per share

    2,536        25        —          —          149,975        —          —          —          150,000   

Common stock issued to purchase Calando Pharmaceuticals, Inc. @ $51.70 per share

    20,838        208        —          —          1,077,125        —          —          —          1,077,333   

Stock-based compensation

    —          —          —          —          1,369,478        —          —          —          1,369,478   

Net loss for the year ended September 30, 2006

    —          —          —          —          —          —          (18,997,209     (964,752     (19,961,961
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2006

    3,414,359        34,156        —          —          59,113,369        —          (28,476,319     934,438        31,605,644   

Exercise of stock options

    18,616        186        —          —          434,541        —          —          —          434,727   

Common stock and warrants issued @ $57.80 per unit

    284,945        2,849        —          —          15,149,366        —          —          —          15,152,215   

Arrowhead’s increase in proportionate share of Insert Therapeutics’ equity

    —          —          —          —          2,401,394        —          —          —          2,401,394   

Common stock issued for purchase of Carbon Nanotechnologies, Inc. @ $37.70 per share

    143,122        1,431        —          —          5,398,569        —          —          —          5,400,000   

Stock-based compensation

    —          —          —          —          2,175,544        —          —          —          2,175,544   

Net loss for the year ended September 30, 2007

    —          —          —          —          —          —          (29,931,118     (781,829     (30,712,947
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2007

    3,861,042        38,622        —          —          84,672,783        —          (58,407,437     152,609        26,456,577   

Exercise of stock options

    10,536        106        —          —          289,921        —          —          —          290,027   

Common stock and warrants issued at approximately $18.00 per unit

    386,399        3,867        —          —          6,956,718        —          —          —          6,960,585   

Arrowhead’s increase in proportionate share of Unidym’s equity

    —          —          —          —          1,720,962        —          —          —          1,720,962   

Common stock issued @ $27.20 per share to Rice University

    5,000        50        —          —          135,950        —          —          —          136,000   

Common stock issued @ $28.30 per share to purchase shares of Unidym, Inc.

    7,055        71        —          —          199,929        —          —          —          200,000   

Common stock issued @ $29.50 per share to purchase MASA Energy, LLC

    10,505        105        —          —          309,895        —          —          —          310,000   

Common stock issued @ $21.90 per share to Unidym for the acquisition of Nanoconduction

    11,416        114        —          —          249,886        —          —          —          250,000   

Common stock issued @ $21.80 per share

    1,500        15        —          —          32,685        —          —          —          32,700   

Stock-based compensation

    —          —          —          —          3,187,397        —          —          —          3,187,397   

Net loss for the year ended September 30, 2008

    —          —          —          —          —          —          (27,089,030     (152,609     (27,241,639
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2008

    4,293,452        42,950        —          —          97,756,126        —          (85,496,467     —          12,302,609   

Common Stock issued @ $5.50 per share to Unidym stockholder in exchange for Unidym’s shares

    205,839        2,059        —          —          1,131,617        —          —          —          1,133,676   

Common Stock issued @ $5.20 per share to TEL Ventures in exchange for Unidym’s shares

    222,222        2,222        —          —          1,156,111        —          —          —          1,158,333   

Reclassification of former Unidym mezzanine debt to equity

    —          —          —          —          2,000,000        —          —          —          2,000,000   

Arrowhead’s increase in proportionate share of Calando’s equity

    —          —          —          —          2,120,250        —          —          —          2,120,250   

Common stock and warrants issued @ $3.00 per unit

    919,664        9,197        —          —          2,749,796        —          —          —          2,758,993   

Change in percentage ownership in subsidiary

    —          —          —          —          16,297        —          —          —          16,297   

Stock-based compensation

    —          —          —          —          2,676,170        —          —          —          2,676,170   

Issuance of Preferred Stock for Subscription in Unidym

    —          —          —          —          300,000        (300,000     —          —          —     

Amortization of discount on Unidym Series D Preferred Stock

    —          —          —          —          163,960        —          (163,960     —          —     

Net loss for the year ended September 30, 2009

    —          —          —          —          —          —          (19,308,392     —          (19,308,392
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2009

    5,641,177        56,428        —          —          110,070,327        (300,000     (104,968,819     —          4,857,936   

Exercise of stock options

    688        7        —          —          7,624        —          —          —          7,631   

Issuance of Preferred Stock for Subscription in Unidym

    —          —          —          —          —          300,000        —          —          300,000   

Issuance of Unidym’s common stock to minority shareholders

    —          —          —          —          245,345        —          —          54,655        300,000   

Common stock and warrants issued @ $6.34 per unit

    508,343        5,083        —          —          3,217,813        —          —          —          3,222,896   

Common stock and warrants issued @ $13.12 per unit

    659,299        6,593        —          —          3,692,078        —          —          —          3,698,671   

Common Stock issued to Calando stockholders in exchange for Calando’s shares

    122,000        1,220        —          —          (160,667     —          —          159,447        —     

Common Stock issued to Unidym stockholders in exchange for Unidym’s shares

    15,318        153        —          —          (1,435     —          —          1,282        —     

Stock-based compensation

    —          —          —          —          1,582,149        —          —          —          1,582,149   

Exercise of warrants

    225,189        2,250        —          —          1,063,600        —          —          200        1,066,050   

Net loss for the year ended September 30, 2010

    —          —          —          —          —          —          (5,774,048     (1,182,990     (6,957,038
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2010

    7,172,014        71,734        —          —          119,716,834        —          (110,742,867     (967,406     8,078,295   

Exercise of warrants

    8,656        87        —          —          43,192        —          —          —          43,279   

Exercise of stock options

    2,700        27        —          —          13,857        —          —          —          13,884   

Divestiture of Unidym

    —          —          —          —          —          —          —          254,275        254,275   

Issuance of preferred stock in subsidiary

    —          —          —          —          1,618,509        —          —          —          1,618,509   

Change in percentage of ownership in subsidiary

    —          —          —          —          (849,707     —          —          849,707        —     

Stock-based compensation

    —          —          —          —          1,404,640        —          —          —          1,404,640   

Common stock issued @ $3.80 per share

    1,458,917        14,574        —          —          4,629,110        —          —          —          4,643,684   

Issuance of Common Stock for Subscription

        —          —          900,000        (900,000         —     

Net loss for the year ended September 30, 2011

    —          —          —          —          —          —          (3,128,885     (363,514     (3,492,399
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    8,642,286      $ 86,422        —        $ —        $ 127,476,435      $ (900,000   $ (113,871,752   $ (226,938     12,564,167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exercise of stock options

    4,583        45        —          —          23,788        —          —          —          23,833   

Stock-based compensation

    —          —          —          —          1,241,404        —          —          —          1,241,404   

Common stock issued @ $3.80 per share

    138,158        1,382        —          —          523,618        (100,000     —          —          425,000   

Common stock issued @ $3.70 per share

    675,000        6,750        —          —          2,241,000          —          —          2,247,750   

Common stock issued @ $4.00 per share

    100,000        1,000        —          —          399,000        —          —          —          400,000   

Common stock issued @ $6.23 per share

    83,211        83        —          —          499,918        —          —          —          500,001   

Common stock issued @ $5.11 per share

    97,831        98        —          —          499,904        —          —          —          500,002   

Common stock and warrants issued @ $2.76 per unit

    2,260,869        2,261        —          —          5,809,979        (16,000         5,796,240   

Common stock issued under Committed Capital Agreement

    68,926        689        —          —          (689     —          —          —          —     

Common stock issued in acquisitions

    1,217,159        9,332        —          —          6,138,498        —          —          —          6,147,830   

Fractional shares redeemed in reverse stock split

    (131     —          —          —          —          —          —          —          —     

Preferred stock issued @ $1,000 per share

    —          —          1,015        1        1,014,999        —          —          —          1,015,000   

Preferred stock converted to common stock

    275,782        276        (1,015     (1     (275     —          —          —          —     

Exercise of Calando stock options

    —          —          —          —          —          —          —          8,000        8,000   

Exercise of warrants

    15,511        16        —          —          50,390        —          —          —          50,406   

Net loss for the year ended September 30, 2012

    —          —          —          —          —          —          (21,125,928     (984,795     (22,110,723
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    13,579,185      $ 108,354        —        $ —        $ 145,917,968      $ (1,016,000   $ (134,997,680   $ (1,203,733   $ 8,808,909   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation

    —          —          —          —          750,782        —          —          —          750,782   

Subscription payment

    —          —          —          —          —          16,000        —          —          16,000   

Subscription reversal

    (268,445     (2,685     —          —          (997,315     1,000,000        —          —          —     

Common stock and warrants issued @ $2.26 per unit

    1,825,079        1,826        —          —          2,676,747        —          —          —          2,678,573   

Common stock and warrants issued @ $2.12 per unit

    1,667,051        1,667        —          —          2,239,269        —          —          —          2,240,936   

Common stock issued @ $4.49 per share to Roche

    239,894        240        —          —          985,809        —          —          —          986,049   

Net loss for the six months ended March 31, 2013

    —          —          —          —          —          —          (11,372,095     (348,650     (11,720,745
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

    17,042,764      $ 109,402        —        $ —        $ 151,573,260      $ —        $ (146,369,775   $ (1,552,383   $ 3,760,504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Cash Flows

(unaudited)

 

     Six Months Ended
March 31, 2013
    Six Months Ended
March 31, 2012
    May 7, 2003
(Date of  inception)
to March 31, 2013
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income (loss)

   $ (11,720,745   $ (8,270,913   $ (165,373,750

Net (income) loss attributable to noncontrolling interests

     348,650        450,176        19,167,935   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Arrowhead

     (11,372,095     (7,820,737     (146,205,815

(Income) loss from discontinued operations

     354        702        42,838,408   

Realized and unrealized (gain) loss on investments

     —          58,091        (762,954

Charge for bad debt allowance

     —          —          2,497,300   

(Gain) loss from sale of subsidiary

     —          —          (306,344

(Gain) loss on purchase of Roche Madison

     —          (1,576,107     (1,576,107

(Gain) loss on disposal of fixed assets

     36,439        33,484        1,242,904   

Stock issued for professional services

     —          —          741,632   

Change in value of derivatives

     (14,873     689,048        (3,296,277

Purchased in-process research and development

     —          —          15,851,555   

Stock-based compensation

     750,782        421,268        14,332,250   

Depreciation and amortization

     898,362        878,391        8,307,648   

Amortization (accretion) of note discounts, net

     36,931        6,285        38,383   

Gain on sale of stock in subsidiary

     —          —          (2,292,800

Write down of Note Receivable

     1,279,882        —          2,922,657   

Equity in income (loss) of unconsolidated affiliates

     221,169        170,788        1,184,576   

Noncontrolling interest

     (348,650     (450,176     (19,167,935

Changes in operating assets and liabilities:

      

Receivables

     9,375        149,570        109,415   

Other receivables

     1,080        (698,224     (2,542,062

Prepaid expenses

     191,733        (185,341     (289,366

Other current assets

     (214,318     —          (378,073

Accounts payable

     (6,279     224,495        492,031   

Accrued expenses

     199,242        398,787        920,151   

Other liabilities

     26,516        837,234        1,156,677   
  

 

 

   

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES OF CONTINUING OPERATIONS

     (8,304,350     (6,862,442     (84,182,146

CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS:

      

Purchase of property and equipment

     (31,468     (277,240     (4,076,777

Proceeds from sale of investments

     1,160,181        509,009        4,473,790   

Proceeds from sale of fixed assets

     129,454        6,528        562,141   

Cash transferred in acquisitions/divestitures

     —          100,035        (1,579,365

Purchase of marketable securities - US Treasury Bills

     —          —          (18,575,915

Purchase of MASA Energy, LLC

     —          —          (250,000

Minority equity investment

     —          —          (2,000,000

Cash paid for interest in Insert

     —          —          (10,150,000

Cash obtained from interest in Insert

     —          —          10,529,594   

Proceeds from sale of marketable securities - US Treasury Bills

     —          —          18,888,265   

Proceeds from sale of subsidiaries

     —          —          359,375   

Payment for patents

     —          —          (303,440

Restricted cash

     —          —          50,773   
  

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS

     1,258,167        338,332        (2,071,559

CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS:

      

Principal payments on capital leases

     (106,595     (91,598     (303,201

Proceeds from issuance of Calando debt

     —          —          2,516,467   

Proceeds from sale of stock in subsidiary

     —          8,000        20,902,100   

Proceeds from issuance of common stock and warrants, net

     7,089,327        2,696,333        113,342,338   
  

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS

     6,982,732        2,612,735        136,457,704   
  

 

 

   

 

 

   

 

 

 

Cash flows from discontinued operations:

      

Operating cash flows

     (354     (902     (46,004,141

Investing cash flows

     —          —          790,625   

Financing cash flows

     —          —          (1,677,000
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) discontinued operations:

     (354     (902     (46,890,516
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH

     (63,805     (3,912,277     3,313,483   

CASH AT BEGINNING OF PERIOD

     3,377,288        7,507,389        —     
  

 

 

   

 

 

   

 

 

 

CASH AT END OF PERIOD

   $ 3,313,483      $ 3,595,112      $ 3,313,483   
  

 

 

   

 

 

   

 

 

 

Supplementary disclosures:

      

Interest paid

   $ 21,828      $ 22,853      $ 302,516   

Taxes paid

   $ —        $ —        $ 742,500   

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

 

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Table of Contents

SUPPLEMENTAL NON-CASH TRANSACTIONS

On March 23, 2005, Arrowhead purchased 7,375,000 shares of Insert Therapeutics, Inc. common stock from two minority stockholders of Insert for 50,226 newly issued shares of Arrowhead Common Stock valued at $2,000,000 based on the closing market price of Arrowhead Common Stock on NASDAQ on the date of the closing.

On March 31, 2006, Arrowhead purchased 964,000 shares of Calando Pharmaceuticals, Inc. common stock from minority stockholders of Calando for $1,928,000 consisting of 20,838 newly issued shares of Arrowhead Common Stock valued at $1,077,333 plus $850,667 in cash. The 20,838 shares of Arrowhead Common Stock were valued based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing.

On April 20, 2007, Arrowhead purchased shares of Series E Preferred Stock of Carbon Nanotechnologies, Inc. in exchange for 143,122 shares of Arrowhead Common Stock with an estimated fair market value of $5,400,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to March 24, 2007, as set forth in the Agreement and Plan of Merger among Unidym, Carbon Nanotechnologies, Inc., Arrowhead, and others.

On April 23, 2008, Arrowhead purchased 200,000 shares of the Common Stock of Unidym Inc., in exchange for 7,054 shares of Arrowhead Common Stock with an estimated fair market value of $200,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing.

On April 29, 2008, Arrowhead purchased all of the membership units of MASA Energy, LLC for $560,000. The purchase price consisted of 10,504 shares of Arrowhead Common Stock with an estimated fair market value of $310,000 based on the average closing price of Arrowhead’s Common Stock on NASDAQ the ten trading days immediately prior to the date of the closing, plus $250,000 in cash.

On August 8, 2008, Unidym acquired all of the outstanding stock of Nanoconduction, Inc. in exchange for 11,411 shares of Arrowhead stock with an estimated fair market value of $250,000.

On June 11, 2009, Arrowhead issued 132,462 shares of Common Stock with an estimated fair market value of $688,802 in exchange for an equal number of Series A Preferred Stock of Unidym, with minority stockholders of Unidym.

On June 25, 2009, Arrowhead issued 194,444 shares of Common Stock with an estimated fair market value of $972,222 in exchange for an equal number of Series C Preferred Stock of Unidym, with a minority stockholder of Unidym.

On September 22, 2009, Arrowhead issued 9,149 shares of Common Stock with an estimated fair market value of $46,662 in exchange for an equal number of Series A Preferred Stock of Unidym with a minority stockholder of Unidym.

On September 28, 2009, Arrowhead issued 64,227 shares of Common Stock with an estimated fair market value of $398,209 in exchange for 5,574 shares of Series A Preferred Stock and 636,699 shares of Series C Preferred Stock of Unidym, with several minority stockholders of Unidym.

On September 30, 2009, Arrowhead issued 27,777 shares of Common Stock with an estimated fair market value of $186,111 in exchange for an equal number of Series C-1 Preferred Stock of Unidym, with a minority stockholder of Unidym.

In October and November 2009, Arrowhead issued 15,317 shares of Common Stock with an estimated fair market value of $47,485 in exchange for an equal number of shares of Series C Preferred Stock of Unidym, with several minority stockholders of Unidym.

In October and November 2009, Arrowhead issued 114,000 shares of Common Stock with an estimated fair market value of $706,800 in exchange for 2,850,000 shares of Calando’s common stock, with several minority stockholders of Calando. In conjunction with the exchange, Arrowhead also issued 24,000 Warrants to purchase Arrowhead Common Stock in exchange for 600,000 Warrants to purchase Calando common stock.

In February 2010, Arrowhead issued 8,000 shares of Common Stock and 2,400 warrants to purchase Arrowhead Common Stock, at an exercise price of $5.00, to several Calando shareholders, in exchange for 200,000 shares of Calando common stock and 60,000 warrants to purchase Calando common stock.

In March 2010, a warrant holder exercised 24,788 warrants to purchase Arrowhead Common Stock, in a cashless exercise, whereby Arrowhead issued to the warrant holder 12,870 shares of Arrowhead Common Stock.

In September 2010, Arrowhead issued warrants to purchase 390,625 shares of Arrowhead Common Stock, at an exercise price of $5.00, to two Calando shareholders, in exchange for 1,562.5 shares of Series A Preferred Stock of Calando Pharmaceuticals, Inc.

On October 21, 2011, Arrowhead entered into a Stock and Asset Purchase Agreement whereby in acquired all of the outstanding common stock of Roche Madison Inc. and certain intellectual property rights in exchange for 1,288,158 shares of Arrowhead Common Stock, a promissory note of $50,000, and potential contingent consideration based on the achievement of certain regulatory milestones, and sales milestones and royalty payments after drug approval.

 

5


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On April 5, 2012, Arrowhead entered into a Stock Purchase Agreement whereby it acquired all of the outstanding common stock of Alvos Therapeutics, Inc. for 315,457 shares of Arrowhead Common Stock and potential contingent consideration based on the achievement of certain clinical, regulatory and sales milestones.

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

 

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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”) , Alvos Therapeutics, Inc. (“Alvos”), Calando Pharmaceuticals, Inc. (“Calando”), Ablaris Therapeutics, Inc. (“Ablaris”), Agonn Systems, Inc. (“Agonn”), and Tego Biosciences Corporation (“Tego”) as well as, where applicable, our former subsidiary, Unidym, Inc. (“Unidym”), which was divested in January 2011, (4) the term “Minority Investment” refers to Leonardo Biosystems, Inc. (“Leonardo”) in which the company holds a less than majority ownership position, and (5) the term “Common Stock” refers to Arrowhead’s Common Stock and the term “stockholder(s)” refers to the holders of Arrowhead Common Stock.

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Nature of Business

Arrowhead Research Corporation is a clinical stage targeted therapeutics company with development programs in oncology, obesity, and chronic hepatitis B virus infection. Our novel delivery technologies have the potential to enable revolutionary new classes of drugs, such as RNAi interference and peptide drug conjugates, for a broad range of unmet medical needs. Our pipeline of targeted therapeutics are designed to have increased effectiveness through guided delivery and decreased toxicity through reduction of side effects associated with unwanted exposure in healthy cells and tissues.

Financing and Liquidity

The Company has historically financed its operations through the sale of equity securities of Arrowhead or its Subsidiaries. Development activities have required significant capital investment since the Company’s inception and we expect our current operations to continue to require cash investment in fiscal 2013 and beyond to continue development.

At March 31, 2013, the Company had $3.3 million in cash to fund operations. During the six months ended March 31, 2013, the Company’s cash position remained relatively constant. During the six months ended March 31, 2013, the Company received $7.2 million from the issuance of equity, net of fees. Other cash collections were $1.6 million. The company had cash outflow of $8.8 million related to its continuing operating activities.

In September 2011, the Company entered into an equity line facility whereby it has the ability to draw capital up to $15 million, subject to certain provisions, including maintaining a minimum stock price of $2.00 per share. During fiscal 2012, the Company drew $1 million from this facility. During fiscal 2013, the Company has not made any draws on this facility.

In December 2012, the Company sold 1.8 million units at a price of $2.26 per unit in a public offering. Each unit consisted of one share of Common Stock and a warrant to purchase 0.5 share of Common Stock. The exercise price of these warrants was $2.12 as of March 31, 2013, subsequently adjusted to $1.83. Proceeds net of expenses from the offering were $3.9 million.

In January 2013, the Company sold 1.7 million units at a price of $2.12 per unit in a public offering. Each unit consisted of one share of Common Stock and a warrant to purchase 0.5 share of Common Stock. The exercise price of these warrants was $2.14 as of March 31, 2013, subsequently adjusted to $1.83. Proceeds net of expenses from the offering were $3.3 million.

In May 2013, the Company sold 14.3 million shares of Arrowhead common stock at a price of $1.83 per share, and 9,900 shares of Arrowhead series B convertible preferred stock at a price of $1,000 per share. The series B preferred stock is convertible into common stock at a conversion price of $1.83. Gross proceeds were $36 million.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The September 30, 2012 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012.

The consolidated financial statements of the Company include the accounts of Arrowhead and its wholly-owned and majority-owned Subsidiaries. Prior to April 2008, Arrowhead’s Subsidiaries included Insert Therapeutics, Inc. (“Insert”), which was merged with Calando in April 2008. The merged entity is majority-owned by Arrowhead and continues to operate under the name of Calando. Arrowhead sold its interests in Unidym and Tego in 2011 and 2009, respectively. Unidym and Tego results are included in the Income

 

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(Loss) from Discontinued Operations. Income (Loss) from Discontinued Operations also includes Aonex Technologies, Inc. (“Aonex”), sold in 2008 and Nanotechnica, Inc. (“Nanotechnica”), dissolved in 2005. All significant intercompany accounts and transactions are eliminated in consolidation, and noncontrolling interests are accounted for in the Company’s financial statements. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Actual results could differ from those estimates.

Reverse Stock Split

As of November 17, 2011, the Company effected a 1 for 10 reverse stock split. As a result of the reverse stock split, each ten shares of the Company’s Common Stock issued and outstanding immediately prior to the reverse stock split were combined into one share of Common Stock. Also, as a result of the reverse stock split, the per share exercise price, and the number of shares of Common Stock underlying Company stock options, warrants, and any Common Stock based equity grants outstanding immediately prior to the reverse stock split was proportionally adjusted, based on the one-for-ten split ratio, in accordance with the terms of such options, warrants or other Common Stock based equity grants as the case may be. No fractional shares of Common Stock were issued in connection with the reverse split. Stockholders received a cash payment in lieu of any fractional shares. All share and per share amounts in these financial statements have been retrospectively adjusted to reflect the reverse stock split. Unless otherwise noted, all impacted information has been retroactively adjusted to reflect this reverse stock split.

Recently Issued Accounting Standards

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which amended the guidance in ASU 2011-08 to simplify the testing of indefinite-lived intangible assets other than goodwill for impairment. ASU 2012-02 becomes effective for annual and interim impairment tests performed for fiscal years beginning on or after September 15, 2012 and earlier adoption is permitted. We adopted this standard in the third quarter of fiscal year 2012. We believe adoption did not have a material effect on our financial statements.

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If after performing the qualitative assessment an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. ASU 2011-08 is effective for us in fiscal 2013 and earlier adoption is permitted. The adoption of ASU 2011-08 is not anticipated to have any impact on our financial position, results of operations or cash flows.

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (“ASU 2011- 04”), which amended ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements. ASU 2011-04 was effective for us beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on our consolidated financial statements or disclosures.

NOTE 2. NOTE RECEIVABLE

As part of the proceeds from the sale of Unidym in January 2011, Arrowhead received a Note Receivable from Wisepower (the “Wisepower Note”) in the face amount of $2.5 million. On January 24, 2013, the Company entered into an agreement to sell the Wisepower Note. As consideration for selling the Wisepower Note the Company received 1,570,000 shares of Wisepower stock, (the “First Tranche”). Per the terms of the agreement, the Company was entitled to receive additional consideration (the “Second Tranche”) based on the proceeds realized from the First Tranche, at which time the Company would deliver the Wisepower Note to the Purchaser.

During the three months ended March 31, 2013, the Company sold 1,170,000 shares of Wisepower from the First Tranche, and realized approximately $1.2 million in proceeds prior to a trading halt of Wisepower stock on March 22, 2013. As of May 6, 2013 the trading of Wisepower stock had not resumed. It is unclear whether trading will resume and whether the Company will receive any further proceeds from the sale of Wisepower stock, and whether the Company will receive the Second Tranche. Accordingly, the remaining 400,000 shares of Wisepower stock have been recorded at no value. The Company recorded the $1.2 million proceeds realized from sales of shares from the First Tranche against the $2.5 million value of the Wisepower Note, and has recorded a reserve for the balance of the Wisepower Note in the amount of approximately $1.3 million. The Company is pursuing its rights under the applicable agreements.

 

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NOTE 3. ACQUISITIONS

Roche Madison

On October 21, 2011, the Company entered into a Stock and Asset Purchase Agreement (the “RNAi Purchase Agreement”) with Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd (collectively, “Roche”), pursuant to which the Company purchased from Roche (i) all of the outstanding common stock of Roche Madison Inc. (“Roche Madison”) and (ii) the intellectual property rights then held by Roche related to its RNAi business and identified in the RNAi Purchase Agreement (the “Transaction”). In consideration for the purchase of Roche Madison and the Roche RNAi assets, the Company issued to Roche a promissory note with a principal value of $50,000 and 901,702 shares of Common Stock. Subsequently, pursuant to the RNAi Purchase Agreement, the Company issued an additional 239,894 shares of Common Stock. The acquisition provided additional technology, particularly related to RNAi delivery, and provided a state-of-the-art lab facility.

Pursuant to the RNAi Purchase Agreement, Roche has a right of first negotiation on certain product candidates 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 Clinical Candidate or Existing Candidate (as such terms are defined in the RNAi Purchase Agreement), the Company must give notice of the Candidate it proposes to out-license and negotiate exclusively and in good faith with Roche for 90 days regarding the applicable out-license. This right of first negotiation applies to all Existing Candidates (as defined in the RNAi Purchase Agreement) and the first five Clinical Candidates for which the Company delivers notice to Roche and subsequently enters into an out-license.

In addition to the consideration paid by the Company as per the closing terms, the Company is obligated to make certain royalty and milestone payments to Roche upon the occurrence of certain events. For certain product candidates that are developed by the Company or its affiliates and that are covered by a valid claim by the patent rights transferred in the Transaction for which the Company and Roche do not enter into a licensing arrangement, the Company will be obligated to pay a 3% royalty on Net Sales (as defined in the RNAi Purchase Agreement), 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 expire patent right related to such product candidate that was transferred in the Transaction and (ii) ten years after the first commercial sale of such product candidate.

The Company will also be obligated to make cash payments to Roche upon the achievement of various milestones, including the first regulatory approval of an Existing Candidate in certain jurisdictions and upon certain annual sales milestones for Existing Candidates that may receive regulatory approval. The potential payments range from $2,500,000 to $6,000,000 per milestone. Based on the Company’s estimate of future payments, a net present value of $84,935 was calculated as contingent consideration, and is recorded as a part of other noncurrent liabilities.

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

 

Current assets

   $ 432,709   

Property and equipment

     7,215,206   

Intangible assets

     1,174,935   

Other noncurrent assets

     6,264   

Current liabilities

     (414,122

Noncurrent liabilities

     (1,570,072

Gain on purchase

     (1,576,106
  

 

 

 

Total purchase consideration

   $ 5,268,814   
  

 

 

 

The purchase consideration was composed of the following:

 

Promissory note due Roche

   $ 50,000   

Contingent consideration

     84,935   

Shares issued to Roche

     5,133,879   
  

 

 

 

Total purchase consideration

   $ 5,268,814   
  

 

 

 

We estimated the fair value of the assets and liabilities acquired through various valuation techniques including a market approach and an income approach. Because the net identifiable tangible and intangible assets and liabilities were in excess of the purchase price, a gain on the purchase of $1.6 million was recorded. The most significant assets capitalized were research equipment

 

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and certain in-process research and development. We believe that we were able to acquire these assets at a reasonable purchase price and generate a gain on the transaction due in part from the seller’s desire to exit the relatively early stage of the RNAi business, as compared to the seller’s other business operations, as well as the seller’s desire to dispose of certain on-going costs associated with the facility, primarily lease costs and personnel costs, which were synergistic to the Company’s strategy to establish a research facility to advance development efforts for its drug product candidates.

Alvos Therapeutics

On April 5, 2012, the Company entered into a Stock Purchase Agreement to purchase all of the outstanding shares of Alvos Therapeutics, Inc., (“Alvos”), a privately held company that licensed a large platform of proprietary human-derived Homing Peptides, and the method for their discovery, from MD Anderson Cancer Center. In conjunction with the acquisition, Arrowhead hired one employee from Alvos, and retained one employee on a consulting basis. In exchange for all of the outstanding shares of Alvos, Arrowhead issued an upfront payment of 315,457 shares of Common Stock. The former Alvos stockholders are also eligible to receive additional issuances of stock valued at up to $23.5 million at the time of issuance based on the future achievement of clinical, regulatory and sales milestones. Based on the Company’s estimate of future payments, a net present value of $88,686 was calculated as contingent consideration, and is recorded as a part of other noncurrent liabilities. The Alvos acquisition provided key technology in targeted therapeutics.

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

 

Current assets

   $ 29,332   

In-process R&D

     2,172,387   

Current liabilities

     (113,033
  

 

 

 

Total purchase consideration

   $ 2,088,686   
  

 

 

 

The purchase consideration was comprised of shares of Arrowhead Common Stock issued to the former shareholders of Alvos Therapeutics, Inc.

 

Shares issued

     315,457   

Price per share

   $ 6.34   
  

 

 

 

Share consideration

   $ 2,000,000   

Contingent consideration

     88,686   
  

 

 

 

Total purchase consideration

   $ 2,088,686   
  

 

 

 

NOTE 4. INTANGIBLE ASSETS

Intangible assets consist of in-process research and development (IPR&D) not subject to amortization, and patents and other intangible assets subject to amortization, which were capitalized as a part of a 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, we 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 we would record an impairment loss.

Intangible assets subject to amortization include license agreements and patents capitalized as part of a business combination.

The license agreements are being amortized over the estimated life remaining at the time of acquisition which was 4 years. Patents are amortized over a period of three years to twenty years. The weighted average original amortization period is twelve years. Amortization of license agreements and patents is expected to be approximately $148,000 for the balance of fiscal year 2013, and $300,000 for fiscal years 2014, and 2015, $250,000 in 2016, $240,000 in 2017 and $280,000 thereafter.

We review amounts capitalized as in-process research and development for impairment at least annually in the fourth quarter, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In the event the carrying value of the assets is not expected to be recovered, the assets are written down to their estimated fair values. We continue to test our indefinite-lived IPR&D assets for potential impairment until the projects are completed or abandoned.

 

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The below table provides details on our intangible asset balances:

 

     Intangible assets
not subject to
amortization
     Intangible assets
subject to
amortization
    Total
Intangible assets
 

Balance at September 30, 2011

   $ 0       $ 1,731,211      $ 1,731,211   

Additions - Madison acquisition

     944,935         230,000        1,174,935   

Additions - Alvos acquisition

     2,172,387         0        2,172,387   

Amortization

     0         (293,964     (293,964
  

 

 

    

 

 

   

 

 

 

Balance at September 30, 2012

   $ 3,117,322       $ 1,667.247      $ 4,784,569   

Amortization

     0         (148,230     (148,230
  

 

 

    

 

 

   

 

 

 

Balance at March 31, 2013

   $ 3,117,322       $ 1,519.017      $ 4,636,339   
  

 

 

    

 

 

   

 

 

 

NOTE 5. INVESTMENT IN SUBSIDIARIES

In addition to 100% ownership interest in Arrowhead Madison, Inc. and Alvos Therapeutics, Inc., Arrowhead also maintains majority ownership in Calando Pharmaceuticals, Ablaris Therapeutics, Inc., and a minority investment in Leonardo Biosystems, Inc.

Calando Pharmaceuticals, Inc.

Calando is a clinical stage RNAi therapeutics company. On April 17, 2008, Calando merged with and into Insert, with Insert as the surviving company.

In January 2011, Arrowhead invested $9.1 million, through a cash investment of $1.0 million and the conversion of $8.1 million intercompany debt, acquiring newly issued Calando Series B and Series C preferred stock.

As of March 31, 2013, Calando owed to Arrowhead $3.9 million under a series of 8% simple interest notes and advances. It is expected that these loans will either be repaid or converted to equity in the future. The balance of the notes and advances is eliminated in consolidation.

As of March 31, 2013, Arrowhead owned 79% of the outstanding shares of Calando and 76% on a fully diluted basis.

Ablaris Therapeutics, Inc.

Ablaris was formed and began operations in the first quarter of fiscal 2011, based on the license of certain anti-obesity technology developed at the MD Anderson Cancer Center at the University of Texas. During the year ended September 30, 2011, Ablaris raised $2.9 million in cash, of which $1.3 million was invested by Arrowhead and $1.6 million was invested by outside investors, through the issuance of Ablaris Series A Preferred stock.

As of March 31, 2013, Arrowhead owned 64% of the outstanding shares of Ablaris and 64% on a fully diluted basis.

Nanotope, Inc.

Nanotope has ceased all operations and will be dissolved.

Leonardo Biosystems, Inc.

Leonardo is developing a drug-delivery platform technology based on novel methods of designing porous silicon microparticles that selectively accumulate in tumor vasculature. Arrowhead accounts for its investment in Leonardo using the cost method of accounting. As of March 31, 2013, Leonardo owed to Arrowhead $698,000, included in other receivables. The Company has provided a full reserve against the receivable from Leonardo. As of March 31, 2013, Arrowhead’s ownership interest in Leonardo was 3%.

NOTE 6. NOTES PAYABLE

On November 26, 2008, Calando entered into Unsecured Convertible Promissory Note Agreements (“Notes”) for $2.5 million with accredited investors and Arrowhead, which invested $200,000 in the Notes offering. Arrowhead subsequently invested an additional $600,000 in the same offering. Except for one Note in the principal amount of $500,000, all Notes and accrued interest were converted into a total of 2,950 shares of Calando Series A Preferred Stock on June 23, 2009. The remaining Note was renegotiated and extended until November 26, 2013. The terms of the new note include a 10% interest rate and require two times principal payment upon certain events as defined in the note and at maturity. At March 31, 2013, the Note is reflected on the balance sheet at the maturity amount of $1,000,000 less a discount of $119,761.

Also, as part of the acquisition of Roche Madison, Inc. in October 2011, the Company recorded a note payable of $50,000, which is due October 17, 2014 and is reflected in long-term liabilities on the Company’s balance sheet.

 

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NOTE 7. STOCKHOLDERS’ EQUITY

At March 31, 2013, 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, and 5,000,000 shares of Preferred Stock, par value $0.001.

At March 31, 2013, 17,042,764 shares of Common Stock were outstanding; no shares of Preferred Stock were outstanding. At March 31, 2013, 3,369,960 shares were reserved for issuance upon exercise of options granted or available to grant under Arrowhead’s 2000 Stock Option Plan and 2004 Equity Incentive Plan.

On September 30, 2011, the Company sold 1,458,917 shares of Common Stock at a price of $3.80 per share. Cash proceeds received in fiscal 2011 were $4.5 million; the balance of $1 million was recorded as subscription receivable. As of March 31, 2013, the subscription receivable had not been received, and it is not expected to be received. During the quarter ended March 31, 2013, the Company reversed the subscription receivable. On October 4, 2011, the Company completed a second closing of the offering in which the Company sold 138,158 shares of Common Stock at a price of $3.80 per share. Cash proceeds were $525,000.

On October 20, 2011, the Company and Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“LPC”) entered into a $15 million purchase agreement (the “Purchase Agreement”), together with a registration rights agreement, whereby LPC agreed to purchase up to $15 million of Common Stock, subject to certain limitations, from time to time during the three-year term of the Purchase Agreement. Additionally, the Company filed a registration statement with the U.S. Securities & Exchange Commission covering the resale of the shares that may be issued to LPC under the Purchase Agreement. On January 30, 2012, the SEC declared the registration statement effective for the resale of such shares. The Company has the right, in its sole discretion, over a 36-month period to sell up to $15 million of Common Stock (subject to certain limitations) to LPC, depending on certain conditions as set forth in the Purchase Agreement. As of March 31, 2013, the Company had drawn $1 million from the facility.

On October 21, 2011 and October 24, 2011, the Company entered into Subscription Agreements with certain accredited investors (the “Series A Purchasers”), pursuant to which the Company issued and sold an aggregate of 1,015 shares of Series A Preferred Convertible Stock, $0.001 par value per share, at a purchase price of $1,000 per share. The aggregate purchase price paid for the shares of Series A Preferred was $1,015,000. On February 16, 2012, upon approval by the Company’s shareholders, 1,015 shares of Arrowhead Series A Preferred Convertible Stock, $0.001 par value per share, were converted to 275,782 shares of Common Stock.

On October 21, 2011, the Company entered into a Subscription Agreement with an accredited investor, pursuant to which the Company issued and sold an aggregate of 675,000 shares of Common Stock, $0.001 par value per share, at a purchase price of $3.70 per share. The aggregate purchase price paid by the purchaser for the shares of Common Stock was $2,497,500.

On August 10, 2012, the Company sold 2,260,869 units at a price of $2.76 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.75 shares of common stock at an exercise price of $3.25. Gross proceeds from the offering were $6.2 million excluding offering fees and expenses.

In December 2012, the Company sold 1,825,079 units at a price of $2.26 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.5 shares of common stock. Gross proceeds from the offering were $4.1 million excluding offering fees and expenses. The exercise price of these warrants was $2.12 as of March 31, 2013.

In January 2013, the Company sold 1,667,051 units at a price of $2.12 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.5 shares of common stock. Gross proceeds from the offering were $3.5 million excluding offering fees and expenses. The exercise price of these warrants was $2.14 as of March 31, 2013.

In May 2013, the Company sold 14.3 million shares of Arrowhead common stock at a price of $1.83 per share and 9,900 shares of Arrowhead series B convertible preferred stock at a price of $1,000 per share. The series B preferred stock is convertible into common stock at a conversion price of $1.83. Gross proceeds were $36 million. No warrants were issued in the May 2013 financing.

The following table summarizes information about warrants outstanding at March 31, 2013:

 

Exercise prices

   Number of Warrants      Remaining
Life in  Years
 

$70.60

     94,897         4.1   

$20.00

     386,400         0.4   

$5.00

     1,155,023         1.7   

$5.09

     461,024         1.7   

$1.38

     322,150         2.7   

$4.16

     1,000         3.7   

$3.25

     1,695,654         3.4   

$2.12

     987,543         4.7   

$2.83

     79,013         3.4   

$2.14

     833,530         4.8   

$2.65

     39,301         3.4   
  

 

 

    

Total warrants outstanding

     6,055,535      
  

 

 

    

 

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NOTE 8. LEASES

The Company’s research facility in Madison, Wisconsin is leased through February 28, 2019. Monthly rental expense is approximately $22,000. Other monthly rental expenses include common area maintenance and real estate taxes totaling approximately $13,000 per month. Utilities costs are approximately $16,000 per month. Including monthly payments recorded under a capital lease of approximately $21,000, total monthly costs are approximately $72,000 per month. The Company’s corporate headquarters are located in Pasadena, California; Rental expense is approximately $13,000 per month.

Facility and equipment rent expense, related to continuing operations, for the six months ended March 31, 2013 and 2012 was $281,000 and $214,000, respectively. From inception to date, rent expense was $4,407,000.

As of March 31, 2013, future minimum lease payments due in fiscal years under capitalized leases are as follows:

 

2013

   $ 128,423   

2014

     256,846   

2015

     256,846   

2016

     256,846   

2017

     256,846   

2018

     256,846   

2019 and thereafter

     107,020   

Less interest

     (129,006
  

 

 

 

Principal

     1,390,665   

Less current portion

     (218,048
  

 

 

 

Noncurrent portion

   $ 1,172,616   
  

 

 

 

As of March 31, 2013, future minimum lease payments due in fiscal years under operating leases are as follows:

 

2013

   $ 182,899   

2014

     434,229   

2015

     445,921   

2016

     457,961   

2017

     470,154   

2018

     359,370   

2019 and thereafter

     125,415   
  

 

 

 

Total

   $ 2,475,949   
  

 

 

 

NOTE 9. STOCK-BASED COMPENSATION

Arrowhead has two plans that provide for equity-based compensation. Under the 2000 Stock Option Plan, 153,200 shares of Arrowhead’s Common Stock are reserved for issuance upon exercise of non-qualified stock options. No further grants can be made under the 2000 Stock Option Plan. Under the 2004 Equity Incentive Plan, 1,965,860 shares of Common Stock are reserved for the grant of stock options, stock appreciation rights, restricted stock awards and performance unit/share awards by the Board of Directors to employees, consultants and others. As of March 31, 2013, there were options granted and outstanding to purchase 152,900 and 1,585,694 shares of Common Stock under the 2000 Stock Option Plan and the 2004 Equity Incentive Plan, respectively, and 251,200 options outstanding that were issued outside of equity incentive plans, as inducement options to new employees hired in conjunction with the Company acquisition of its Madison research facility in October 2011.

During the six months ended March 31, 2013, 79,000 options were granted under the 2004 Equity Incentive Plan. The following tables summarize information about stock options:

 

     Number of
Options
Outstanding
    Weighted-
Average
Exercise
Price
Per Share
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Balance At September 30, 2011

     729,096        9.03         

Granted

     1,229,500        4.40         

Cancelled

     (42,919     11.77         

Exercised

     (4,883     5.20         
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance At September 30, 2012

     1,910,794      $ 6.01         

Granted

     79,000        2.20         

Cancelled

     0        0         

Exercised

     0        0         

Balance At March 31, 2013

     1,989,794      $ 5.86         7.8 years       $ 800   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable At March 31, 2013

     1,037,989      $ 7.24         6.7 years       $ —    
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Stock-based compensation expense for the six months ended March 31, 2013 and 2012 was $750,782 and $486,152, respectively. There is no income tax benefit as the company is currently operating at a loss and an actual income tax benefit may not be realized. The loss creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The fair value of the options granted by Arrowhead during the six months ended March 31, 2013 and 2012 is estimated at $103,293 and $3,505,912, respectively. The aggregate fair value of options granted by Calando during the six months ended March 31, 2013 and 2011 is estimated at $0 and $33,690, respectively.

The intrinsic value of the options exercised during the six months ended March 31, 2012 was $0, there were no options exercised during the six months ended March 31, 2013.

As of March 31, 2013, the pre-tax compensation expense for all unvested stock options at Arrowhead in the amount of approximately $3,108,499 will be recognized in our results of operations over a weighted average period of 2.7 years. As of March 31, 2013, the pre-tax compensation expense for all unvested stock options at Calando in the amount of approximately $45,478 will be recognized in our results of operations over a weighted average period of 2.4 years.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. The determination of the fair value of each stock option is affected by our stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The assumptions used to value stock options are as follows:

 

     Six months ended March 31,
     2013    2012

Dividend yield

   —      —  

Risk-free interest rate

   0.7% to 1.25%    0.9% to 1.7%

Volatility

   69%    90% to 100%

Expected life (in years)

   5.5 to 6.25    5.5 to 6.25

Weighted average grant date fair value per share of options granted

   $1.31    $3.79

The dividend yield is zero as the Company currently does not pay a dividend.

The risk-free interest rate is based on the U.S. Treasury bond.

Volatility is estimated based on volatility average of the Company’s Common Stock price.

NOTE 10. FAIR VALUE MEASUREMENTS & DERIVATIVE INSTRUMENTS

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1 – Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

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Level 2 – Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3 – Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following table summarizes fair value measurements at March 31, 2013 and September 30, 2012 for assets and liabilities measured at fair value on a recurring basis:

March 31, 2013:

 

     Level 1      Level 2      Level 3      Total  

Cash and cash equivalents

   $ 3,313,310       $ —        $ —        $ 3,313,310   

Marketable securities

   $ —         $ —        $ —        $ —     

Derivative assets

   $ —        $ —        $ —         $ —     

Derivative liabilities

   $ —        $ —        $ 2,535,910       $ 2,535,910   

Contingent consideration

   $ —        $ —        $ 173,621       $ 173,621   

September 30, 2012:

 

     Level 1      Level 2      Level 3      Total  

Cash and cash equivalents

   $ 3,377,288       $ —        $ —        $ 3,377,288   

Marketable securities

   $ 106,500       $ —        $ —        $ 106,500   

Derivative assets

   $ —        $ —        $ 250,250       $ 250,250   

Derivative liabilities

   $ —        $ —        $ 647,213       $ 647,213   

Contingent consideration

   $ —        $ —        $ 173,621       $ 173,621   

As part of the proceeds from the sale of Unidym in January 2011, Arrowhead received a bond from Wisepower in the face amount of $2.5 million. The bond is convertible to Wisepower common stock at a price of $2.00 per share. The conversion feature is subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the conversion feature on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative asset. The fair value of the conversion feature is estimated at the end of each reporting period and the change in the fair value of the conversion feature is recorded as a nonoperating gain/loss as change in value of derivatives in Company’s Consolidated Statement of Operations. During the quarter ended March 31, 2013, the trading of Wisepower stock was halted. The Company determined that the probability of realizing value from the conversion feature was remote, and the derivative asset value has been reduced to zero.

During the six months ended March 31, 2013, the Company recorded a loss from the change in fair value of the derivative asset of $250,250. The assumptions used in valuing the derivative asset were as follows:

 

     March 31, 2013      September 30, 2012  

Risk free interest rate

     NA         0.23%   

Expected life

     0 Years         1.3 Years   

Dividend yield

     none         none   

Volatility

     72%         72%   

The following is a reconciliation of the derivative asset:

 

Value at September 30, 2011

     161,125   

Receipt of instruments

     —     

Increase in value

     89,125   

Net settlements

     —     
  

 

 

 

Value at September 30, 2012

     250,250   

Receipt of instruments

     —     

Change in value

     (250,250

Net settlements

     —     
  

 

 

 

Value at March 31, 2013

   $ —     
  

 

 

 

 

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As part of the equity financing on June 17, 2010, Arrowhead issued warrants to acquire up to 329,649 shares of Common Stock (the “2010 Warrants”), of which 322,150 warrants were outstanding at March 31, 2013, which contain a mechanism to adjust the strike price upon the issuance of certain dilutive equity securities. If during the term of the 2010 Warrants, the Company issues Common Stock at a price lower than the exercise price of the 2010 Warrants, the exercise price of the 2010 Warrants would be reduced to the amount equal to the issuance price of the Common Stock. Similarly, as part of a financing on December 12, 2012, Arrowhead issued warrants to acquire up to 912,543 shares of Common Stock (the “2012 Warrants”) which contain a mechanism to adjust the strike price upon the issuance of certain dilutive equity securities. If during the term of the 2012 Warrants, the Company issues Common Stock at a price lower than the exercise price of the 2012 Warrants, the exercise price of the 2012 Warrants would be reduced to the amount equal to the issuance price of the Common Stock. Further, as part of a financing on January 25, 2013, Arrowhead issued warrants to acquire up to 833,530 shares of Common Stock (the “2013 Warrants”) which contain a mechanism to adjust the strike price upon the issuance of certain dilutive equity securities. If during the term of the 2013 Warrants, the Company issues Common Stock at a price lower than the exercise price of the 2013 Warrants, the exercise price of the 2013 Warrants would be reduced to the amount equal to the issuance price of the Common Stock.

As a result of these features, the 2010 Warrants, the 2012 Warrants, and the 2013 Warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the Warrants on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative liability. The fair value of the Warrants is estimated at the end of each reporting period and the change in the fair value of the Warrants is recorded as a nonoperating gain or loss in the Company’s consolidated statement of operations. During the six months ended March 31, 2013, the Company recorded a non-cash gain from the change in fair value of the derivative liability of $244,801. The assumptions used in valuing the derivative liabilities were as follows:

 

2010 Warrants    March 31, 2013     September 30, 2012  

Risk free interest rate

     0.36     0.31

Expected life

     2.7 Years        3.2 Years   

Dividend yield

     none        none   

Volatility

     69     100

 

2012 Warrants    March 31, 2013     September 30, 2012  

Risk free interest rate

     0.77     N/A   

Expected life

     4.7 Years        N/A   

Dividend yield

     none        N/A   

Volatility

     69     N/A   

 

2013 Warrants    March 31, 2013     September 30, 2012  

Risk free interest rate

     0.77     N/A   

Expected life

     4.8 Years        N/A   

Dividend yield

     none        N/A   

Volatility

     69     N/A   

The following is a reconciliation of the derivative liability related to these warrants:

 

Value at September 30, 2011

   $ 907,233   

Issuance of instruments

     —    

Change in value

     (281,038

Net settlements

     —    
  

 

 

 

Value at September 30, 2012

   $ 626,195   

Issuance of instruments

     1,137,896   

Issuance of instruments

     1,015,923   

Change in value

     (244,801

Net settlements

     —    
  

 

 

 

Value at March 31, 2013

   $ 2,535,213   
  

 

 

 

In conjunction with the financing of Ablaris during the year ended September 30, 2011, Arrowhead sold exchange rights to certain investors whereby the investors have the right to exchange their shares of Ablaris for a prescribed number of shares of Arrowhead Common Stock based upon a predefined ratio. The exchange rights have a seven-year term. During the first year, the

 

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exchange right allows the holder to exchange one Ablaris share for 0.06 Arrowhead shares. This ratio declines to 0.04 in the second year, 0.03 in the third year and 0.02 in the fourth year. In the fifth year and beyond the exchange ratio is 0.01. Exchange rights for 675,000 Ablaris shares were sold during the year ended September 30, 2011, and remain outstanding. The exchange rights are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the exchange rights on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative liability. The fair value of the exchange rights is estimated at the end of each reporting period and the change in the fair value of the exchange rights is recorded as a nonoperating gain or loss in the Company’s Consolidated Statement of Operations. During the six months ended March 31, 2013, the Company recorded a non-cash gain from the change in fair value of the derivative liability of $9,675. The assumptions used in valuing the derivative liability were as follows:

 

     March 31, 2013     September 30, 2012  

Risk free interest rate

     0.72     0.62

Expected life

     4.8 Years        5.3 Years   

Dividend yield

     none        none   

Volatility

     69     100

The following is a reconciliation of the derivative liability related to these exchange rights:

 

Value at September 30, 2010

   $ —     

Issuance of instruments

     100,650   

Change in value

     (69,758
  

 

 

 

Value at September 30, 2011

   $ 30,892   

Issuance of instruments

     —    

Change in value

     (20,520

Net settlements

     —    
  

 

 

 

Value at September 30, 2012

   $ 10,372   

Issuance of instruments

     —    

Change in value

     (9,675

Net settlements

     —    
  

 

 

 

Value at March 31, 2013

   $ 697   
  

 

 

 

During the year ended September 30, 2012, contingent consideration was recorded upon the acquisitions of Roche Madison, Inc. and Alvos Therapeutics, Inc., totaling $173,621. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. The measurement is based upon unobservable inputs supported by little or no market activity based on our own assumptions and experience. Estimating timing to complete the development, and obtain approval of products is difficult, and there are inherent uncertainties in developing a product candidate, such as obtaining U.S. Food and Drug Administration (FDA) and other regulatory approvals. In determining the probability of regulatory approval and commercial success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant 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 we record in any given period. Changes in the fair value of the contingent consideration obligations are recorded in our consolidated statement of operations. There were no changes in contingent consideration fair value.

 

Value at September 30, 2011

   $ —     

Purchase price contingent consideration

     173,621   

Contingent consideration payments

     —     

Change in fair value of contingent consideration

     —     
  

 

 

 

Value at September 30, 2012

   $ 173,621   

Purchase price contingent consideration

     —     

Contingent consideration payments

     —     

Change in fair value of contingent consideration

     —     
  

 

 

 

Value at March 31, 2013

   $ 173,621   
  

 

 

 

 

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The carrying amounts of the Company’s other financial instruments, which include accounts receivable, accounts payable, and accrued expenses approximate their respective fair values due to the relatively short-term nature of these instruments. The carrying value of the Company’s debt obligations approximates fair value based on market interest rates.

NOTE 11. SUBSEQUENT EVENTS

On April 29, 2013, the Company entered into a Securities Purchase Agreement (the “SPA”) with certain institutional investors (the “Purchasers”), pursuant to which the Company agreed to issue and sell an aggregate of 14,262,553 shares of common stock, $0.001 par value per share (the “Shares”), at a purchase price of $1.83 per share, and 9,900 shares of Series B Convertible Preferred Stock (the “Preferred Shares”), at a purchase price of $1,000 per share. The Preferred Shares are convertible into shares of common stock at a conversion price of $1.83 per share of common stock. The aggregate purchase price paid by the Purchasers for the Shares and Preferred Shares was $36,000,472 and the Company received net proceeds of approximately $35,350,000, after advisory fees and offering expenses. The closing of the offering occurred on May 3, 2013.

The Securities Purchase Agreement requires the Company to register the resale of the Shares and the Common Stock underlying the Preferred Shares (the “Conversion Shares”). The Company is required to prepare and file a registration statement with the Securities and Exchange Commission within 30 days of the closing of the offering, and to use commercially reasonable efforts to have the registration statement declared effective within 90 days of the closing date if there is no review by the Securities and Exchange Commission, and within 120 days of the closing date in the event of such review. Should the Company fail to file the registration statement as required by the SPA, fail to obtain effectiveness of such registration statement as required by the SPA, or fail to maintain such effectiveness as required by the SPA, the Company is subject to cash penalties during the time period of such failures up to 10% of the aggregate purchase price.

The Preferred Shares are convertible at the option of the stockholder into the number of shares of common stock determined by dividing the value of the Preferred Shares being converted by the conversion price of $1.83, subject to adjustment for stock splits, reverse stock splits and similar recapitalization events. The Company will not effect any conversion of the Preferred Shares, and a stockholder shall not have the right to convert any portion of the Preferred Shares, to the extent that, after giving effect to the conversion such stockholder would beneficially own in excess of the Beneficial Ownership Limitation. The “Beneficial Ownership Limitation” is 9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon conversion of Preferred Shares held by the applicable stockholder. The Preferred Shares are eligible to vote with the common stock of the Company on an as-converted basis, but only to the extent that the Preferred Shares are eligible for conversion without exceeding the Beneficial Ownership Limitation. The Preferred Shares are entitled to receive dividends on a pari passu basis with the common stock, when, and if declared. In any liquidation or dissolution of the Company, the Preferred Shares are entitled to participate in the distribution of assets, to the extent legally available for distribution, on a pari passu basis with the common stock.

 

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

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Readers should carefully review the factors identified in this report under the caption “Risk Factors” as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including our most recent Annual Report on Form 10-K. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

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Overview

Arrowhead Research Corporation is a nanomedicine company developing innovative therapies at the interface of biology and nanoengineering to cure disease and improve human health. Arrowhead has one of the most advanced and broadest technology platforms for therapeutics based on RNA interference (RNAi), including access to several different RNAi delivery systems and small interfering RNA (siRNA) structures in commercial development for RNAi therapeutics. This broad technology platform enables optimization of siRNA therapeutic candidates for delivery based on siRNA chemistry, tissue type, disease state, target gene and siRNA type and chemistry on a target-by-target basis. Through its acquisition of Alvos Therapeutics, Arrowhead has access to a large platform of proprietary human-derived homing peptides and the method for their discovery. These targeting peptide sequences can be linked to our siRNA delivery vehicles as well as to traditional small molecule drugs to preferentially shuttle them into target cells. Arrowhead is leveraging its in-house R&D expertise and capabilities, as well as a broad intellectual property portfolio for RNAi therapeutics, and RNAi and peptide delivery vehicles and targeting methods to seek development partnerships with other pharmaceutical and biotech companies committed to bringing RNAi therapeutics to market, as well as continuing the preclinical and clinical development of its own clinical candidates. Arrowhead’s non-RNAi development programs include a therapeutic candidate for the potential treatment of obesity.

Arrowhead’s wholly-owned subsidiary, Arrowhead Madison Inc., operates a lab facility in Madison, Wisconsin, supporting the company’s initiatives including the development of RNAi therapeutics. In addition to its wholly owned subsidiaries, Arrowhead Madison and Alvos Therapeutics, Arrowhead operates two majority owned subsidiaries, Calando, a leader in delivering small interfering RNAs for gene silencing, and Ablaris, an anti-obesity therapeutics company, and has minority investments in Nanotope, a regenerative medicine company and Leonardo, a multistage drug delivery company.

The Company’s principal executive offices are located at 225 South Lake Avenue, Suite 1050, Pasadena, California 91101, and its telephone number is (626) 304-3400.

Liquidity and Capital Resources

As a development stage company, Arrowhead has historically financed its operations through the sale of securities of Arrowhead and its subsidiaries. Research and development activities have required significant capital investment since the Company’s inception, and are expected to continue to require significant cash investment for the foreseeable future.

At March 31, 2013, the Company had $3.3 million in cash to fund operations. During the six months ended March 31, 2013, the Company’s cash position remained relatively constant. The Company received $7.1 million from the issuance of equity, net of fees. Other cash collections were $1.5 million. The company had cash outflow of $8.7 million related to its continuing operating activities.

During the six months ended March 31, 2013, cash used in operating activities was $8.3 million, which represents the on-going expenses for research and development activities, business development, and corporate overhead. Cash expenses were partially offset by cash received from revenues and other inflows of $0.4 million.

Cash provided by investing activities was $1.3 million, primarily related to proceeds from the sales of investments.

Cash provided by financing activities was $7.0 million, primarily related to cash received from the sale of Common Stock.

Recent Financing Activity:

In May 2013, the Company sold 14.3 million shares of Arrowhead common stock at a price of $1.83 per share, and 9,900 shares of Arrowhead series B convertible preferred stock at a price of $1,000 per share. The series B preferred stock is convertible into common stock at a conversion price of $1.83. Gross proceeds were $36 million.

On January 25, 2013, the Company sold 1.7 million units at a price of $2.12 per unit in a public offering. Each unit consisted of one share of Common Stock and a warrant to purchase 0.5 share of Common Stock. The exercise price of these warrants was $2.14 as of March 31, 2013. Gross proceeds from the offering were $3.5 million; net proceeds were $3.3 million after deducting commissions and other offering expenses.

On December 6, 2012, the Company sold 1.8 million units at a price of $2.26 per unit in a public offering. Each unit consisted of one share of Common Stock and a warrant to purchase 0.5 share of Common Stock. The exercise price of these warrants was $2.12 as of March 31, 2013. Gross proceeds from the offering were $4.1 million; net proceeds were $3.9 million after deducting commissions and other offering expenses.

On August 10, 2012, the Company sold 2.3 million units at a price of $2.76 per unit in a registered offering to institutional and individual investors. Each unit consisted of one share of Common Stock and a warrant to purchase 0.75 share of Common Stock exercisable at $3.25 per share. Gross proceeds from the offering were approximately $6.2 million, with net proceeds of $5.8 million after deducting commissions and other offering expenses.

 

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On October 20, 2011, the Company and Lincoln Park Capital Fund, LLC, an Illinois limited liability company (“LPC”) entered into a $15 million purchase agreement, together with a registration rights agreement, whereby LPC agreed to purchase up to $15 million of Common Stock, subject to certain limitations, from time to time during the three-year term of the agreement. Additionally, the Company filed a registration statement with the U.S. Securities & Exchange Commission covering the resale of the shares that may be issued to LPC under the agreement. On January 30, 2012, the SEC declared the registration statement effective for the resale of such shares. The Company has the right, in its sole discretion, over a 36-month period to sell up to $15 million of Common Stock (subject to certain limitations) to LPC, depending on certain conditions as set forth in the agreement. As of March 31, 2013, the Company had drawn $1 million from the facility. The use of this facility requires a minimum share price of $2.00, as defined in the agreement.

Although the Company has sources of liquidity, as described above, the Company anticipates that further equity financings, and/or license agreements, or other sources of revenue, will be necessary to continue to fund operations in the future.

Critical Accounting Policies and Estimates

Management makes certain judgments and uses certain estimates and assumptions when applying accounting principles generally accepted in the United States in the preparation of our Consolidated Financial Statements. We evaluate our estimates and judgments on an ongoing basis and base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our consolidated financial statements and require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements. For further information, see Note 1, Organization and Basis of Presentation, to our Consolidated Financial Statements which outlines our application of significant accounting policies and new accounting standards.

Stock Compensation Expense

We recognize stock-based compensation expense based on the grant date fair value using the Black-Scholes options pricing model, which requires us to make assumptions regarding certain variables including the risk-free interest rate, expected stock price volatility, and the expected life of the award. The assumptions used in calculating stock-based compensation expense represent management’s best estimates, but these estimates involve inherent uncertainties, and if factors change or the Company used different assumptions, its stock-based compensation expense could be materially different in the future.

Derivative Financial Instruments

During the normal course of business, and associated with certain equity financings, the Company may issue warrants or become party to other agreements which require the use of derivative accounting treatment under GAAP. The company does not enter into derivative contracts for speculative purposes. We account for derivatives under the provisions of ASC Topic 815, which generally requires that derivative assets and liabilities be measured at fair value each reporting period with changes in fair value reflected as a current period income or loss, unless the derivatives qualify for hedge accounting treatment. The valuation of such derivatives are made using option pricing models which require various assumptions, some of which may be subjective, including but not limited to the Company’s stock price, the expected life of the instrument, a risk-free interest rate, and expected stock price volatility. Subjective assumptions are estimated by management, but other reasonable assumptions could provide differing results.

Revenue Recognition

Revenue from product sales are recorded when persuasive evidence of an arrangement exists, title has passed and delivery has occurred, a price is fixed and determinable, and collection is reasonably assured.

We may generate revenue from technology licenses, collaborative research and development arrangements, research grants and product sales. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding, and various milestone and future product royalty or profit-sharing payments.

Revenue associated with research and development funding payments under collaborative agreements is recognized ratably over the relevant periods specified in the agreement, generally the research and development period. 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.

 

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Overview for the six months ended March 31, 2013

During the six months ended March 31, 2013, the Company continued its research and development efforts, in particular, its focus on advancing ARC-520, its next clinical candidate for treatment of chronic hepatitis B virus (HBV). The Company has completed internal preclinical requirements and final IND-enabling steps, including GMP manufacturing and GLP toxicology, are in process.

Results of Operations

The Company had consolidated loss attributable to Arrowhead of $11,372,095 for the six months ended March 31, 2013, compared to a consolidated loss attributable to Arrowhead of $7,820,737 for the six months ended March 31, 2012. Details of the results of operations are presented below.

Revenue

The Company recorded revenue of $202,766 during the six months ended March 31, 2013, as compared to $55,208 during the six months ended March 31, 2012. The revenue in fiscal 2013 was related to three license agreements related to technology acquired through the acquisition of Roche Madison, Inc., totaling $87,500, as well as $115,266 in non-recurring services revenue. The revenue in fiscal 2012 was related to the two license agreements acquired through the acquisition of Roche Madison, Inc.

Operating Expenses

The analysis below details the operating expenses and discusses the expenditures of the Company within the major expense categories. The following tables provide details of operating expenses for the three and six months ended March 31, 2013 and 2012.

Salaries – Three and six months ended March 31, 2013 compared to the three and six months ended March 31, 2012

The Company employs management, administrative, and scientific and technical staff at its corporate offices and its research facility. Salaries expense consists of salary and related benefits. Salary and benefits include two major categories: general and administrative compensation expense, and research and development compensation expense, depending on the primary activities of each employee. Arrowhead also manages certain general and administrative functions Leonardo and charges fees for those services. The following tables provide detail of salary and wage expenses for the three and six months ended March 31, 2013 as compared to the three and six months ended March 31, 2012.

 

(in thousands)                                       
     Three months
Ended
March 31, 2013
     % of
Expense
Category
    Three months
Ended
March 31, 2012
     % of
Expense
Category
   

 

Increase (Decrease)

 
             $     %  

G&A - compensation-related

   $ 785         46   $ 1,124         56   $ (339     -30

R&D - compensation-related

     940         54     893         44     47        5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 1,725         100   $ 2,017         100   $ (292     -14
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Six months
Ended
March 31, 2013
     % of
Expense
Category
    Six months
Ended
March 31, 2012
     % of
Expense
Category
   

 

Increase (Decrease)

 
             $     %  

G&A - compensation-related

   $ 1,503         45   $ 1,717         51   $ (214     -12

R&D - compensation-related

     1,852         55     1,621         49     231        14
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 3,355         100   $ 3,338         100   $ 17        1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

G&A compensation expense was $785,000 during the three months ended March 31, 2013, compared to $1,124,000 in the comparable prior period. During the three months ended March 31, 2012, the Company recorded bonus expense of $518,000, which was not repeated in 2013. This was somewhat offset by higher salaries on higher headcount, and lower salary allocation to non-consolidated entities. R&D compensation expense was relatively constant during the quarter ended March 31, 2013 as compared to the comparable prior period.

During the six months ended March 31, 2013, G&A compensation expense was $1,503,000 compared to $1,717,000 in the comparable prior period. During the six months ended March 31, 2012, the Company made bonus payments of $350,000 and recorded a bonus accrual of $274,000. During the first half of fiscal 2013, the Company did not pay performance bonuses, and no further bonus accrual was recorded. The decrease in bonus expense was somewhat offset by higher salary costs driven by increased headcount and salary increases, and lower salary allocation to non-consolidated entities during the six months ended March 31, 2013. The Company added two management positions in 2012, a Vice President of Program Management and a Director of Finance/Investor Relations, and the Company added one management position in 2013. R&D compensation expense increased from $1,621,000 to $1,852,000 due to higher R&D headcount in 2013 versus 2012.

 

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Table of Contents

General & Administrative Expenses – Three and six months ended March 31, 2013 compared to the three and six months ended March 31, 2012

The following tables provide detail of G&A expenses for the three and six months ended March 31, 2013 as compared to the three and six months ended March 31, 2012.

 

(in thousands)                                       
     Three months
Ended
March 31, 2013
     % of
Expense
Category
    Three months
Ended
March 31, 2012
     % of
Expense
Category
   

 

Increase (Decrease)

 
             $     %  

Professional/outside services

   $ 322         41   $ 378         41   $ (56     -15

Patent expense

     180         23     290         31     (110     -38

Facilities and related

     44         6     26         3     18        69

Travel

     93         12     86         9     7        8

Business insurance

     50         6     50         5     —          0

Communication and Technology

     51         7     57         6     (6     -11

Office expenses

     19         2     20         2     (1     -5

Other

     21         3     24         3     (3     -13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 780         100   $ 931         100   $ (151     -16
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Six months
Ended
March 31, 2013
     % of
Expense
Category
    Six months
Ended
March 31, 2012
     % of
Expense
Category
   

 

Increase (Decrease)

 
             $     %  

Professional/outside services

   $ 689         41   $ 1,180         54   $ (491     -42

Patent expense

     430         25     511         23     (81     -16

Facilities and related

     86         5     52         2     34        65

Travel

     191         11     149         7     42        28

Business insurance

     99         6     100         5     (1     -1

Communication and Technology

     87         5     102         5     (15     -15

Office expenses

     60         4     52         2     8        15

Other

     56         3     52         2     4        8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 1,698         100   $ 2,198         100   $ (500     -23
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Professional/outside services include legal, accounting, consulting and other outside services retained by the Company. All periods include normally recurring legal and audit expenses related to SEC compliance and other corporate matters. Professional/outside services expense was $322,000 during the three months ended March 31, 2013, compared to $378,000 in the comparable prior period. During the six months ended March 31, 2013, professional/outside services expense was $689,000 compared to $1,180,000 in the comparable prior period. The decrease in professional services for the six month ended March 31, 2013 primarily relates to certain fees and expenses associated with the acquisition of Roche Madison, Inc. incurred in the first quarter of fiscal 2012 which were not repeated in the current quarter.

Patent expense was $180,000 during the three months ended March 31, 2013, compared to $290,000 in the comparable prior period. During the six months ended March 31, 2013, patent expense was $430,000 compared to $511,000 in the comparable prior period. The decrease in patent-related expenses was primarily due to the nonrecurring legal costs in the prior period associated with the due diligence services on the patent portfolio of Roche Madison Inc. in association with its acquisition. The Company expects to continue to invest in patent protection as the Company extends and maintains protection for its current portfolios and files new patent applications as its product applications are improved. The cost will vary depending on the needs of the Company.

Facilities-related expense was $44,000 during the three months ended March 31, 2013, compared to $26,000 in the comparable prior period. During the six months ended March 31, 2013, facilities-related expense was $86,000 compared to $52,000 in the comparable prior period. Facilities expense increased due to the increase of lease costs as the Company moved from a temporary lower cost location to a new corporate office in August of 2012.

Travel expense was $93,000 during the three months ended March 31, 2013, compared to $86,000 in the comparable prior period. During the six months ended March 31, 2013, travel expense was $191,000 compared to $149,000 in the comparable prior period. Travel expense increased due to travel related to fund raising efforts, investor relations meetings and business development by Company personnel. Travel expense includes expenses related to travel by Company personnel for operational business meetings at other company locations for other business initiatives and collaborations with other companies, and for marketing, investor relations, fund raising and public relations purposes. Travel expenses can fluctuate from quarter to quarter and from year to year depending on current projects and activities.

 

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Table of Contents

Business insurance expense was $50,000 during the three months ended March 31, 2013, compared to $50,000 in the comparable prior period. During the six months ended March 31, 2013, business insurance expense was $99,000 compared to $100,000 in the comparable prior period.

Communication and technology expense was $51,000 during the three months ended March 31, 2013 compared to $57,000 in the comparable prior period. During the six months ended March 31, 2013, communication and technology expense was $87,000 compared to $102,000 in the comparable prior period. The decrease was related to lower software maintenance costs at our Madison facility, primarily end-user software and software maintenance on laboratory computer software.

Office expense was $19,000 during the three months ended March 31, 2013 compared to $20,000 in the comparable prior period. During the six months ended March 31, 2013, office expense was $60,000 compared to $52,000 in the comparable prior period. The increase was related to higher costs associated with the new corporate headquarters, as well as increased costs at the Madison facility.

Research and Development Expenses – Three and six months ended March 31, 2013 compared to the three and six months ended March 31, 2012

R&D expenses are related to the Company’s on-going research and development efforts, primarily related to its laboratory research facility in Madison, Wisconsin, and also include outsourced R&D services. The following tables provide detail of research and development expenses for the three and six months ended March 31, 2013, as compared to the three and six months ended March 31, 2012.

 

(in thousands)                                       
     Three months
Ended
March 31, 2013
     % of
Expense
Category
    Three months
Ended
March 31, 2012
     % of
Expense
Category
   

 

Increase (Decrease)

 
             $     %  

Outside labs & contract services

   $ 345         16   $ 267         20   $ 78        29

In vivo studies

     446         21     94         7     352        374

Drug Manufacturing

     486         23     390         29     96        25

Consulting

     130         6     133         10     (3     -2

License, royalty & milestones

     134         6     22         2     112        509

Laboratory supplies & services

     301         14     221         15     80        36

Facilities and related

     173         8     198         15     (25     -13

Sponsored research

     84         4     28         2     56        200

Other research expenses

     26         2     6         0     20        333
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 2,125         100   $ 1,359         100   $ 766        56
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

     Six months
Ended
March 31, 2013
     % of
Expense
Category
    Six months
Ended
March 31, 2012
     % of
Expense
Category
   

 

Increase (Decrease)

 
             $      %  

Outside labs & contract services

   $ 628         17   $ 512         24   $ 116         23

In vivo studies

     808         22     107         5     701         655

Drug Manufacturing

     703         19     470         22     233         50

Consulting

     308         8     287         13     21         7

License, royalty & milestones

     162         4     37         2     125         338

Laboratory supplies & services

     536         15     303         15     233         77

Facilities and related

     364         10     330         16     34         10

Sponsored research

     156         4     73         3     83         114

Other research expenses

     37         1     9         0     28         311
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,702         100   $ 2,128         100   $ 1,574         74
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Outside labs and contract services expense was $345,000 during the three months ended March 31, 2013, compared to $267,000 in the comparable prior period. During the six months ended March 31, 2013, outside labs and contract services expense was $628,000 compared to $512,000 in the comparable prior period. The increase was primarily related to study and analytic development costs for ARC-520, our HBV candidate.

 

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Table of Contents

In vivo studies expense was $446,000 during the three months ended March 31, 2013, compared to $94,000 in the comparable prior year period. During the six months ended March 31, 2013, in vivo studies expense was $808,000 compared to $107,000 in the comparable prior period. The current period expense relates to preclinical GLP toxicology program costs related to our HBV program.

Drug manufacturing expense was $486,000 during the three months ended March 31, 2013, compared to $390,000 in the comparable prior year period. During the six months ended March 31, 2013, drug manufacturing expense was $703,000 compared to $470,000 in the comparable prior period. Drug manufacturing costs during the current quarter related to manufacturing costs for clinical supplies for the HBV program. Drug manufacturing costs in 2012 related to costs to manufacture polymer components for RONDEL. Drug manufacture costs for the HBV program will continue until the Company completes its manufacturing campaign related to supplies for the HBV clinical trial expected to begin in the summer of 2013. Additional manufacturing costs will be incurred for the HBV program as the candidate progresses to further stages of the clinical trial, and for future clinical trials based on timing of new drug candidates.

Consulting expense was $130,000 during the three months ended March 31, 2013, compared to $133,000 in the comparable prior period. During the six months ended March 31, 2013, consulting expense was $308,000 compared to $287,000 in the comparable prior period. The majority of consulting expense during the current quarter relates to clinical and regulatory consulting related to the Company’s HBV program. The costs in the prior period related to clinical consulting for our cancer candidate, CALAA-01. The Company expects consulting costs related to the HBV program to accelerate over the next several quarters.

Licensing fees, royalty and milestones expense was $134,000 during the three months ended March 31, 2013, compared to $22,000 in the comparable prior period. During the six months ended March 31, 2013, licensing fees, royalty and milestones expense was $162,000 compared to $37,000 in the comparable prior period. Licensing fees, royalty and milestones expenses increased due to a nonrecurring payment of $120,000, related to access to certain targeting technology, during the three months ended March 31, 2013.

Laboratory supplies and services expense was $301,000 during the three months ended March 31, 2013, compared to $221,000 in the comparable prior period. During the six months ended March 31, 2013, laboratory supplies and services expense was $536,000 during compared to $303,000 in the comparable prior period. Laboratory supplies are used at our Madison research facility which was acquired on October 21, 2011. During the three months ended December 31, 2011, the Madison research facility was acquired and did not include a full three months of activity, and the facility was utilizing laboratory supplies on-hand at the time of the acquisition. In addition, the Company increased research on its targeting platform obtained as part of it acquisition of Alvos in 2012.