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, 2015
¨ |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-21898
ARROWHEAD RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
|
46-0408024 |
(State of incorporation) |
|
(I.R.S. Employer Identification No.) |
225 S. Lake Avenue, Suite 1050
Pasadena, California 91101
(626) 304-3400
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated |
|
x |
|
Accelerated filer |
|
¨ |
|
|
|
|
|||
Non-accelerated filer |
|
¨ (Do not check if a smaller reporting company) |
|
Smaller reporting company |
|
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the registrant’s common stock outstanding as of May 8, 2015 was 59,498,362.
Arrowhead Research Corporation
|
(unaudited) |
|
|
|
|
|
|
|
March 31, 2015 |
|
|
September 30, 2014 |
|
||
ASSETS |
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
96,447,301 |
|
|
$ |
132,510,610 |
|
Prepaid expenses |
|
3,811,096 |
|
|
|
588,626 |
|
Other current assets |
|
327,384 |
|
|
|
48,502 |
|
Short term investments |
|
19,561,172 |
|
|
|
21,653,032 |
|
TOTAL CURRENT ASSETS |
|
120,146,953 |
|
|
|
154,800,770 |
|
Property and equipment, net |
|
4,127,366 |
|
|
|
3,872,753 |
|
Intangible assets, net |
|
25,701,657 |
|
|
|
1,013,473 |
|
Investments |
|
12,361,068 |
|
|
|
23,088,346 |
|
Other assets |
|
41,414 |
|
|
|
41,414 |
|
TOTAL ASSETS |
$ |
162,378,458 |
|
|
$ |
182,816,756 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
Accounts payable |
$ |
4,936,282 |
|
|
$ |
2,579,478 |
|
Accrued expenses |
|
2,041,174 |
|
|
|
1,399,486 |
|
Due to Novartis |
|
3,000,000 |
|
|
|
- |
|
Accrued payroll and benefits |
|
1,272,001 |
|
|
|
3,268,506 |
|
Deferred revenue |
|
65,625 |
|
|
|
103,125 |
|
Derivative liabilities |
|
1,619,755 |
|
|
|
4,173,943 |
|
Capital lease obligation |
|
215,762 |
|
|
|
213,991 |
|
Notes payable |
|
- |
|
|
|
50,000 |
|
Other current liabilities |
|
59,762 |
|
|
|
58,495 |
|
TOTAL CURRENT LIABILITIES |
|
13,210,361 |
|
|
|
11,847,024 |
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
Capital lease obligation, net of current portion |
|
650,014 |
|
|
|
758,340 |
|
Contingent consideration obligations |
|
3,970,931 |
|
|
|
3,970,931 |
|
Other non-current liabilities |
|
350,798 |
|
|
|
255,206 |
|
TOTAL LONG-TERM LIABILITIES |
|
4,971,743 |
|
|
|
4,984,477 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Arrowhead Research Corporation stockholders' equity: |
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 15,652 and 18,300 shares issued and outstanding as of March 31, 2015 and September 30, 2014, respectively |
|
16 |
|
|
|
18 |
|
Common stock, $0.001 par value; 145,000,000 shares authorized; 59,435,862 and 54,656,936 shares issued and outstanding as of March 31, 2015 and September 30, 2014, respectively |
|
151,805 |
|
|
|
147,026 |
|
Additional paid-in capital |
|
420,696,539 |
|
|
|
391,164,558 |
|
Accumulated other comprehensive income (loss) |
|
(63,965 |
) |
|
|
- |
|
Accumulated deficit |
|
(276,032,853 |
) |
|
|
(224,771,159 |
) |
Total Arrowhead Research Corporation stockholders' equity |
|
144,751,542 |
|
|
|
166,540,443 |
|
Noncontrolling interest |
|
(555,188 |
) |
|
|
(555,188 |
) |
TOTAL STOCKHOLDERS’ EQUITY |
|
144,196,354 |
|
|
|
165,985,255 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ |
162,378,458 |
|
|
$ |
182,816,756 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
Arrowhead Research Corporation
Consolidated Statements of Operations
(unaudited)
|
|
Three Months ended |
|
|
Three Months ended |
|
|
Six Months ended |
|
|
Six Months ended |
|
||||
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
||||
REVENUE |
|
$ |
43,750 |
|
|
$ |
43,750 |
|
|
$ |
214,500 |
|
|
$ |
87,500 |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
11,640,794 |
|
|
|
5,216,446 |
|
|
|
29,387,524 |
|
|
|
8,349,460 |
|
Acquired in-process research and development |
|
|
10,142,786 |
|
|
|
- |
|
|
|
10,142,786 |
|
|
|
- |
|
Salaries and payroll-related costs |
|
|
3,541,652 |
|
|
|
3,097,902 |
|
|
|
6,692,268 |
|
|
|
5,179,693 |
|
General and administrative expenses |
|
|
1,696,623 |
|
|
|
1,347,677 |
|
|
|
3,782,826 |
|
|
|
2,261,461 |
|
Stock-based compensation |
|
|
2,205,079 |
|
|
|
1,198,444 |
|
|
|
4,219,935 |
|
|
|
1,719,582 |
|
Depreciation and amortization |
|
|
449,559 |
|
|
|
395,779 |
|
|
|
739,598 |
|
|
|
799,184 |
|
TOTAL OPERATING EXPENSES |
|
|
29,676,493 |
|
|
|
11,256,248 |
|
|
|
54,964,937 |
|
|
|
18,309,380 |
|
OPERATING LOSS |
|
|
(29,632,743 |
) |
|
|
(11,212,498 |
) |
|
|
(54,750,437 |
) |
|
|
(18,221,880 |
) |
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income (loss) of unconsolidated affiliates |
|
|
- |
|
|
|
(9,597 |
) |
|
|
- |
|
|
|
(148,053 |
) |
Gain (loss) on sale of fixed assets, net |
|
|
45,576 |
|
|
|
(5,316 |
) |
|
|
19,195 |
|
|
|
(58,878 |
) |
Interest income (expense), net |
|
|
198,113 |
|
|
|
119,390 |
|
|
|
435,530 |
|
|
|
159,968 |
|
Change in value of derivatives |
|
|
168,974 |
|
|
|
(2,951,225 |
) |
|
|
2,551,116 |
|
|
|
(6,470,803 |
) |
Other income (expense) |
|
|
536,087 |
|
|
|
76,546 |
|
|
|
482,902 |
|
|
|
71,215 |
|
TOTAL OTHER INCOME (EXPENSE) |
|
|
948,750 |
|
|
|
(2,770,202 |
) |
|
|
3,488,743 |
|
|
|
(6,446,551 |
) |
LOSS BEFORE INCOME TAXES |
|
|
(28,683,993 |
) |
|
|
(13,982,700 |
) |
|
|
(51,261,694 |
) |
|
|
(24,668,431 |
) |
Provision for income taxes |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
NET LOSS |
|
|
(28,683,993 |
) |
|
|
(13,982,700 |
) |
|
|
(51,261,694 |
) |
|
|
(24,668,431 |
) |
Net loss attributable to noncontrolling interests |
|
|
- |
|
|
|
40,179 |
|
|
|
- |
|
|
|
97,600 |
|
NET LOSS ATTRIBUTABLE TO ARROWHEAD |
|
$ |
(28,683,993 |
) |
|
$ |
(13,942,521 |
) |
|
$ |
(51,261,694 |
) |
|
$ |
(24,570,831 |
) |
NET LOSS PER SHARE ATTRIBUTABLE TO ARROWHEAD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS - BASIC & DILUTED: |
|
$ |
(0.51 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.93 |
) |
|
$ |
(0.60 |
) |
Weighted average shares outstanding - basic and diluted |
|
|
55,719,923 |
|
|
|
44,321,847 |
|
|
|
55,200,512 |
|
|
|
40,941,903 |
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments |
|
|
(63,965 |
) |
|
|
- |
|
|
|
(63,965 |
) |
|
|
- |
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO ARROWHEAD |
|
$ |
(28,747,958 |
) |
|
$ |
(13,942,521 |
) |
|
$ |
(51,325,659 |
) |
|
$ |
(24,570,831 |
) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
Arrowhead Research Corporation
Consolidated Statement of Stockholders’ Equity
(unaudited)
|
Preferred Stock |
|
|
Common Stock |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Shares |
|
|
Amount ($) |
|
|
Shares |
|
|
Amount ($) |
|
|
Additional Paid-In Capital |
|
|
Other Comprehensive Income (loss) |
|
|
Accumulated Deficit |
|
|
Non-controlling Interest |
|
|
Totals |
|
|||||||||
Balance at September 30, 2013 |
|
9,900 |
|
|
$ |
10 |
|
|
|
32,489,444 |
|
|
$ |
124,859 |
|
|
$ |
193,514,766 |
|
|
$ |
- |
|
|
$ |
(166,140,969 |
) |
|
$ |
(1,763,877 |
) |
|
$ |
25,734,789 |
|
Exercise of warrants |
|
- |
|
|
|
- |
|
|
|
2,911,919 |
|
|
|
2,911 |
|
|
|
10,145,133 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,148,044 |
|
Exercise of stock options |
|
- |
|
|
|
- |
|
|
|
454,863 |
|
|
|
455 |
|
|
|
2,729,545 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,730,000 |
|
Stock-based compensation |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,696,173 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,696,173 |
|
Common stock issued @ $5.86 |
|
- |
|
|
|
- |
|
|
|
3,071,672 |
|
|
|
3,072 |
|
|
|
14,057,040 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,060,112 |
|
Common stock issued @ $18.95 |
|
- |
|
|
|
- |
|
|
|
6,325,000 |
|
|
|
6,325 |
|
|
|
112,575,234 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
112,581,559 |
|
Preferred stock issued @ $1,000 per share |
|
46,000 |
|
|
|
46 |
|
|
|
- |
|
|
|
- |
|
|
|
45,999,954 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
46,000,000 |
|
Common stock issued to Galloway |
|
- |
|
|
|
- |
|
|
|
131,579 |
|
|
|
132 |
|
|
|
499,868 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
500,000 |
|
Settlements related to derivative liability |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,956,079 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,956,079 |
|
Preferred stock converted to common stock |
|
(37,600 |
) |
|
|
(38 |
) |
|
|
9,272,459 |
|
|
|
9,272 |
|
|
|
(9,234 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Deconsolidation of Calando Pharmaceuticals, Inc. |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,303,911 |
|
|
|
1,303,911 |
|
Net loss for the year ended September 30, 2014 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(58,630,190 |
) |
|
|
(95,222 |
) |
|
|
(58,725,412 |
) |
Balance at September 30, 2014 |
|
18,300 |
|
|
$ |
18 |
|
|
|
54,656,936 |
|
|
$ |
147,026 |
|
|
$ |
391,164,558 |
|
|
$ |
- |
|
|
$ |
(224,771,159 |
) |
|
$ |
(555,188 |
) |
|
$ |
165,985,255 |
|
Exercise of warrants |
|
- |
|
|
|
- |
|
|
|
53,578 |
|
|
|
54 |
|
|
|
270,571 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
270,625 |
|
Exercise of stock options |
|
- |
|
|
|
- |
|
|
|
17,500 |
|
|
|
18 |
|
|
|
43,108 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43,126 |
|
Stock-based compensation |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,219,935 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,219,935 |
|
Exercise of exchange rights |
|
- |
|
|
|
- |
|
|
|
5,250 |
|
|
|
5 |
|
|
|
3,067 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,072 |
|
Preferred stock converted to common stock |
|
(2,648 |
) |
|
|
(2 |
) |
|
|
1,316,215 |
|
|
|
1,316 |
|
|
|
(1,314 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common stock-RSU vesting |
|
- |
|
|
|
- |
|
|
|
65,000 |
|
|
|
65 |
|
|
|
(65 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common stock issued to Novartis @ $7.53 |
|
- |
|
|
|
- |
|
|
|
3,321,383 |
|
|
|
3,321 |
|
|
|
24,996,679 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,000,000 |
|
Foreign currency translation adjustments |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(63,965 |
) |
|
|
- |
|
|
|
- |
|
|
|
(63,965 |
) |
Net loss for the six months ended March 31, 2015 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(51,261,694 |
) |
|
|
- |
|
|
|
(51,261,694 |
) |
Balance at March 31, 2015 |
|
15,652 |
|
|
$ |
16 |
|
|
|
59,435,862 |
|
|
$ |
151,805 |
|
|
$ |
420,696,539 |
|
|
$ |
(63,965 |
) |
|
$ |
(276,032,853 |
) |
|
$ |
(555,188 |
) |
|
$ |
144,196,354 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Arrowhead Research Corporation
Consolidated Statements of Cash Flows
(unaudited)
|
Six months ended |
|
|
Six months ended |
|
||
|
March 31, 2015 |
|
|
March 31, 2014 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net loss |
$ |
(51,261,694 |
) |
|
$ |
(24,668,431 |
) |
Net loss attributable to non-controlling interests |
|
- |
|
|
|
97,600 |
|
Net loss attributable to Arrowhead |
|
(51,261,694 |
) |
|
|
(24,570,831 |
) |
(Gain) loss on disposal of fixed assets |
|
(19,195 |
) |
|
|
58,878 |
|
Change in value of derivatives |
|
(2,551,116 |
) |
|
|
6,470,803 |
|
Acquired in-process research and development |
|
10,142,786 |
|
|
|
- |
|
Stock-based compensation |
|
4,219,935 |
|
|
|
1,719,582 |
|
Depreciation and amortization |
|
739,598 |
|
|
|
799,184 |
|
Amortization of note premiums |
|
668,364 |
|
|
|
269,313 |
|
Non-controlling interest |
|
- |
|
|
|
(97,600 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Receivables |
|
- |
|
|
|
75,000 |
|
Other receivables |
|
(279,500 |
) |
|
|
(611,360 |
) |
Other current assets |
|
(3,223,118 |
) |
|
|
(206,011 |
) |
Accounts payable |
|
2,402,381 |
|
|
|
1,311,947 |
|
Accrued expenses |
|
(1,442,450 |
) |
|
|
275,370 |
|
Other |
|
34,425 |
|
|
|
(214,329 |
) |
NET CASH USED IN OPERATING ACTIVITIES |
|
(40,569,584 |
) |
|
|
(14,720,054 |
) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Cash paid for acquisitions |
|
(7,000,000 |
) |
|
|
- |
|
Purchases of property and equipment |
|
(852,063 |
) |
|
|
(607,772 |
) |
Proceeds from sale of fixed assets |
|
500 |
|
|
|
- |
|
Purchase of marketable securities |
|
- |
|
|
|
(46,365,528 |
) |
Proceeds from sale of marketable securities |
|
12,150,774 |
|
|
|
5,010,238 |
|
NET CASH USED IN INVESTING ACTIVITIES |
|
4,299,211 |
|
|
|
(41,963,062 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Principal payments on capital leases and notes payable |
|
(106,554 |
) |
|
|
(204,448 |
) |
Proceeds from issuance of common stock and preferred stock, net |
|
- |
|
|
|
172,641,671 |
|
Proceeds from the exercise of warrants and stock options |
|
313,618 |
|
|
|
7,979,309 |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
207,064 |
|
|
|
180,416,532 |
|
NET INCREASE (DECREASE) IN CASH |
|
(36,063,309 |
) |
|
|
123,733,416 |
|
CASH AT BEGINNING OF PERIOD |
|
132,510,610 |
|
|
|
19,114,444 |
|
CASH AT END OF PERIOD |
$ |
96,447,301 |
|
|
$ |
142,847,860 |
|
Supplementary disclosures: |
|
|
|
|
|
|
|
Interest paid |
$ |
7,655 |
|
|
$ |
17,105 |
|
Common stock issued to Novartis for asset acquisition |
$ |
25,000,000 |
|
|
$ |
- |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Arrowhead Research Corporation
Notes to Consolidated Financial Statements
(unaudited)
Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Research Corporation, a Delaware corporation, (2) the terms the “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term “Subsidiaries” refers collectively to Arrowhead Madison Inc. (“Madison”), Arrowhead Australia Pty Ltd (“Arrowhead Australia”) and Ablaris Therapeutics, Inc. (“Ablaris”), (4) the term “Common Stock” refers to Arrowhead’s Common Stock, (5) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock and the term “Stockholder(s)” refers to the holders of Arrowhead Common Stock.
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Arrowhead Research Corporation develops novel drugs to treat intractable diseases by silencing the genes that cause them. Using the broadest portfolio of RNA chemistries and efficient modes of delivery, Arrowhead therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes. Arrowhead’s most advanced drug candidate in clinical development is ARC-520, which is designed to treat chronic hepatitis B infection by inhibiting the production of all HBV gene products. The goal is to reverse the immune suppression that prevents the body from controlling the virus and clearing the disease. Arrowhead’s second clinical candidate is ARC-AAT, a treatment for a rare liver disease associated with a genetic disorder that causes alpha-1 antitrypsin deficiency.
Liquidity
Historically, the Company’s primary source of financing has been through the sale of securities of Arrowhead. Research and development activities have required significant capital investment since the Company’s inception. We expect our operations to continue to require cash investment as the Company pursues its research and development goals, as well as clinical trials and related drug manufacturing. Based upon the Company’s current cash resources and operating plan, the Company expects to have sufficient liquidity to fund operations for at least the next twelve months.
At March 31, 2015, the Company had $96.4 million in cash to fund operations. In addition to its cash resources, the Company has invested excess cash in investment grade commercial bonds maturing in less than 24 months. These bonds provide a source of liquidity, though the Company plans to hold them until maturity. At March 31, 2015, the Company had invested $31.9 million in bonds. During the six months ended March 31, 2015, the Company’s cash position decreased by $36.1 million which was primarily the result of cash outflows related to operating activities of $40.6 million, cash paid for the acquisition of certain RNAi assets from Novartis Institutes for Biomedical Research Inc. of $7.0 million (see footnote 2) and capital expenditures of $0.9 million, partially offset by maturities of fixed income investments totaling $12.2 million and proceeds from the exercise of warrants and options of $0.3 million.
Summary of Significant Accounting Policies
Principles of Consolidation—The consolidated financial statements include the accounts of Arrowhead and its Subsidiaries. Arrowhead’s primary operating subsidiary is Arrowhead Madison, which is located in Madison, Wisconsin, where the Company’s research and development facility is located. All significant intercompany accounts and transactions are eliminated in consolidation.
Basis of Presentation and Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Actual results could materially differ from those estimates. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.
Cash and Cash Equivalents—The Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company had no restricted cash at March 31, 2015 and September 30, 2014.
Concentration of Credit Risk—The Company maintains several bank accounts for its operations at two financial institutions. These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held.
5
Investments—The Company may invest excess cash balances in short-term and long-term marketable debt securities. Investments may consist of certificates of deposits, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper. The Company accounts for its investment in marketable securities in accordance with FASB ASC 320, Investments – Debt and Equity Securities. This statement requires certain securities to be classified into three categories:
Held-to-maturity—Debt securities that the entity has the positive intent and ability to hold to maturity are reported at amortized cost.
Trading Securities—Debt and equity securities that are bought and held primarily for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in earnings.
Available-for-Sale—Debt and equity securities not classified as either securities held-to-maturity or trading securities are reported at fair value with unrealized gains or losses excluded from earnings and reported as a separate component of shareholders’ equity.
The Company classifies its investments in marketable debt securities based on the facts and circumstances present at the time of purchase of the securities. At March 31, 2015, the Company classified all of its investments as held-to-maturity.
Held-to-maturity investments are measured and recorded at amortized cost on the Company’s Consolidated Balance Sheet. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security. No gains or losses on investment securities are realized until they are sold or a decline in fair value is determined to be other-than-temporary.
Property and Equipment—Property and equipment are recorded at cost, which may equal fair market value in the case of property and equipment acquired in conjunction with a business acquisition. Depreciation of property and equipment is recorded using the straight-line method over the respective useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the lesser of the expected useful life or the remaining lease term. Long-lived assets, including property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.
Intangible Assets Subject to Amortization—At March 31, 2015, intangible assets subject to amortization include certain patents and license agreements. Intangible assets subject to amortization are reviewed for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.
In-Process Research & Development (IPR&D)—IPR&D assets represent capitalized on-going research projects that were acquired through business combinations. Such assets are initially measured at their acquisition date fair values. The amounts capitalized are being accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of R&D efforts associated with the project. Upon successful completion of a project, Arrowhead will make a determination as to the then remaining useful life of the intangible asset and begin amortization. Arrowhead tests its indefinite-lived assets for impairment at least annually, through a two-step process. The first step is a qualitative assessment to determine if it is more likely than not that the indefinite lived assets are impaired. Arrowhead considers relevant events and circumstances that could affect the inputs used to determine the fair value of the intangible assets. If the qualitative assessment indicates that it is more likely than not that the intangible assets are impaired, a second step is performed which is a quantitative test to determine the fair value of the intangible asset. If the carrying amount of the intangible assets exceeds its fair value, an impairment loss is recorded in the amount of that excess. If circumstances determine that it is appropriate, the Company may also elect to bypass step one, and proceed directly to the second step.
Contingent Consideration - The consideration for the Company’s acquisitions often includes future payments that are contingent upon the occurrence of a particular event. For example, milestone payments might be based on the achievement of various regulatory approvals or future sales milestones, and royalty payments might be based on drug product sales levels. The Company records a contingent consideration obligation for such contingent payments at fair value on the acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models designed to estimate the probability of such contingent payments based on various assumptions and incorporating estimated success rates. Estimated payments are discounted using present value techniques to arrive at estimated fair value at the balance sheet date. Changes in the fair value of our contingent consideration obligations are recognized within the Company’s Consolidated Statements of Operations. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates, changes in the amount or timing of expected expenditures associated with product development, changes in the amount or timing of cash flows from products upon commercialization, changes in the assumed achievement or timing of any development milestones, changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. These fair value measurements are based on significant inputs not observable in the market. Substantial judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period.
6
Revenue Recognition—Revenue from license fees are recorded when persuasive evidence of an arrangement exists, title has passed or services have been rendered, a price is fixed and determinable, and collection is reasonably assured. The Company may generate revenue from product sales, technology licenses, collaborative research and development arrangements, and research grants. Revenue under technology licenses and collaborative agreements typically consists of nonrefundable and/or guaranteed technology license fees, collaborative research funding and various milestone and future product royalty or profit-sharing payments.
Payments under collaborative research and development agreements are recognized as revenue ratably over the relevant periods specified in the agreement, generally the period during which research and development is conducted. Revenue from up-front license fees, milestones and product royalties are recognized as earned based on the completion of the milestones and product sales, as defined in the respective agreements. Payments received in advance of recognition as revenue are recorded as deferred revenue.
Allowance for Doubtful Accounts—The Company accrues an allowance for doubtful accounts based on estimates of uncollectible revenues by analyzing historical collections, accounts receivable aging and other factors. Accounts receivable are written off when all collection attempts have failed.
Research and Development—Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB ASC 730-10. Included in research and development costs are operating costs, facilities, supplies, external services, clinical trial and manufacturing costs, overhead directly related to the Company’s research and development operations, and costs to acquire technology licenses.
Earnings (Loss) per Share—Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options and restricted stock units issued to employees and warrants to purchase Common Stock of the Company. All outstanding stock options, restricted stock units and warrants for the three and six months ended March 31, 2015 and 2014 have been excluded from the calculation of Diluted earnings (loss) per share due to their anti-dilutive effect.
Stock-Based Compensation—The Company accounts for share-based compensation arrangements in accordance with FASB ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards to be based on estimated fair values. The Company uses the Black-Scholes option valuation model to estimate the fair value of its stock options at the date of grant. The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of stock options. The Company uses historical data and other information to estimate the expected price volatility and the expected forfeiture rate. For performance-based stock awards, the value of the awards is measured at the grant date. Expense is recognized over the vesting period, commencing at the time the Company determines the achievement of such performance conditions is probable. This determination requires significant judgment by management.
Derivative Assets and Liabilities – The Company accounts for warrants and other derivative financial instruments as either equity or assets/liabilities based upon the characteristics and provisions of each instrument. Warrants classified as equity are recorded as additional paid-in capital on the Company’s Consolidated Balance Sheet. Some of the Company’s warrants were determined to be ineligible for equity classification because of provisions that may result in an adjustment to their exercise price. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as assets or liabilities are recorded on the Company’s Consolidated Balance Sheet at their fair value on the date of issuance and are revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. The Company estimates the fair value of these assets/liabilities using option pricing models that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for expected volatility, expected life and risk-free interest rate.
Income Taxes—The Company accounts for income taxes under the liability method, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change in deferred income tax assets and liabilities during the period.
7
NOTE 2. ACQUISITIONS
On March 3, 2015, the Company entered into an Asset Purchase and Exclusive License Agreement (the “RNAi Purchase Agreement”) with Novartis Institutes for BioMedical Research, Inc., a Delaware corporation (“Novartis”), pursuant to which the Company acquired Novartis’ RNAi assets and rights thereunder. Pursuant to the RNAi Purchase Agreement, the Company acquired or licensed certain patents and patent applications owned or controlled by Novartis related to RNAi therapeutics, assignment of a third-party license, rights to three pre-clinical RNAi candidates, and other related assets (collectively, the “Purchased Assets”). The acquisition of the Purchased Assets closed on March 3, 2015, concurrent with execution of the RNAi Purchase Agreement (the “Closing”).
In consideration for the Purchased Assets, the Company made certain payments to Novartis, including: (a) an initial payment of $10,000,000 in cash of which $7,000,000 was paid during the Company’s first fiscal quarter of 2015 to secure an exclusivity period whereby the Company was able to exclusively examine the Novartis RNAi assets prior to finalizing the purchase, and the remaining $3,000,000 was paid in April, and 3,321,383 shares of the Company’s common stock (the “Shares”) were issued during the Company’s second fiscal quarter; (b) escalating royalties in the single digits based upon annual net sales thresholds for certain RNAi products sold by the Company; and (c) milestone payments tied to the achievement of certain development and sales milestones for each target being developed by the Company.
Pursuant to the RNAi Purchase Agreement, prior to initiation of a phase 2 Clinical Trial for a given RNAi Product or Arrowhead RNAi Product directed to an Initial Target, Novartis has an exclusive right to negotiate a license under any Intellectual Property Rights owned or exclusively licensed to the Company to make, sell or otherwise commercially exploit such RNAi Product or Arrowhead RNAi Product (as such italicized terms are defined in the RNAi Purchase Agreement). After initiation of a phase 2 Clinical Trial for a given Arrowhead RNAi Product (“ROFN Candidiate”), Novartis shall have a right of first negotiation on the ROFN Candidate developed by the Company and its affiliates relating to the purchased assets. If the Company proposes to out-license, or enters into substantive negotiations to out-license, any ROFN Candidate, the Company must give notice of the ROFN Candidate it proposes to out-license and negotiate exclusively and in good faith with Novartis for a period of time regarding the applicable out-license.
In addition to the consideration paid by the Company at the closing of the Transaction, the Company is obligated to make certain royalty and milestone payments to Novartis upon the occurrence of certain events. For sales of any RNAi Products for which Novartis and the Company do not enter into a licensing arrangement, the Company will be obligated to pay royalty rates ranging in the low to mid-single digits on Net Sales depending upon the type of RNAi Product provided that the royalty rate may be reduced or offset in certain circumstances. The obligation to pay royalties on such candidates will last until the later of (i) the expiration of the last to Valid Claim Covering such RNAi Product in such country and (ii) 11 years after the first commercial sale of such RNAi Product (as such italicized terms are defined in the RNAi Purchase Agreement).
The Company will also be obligated to make cash payments to Novartis upon the achievement of various milestones for any RNAi Products for which Novartis and the Company do not enter into a licensing arrangement. These milestones include the initiation of a phase 2 and 3 clinical trials, US and other regulatory approvals, and annual sales milestones. These milestone payments could amount to the mid to upper double digit millions of dollars.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
Intangible assets - patents |
|
$ |
21,728,334 |
|
Intangible assets – license |
|
|
3,128,880 |
|
Acquired in-process research and development - Pre-Clinical Candidates |
|
|
10,142,786 |
|
Total purchase consideration |
|
$ |
35,000,000 |
|
The purchase consideration was composed of the following:
|
|
|
|
|
Cash Paid Prior to March 31, 2015 |
|
$ |
7,000,000 |
|
Cash Paid After March 31, 2015 |
|
|
3,000,000 |
|
Value of Shares Issued to Novartis during the three months ended March 31, 2015 |
|
|
25,000,000 |
|
Total purchase consideration |
|
$ |
35,000,000 |
|
8
The Company accounted for this transaction as an acquisition of RNAi assets, including patents, a third-party license and in process research and development for the pre-clinical candidates. The allocation of the purchase price to each asset was determined by estimating the relative fair value of each asset acquired and applying that to the total cost of the acquisition for the Company. The Company capitalized the patents and license acquired as Intangible Assets as they require no future development and will have alternative future uses as the Company expands its RNAi capabilities (see footnote 5 for additional discussion of the useful lives and amortization of these Intangible Assets). The Company expensed the portion of the purchase consideration allocated to the pre-clinical candidates as they will require future development in order to be commercialized. This expense is recorded in the “Acquired in-process research and development” line item of the Consolidated Statements of Operations.
NOTE 3. PROPERTY AND EQUIPMENT
The following table summarizes our major classes of property and equipment:
|
|
|
|||||
|
March 31, 2015 |
|
|
September 30, 2014 |
|
||
Computers, office equipment and furniture |
$ |
372,401 |
|
|
$ |
334,162 |
|
Research equipment |
|
5,284,178 |
|
|
|
4,614,176 |
|
Software |
|
94,848 |
|
|
|
69,623 |
|
Leasehold improvements |
|
3,117,537 |
|
|
|
3,045,022 |
|
Total gross fixed assets |
|
8,868,964 |
|
|
|
8,062,983 |
|
Less: Accumulated depreciation and amortization |
|
(4,741,598 |
) |
|
|
(4,190,230 |
) |
Property and equipment, net |
$ |
4,127,366 |
|
|
$ |
3,872,753 |
|
NOTE 4. INVESTMENTS
The Company invests a portion of its excess cash balances in short-term and long-term debt securities. Investments at March 31, 2015 consisted of corporate bonds with maturities remaining of less than two years. The Company may also invest excess cash balances in certificates of deposit, money market accounts, US Treasuries, US government agency obligations, corporate debt securities, and/or commercial paper. The Company accounts for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities. At March 31, 2015, all investments were classified as held-to-maturity securities.
The following tables summarize the Company’s short- and long-term investments as of March 31, 2015, and September 30, 2014.
|
As of March 31, 2015 |
|
|||||||||||||
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
Commercial notes (due within one year) |
$ |
19,561,172 |
|
|
$ |
784 |
|
|
$ |
(285,310 |
) |
|
$ |
19,276,646 |
|
Commercial notes (due after one year through two years) |
$ |
12,361,068 |
|
|
|
— |
|
|
$ |
(127,628 |
) |
|
$ |
12,233,440 |
|
Total |
$ |
31,922,240 |
|
|
$ |
784 |
|
|
$ |
(412,938 |
) |
|
$ |
31,510,086 |
|
|
As of September 30, 2014 |
|
|||||||||||||
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
Commercial notes (due within one year) |
$ |
21,653,032 |
|
|
$ |
— |
|
|
$ |
(189,830 |
) |
|
$ |
21,463,202 |
|
Commercial notes (due after one year through two years) |
$ |
23,088,346 |
|
|
|
— |
|
|
$ |
(217,693 |
) |
|
$ |
22,870,653 |
|
Total |
$ |
44,741,378 |
|
|
$ |
— |
|
|
$ |
(407,523 |
) |
|
$ |
44,333,855 |
|
NOTE 5. INTANGIBLE ASSETS
Intangible assets consist of in-process research and development (“IPR&D”) not subject to amortization, and patents and license agreements subject to amortization, which were capitalized as a part of an asset acquisition or business combination.
9
IPR&D represents projects that have not yet received regulatory approval and are required to be classified as indefinite assets until the successful completion or the abandonment of the associated R&D efforts. Accordingly, during the development period after the date of acquisition, these assets will not be amortized until approval is obtained in one or more jurisdictions which, individually or combined, are expected to generate a significant portion of the total revenue expected to be earned by an IPR&D project. At that time, the Company will determine the useful life of the asset, reclassify the asset out of IPR&D and begin amortization. If the associated R&D effort is abandoned the related IPR&D assets will likely be written off and the Company would record an impairment loss. Intangible assets not subject to amortization include IPR&D capitalized as part of a business combination from the acquisition of Roche Madison.
Intangible assets subject to amortization include patents and a license agreement capitalized as part of the Novartis RNAi asset acquisition and a business combination from the acquisition of Roche Madison. The license agreement associated with the Novartis RNAi asset acquisition is being amortized over the estimated life remaining at the time of acquisition which was 21 years, and the accumulated amortization of the asset is approximately $12,367. The license agreements associated with the acquisition of Roche Madison are being amortized over the estimated life remaining at the time of acquisition, which was 4 years, and the accumulated amortization of the assets is approximately $188,790. The patents associated with the Novartis RNAi asset acquisition are being amortized over the estimated life remaining at the time of acquisition which was 14 years, and the accumulated amortization of the assets is approximately $129,335. Amortization expense for the three and six months ended March 31, 2015 was $155,366 and $169,030, respectively. Amortization expense for the three and six months ended March 31, 2014 was $13,663 and $27,327, respectively. Amortization expense is expected to be approximately $877,541 for the remainder of fiscal year 2015, $1,714,313 in 2016, $1,700,429 in 2017, $1,700,429 in 2018, $1,700,429 in 2019, $1,700,429 in 2020, and $15,363,152 thereafter.
The following table provides details on the Company’s intangible asset balances:
|
Intangible assets |
|
|
Intangible assets |
|
|
Total |
|
|||
Balance at September 30, 2013 |
$ |
3,117,322 |
|
|
$ |
123,191 |
|
|
$ |
3,240,513 |
|
Impairment |
|
(2,172,387 |
) |
|
|
- |
|
|
|
(2,172,387 |
) |
Amortization |
|
- |
|
|
|
(54,653 |
) |
|
|
(54,653 |
) |
Balance at September 30, 2014 |
$ |
944,935 |
|
|
$ |
68,538 |
|
|
$ |
1,013,473 |
|
Acquisition of Novartis RNAi Assets |
|
- |
|
|
|
24,857,214 |
|
|
|
24,857,214 |
|
Amortization |
|
- |
|
|
|
(169,030 |
) |
|
|
(169,030 |
) |
Balance at March 31, 2015 |
$ |
944,935 |
|
|
$ |
24,756,722 |
|
|
$ |
25,701,657 |
|
NOTE 6. STOCKHOLDERS’ EQUITY
At March 31, 2015, the Company had a total of 150,000,000 shares of capital stock authorized for issuance, consisting of 145,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share.
At March 31, 2015, 59,435,862 shares of Common Stock were outstanding. Additionally, 15,652 shares of Series C Preferred Stock were outstanding, which are convertible into 2,670,990 shares of Common Stock. At March 31, 2015, 8,192,654 shares of Common Stock were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under Arrowhead’s 2004 Equity Incentive Plan and 2013 Incentive Plan, as well as for inducement grants made to new employees.
The Preferred Stock is convertible to Common Stock by its holder at its stated conversion price, though it is not convertible to the extent the holder would beneficially own more than 9.99% of the number of shares of outstanding Common Stock immediately after the conversion. The holders of Preferred Stock are eligible to vote with the Common Stock of the Company on an as-converted basis, but only to the extent they are eligible for conversion without exceeding the 9.99% ownership limitation. The Preferred Stock does not carry a coupon, but it is entitled to receive dividends on a pari passu basis with Common Stock, when and if declared. In any liquidation or dissolution of the Company, the holders of Preferred Stock are entitled to participate in the distribution of the assets, to the extent legally available for distribution, on a pari passu basis with the Common Stock.
On October 11, 2013, the Company sold 3,071,672 shares of Common Stock, at a price of $5.86 per share, and 46,000 shares of Series C Preferred Stock, at a price of $1,000 per share. The Preferred Shares are convertible into shares of common stock at a conversion price of $5.86. The aggregate purchase price paid by the purchasers for the Common Stock and Series C Preferred Stock was $64,000,000 and the Company received net proceeds of approximately $60,000,000, after advisory fees and offering expenses.
On February 24, 2014, the Company sold 6,325,000 shares of Common Stock, at a public offering price of $18.95 per share. Net proceeds were approximately $112.6 million after underwriting commissions and discounts and other offering expenses.
10
The following table summarizes information about warrants outstanding at March 31, 2015:
Exercise prices |
|
Number of |
|
|
Remaining |
|
||||
$ |
70.60 |
|
|
94,897 |
|
|
|
2.1 |
|
|
$ |
5.00 |
|
|
390,625 |
|
|
|
0.5 |
|
|
$ |
5.09 |
|
|
239,534 |
|
|
|
0.2 |
|
|
$ |
1.38 |
|
|
24,324 |
|
|
|
0.7 |
|
|
$ |
4.16 |
|
|
1,000 |
|
|
|
1.7 |
|
|
$ |
3.25 |
|
|
334,347 |
|
|
|
1.4 |
|
|
$ |
2.12 |
|
|
75,000 |
|
|
|
2.7 |
|
|
$ |
1.83 |
|
|
277,284 |
|
|
|
2.7 |
|
|
Total warrants outstanding |
|
|
1,437,011 |
|
|
|
|
|
NOTE 7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space for its corporate headquarters in Pasadena, California. In March 2014, the Company signed a lease addendum to expand its corporate headquarters, and the new space became available in September 2014. The leases for the expansion space and the current space will expire in September 2019. Rental costs, including the expansion space, are approximately $23,000 per month, increasing approximately 3% annually.
The Company’s research facility in Madison, Wisconsin is leased through February 28, 2019. Monthly rental expense is approximately $26,000. Other monthly rental expenses include common area maintenance and real estate taxes totaling approximately $18,000 per month. Utilities costs are approximately $16,000 per month. Total monthly costs are approximately $79,000 per month, including monthly payments recorded under a capital lease of approximately $19,000.
Facility rent expense for the three and six months ended March 31, 2015 was $191,000 and $362,000, respectively. Facility rent expense for the three and six months ended March 31, 2014 was $134,000 and $264,000, respectively.
As of March 31, 2015, future minimum lease payments due in fiscal years under capitalized leases are as follows:
2015 (remainder of) |
$ |
114,210 |
|
2016 |
|
228,420 |
|
2017 |
|
228,420 |
|
2018 |
|
228,420 |
|
2019 |
|
95,178 |
|
2020 and thereafter |
|
- |
|
Less interest |
|
(28,872 |
) |
Principal |
|
865,776 |
|
Less current portion |
|
(215,762 |
) |
Noncurrent portion |
$ |
650,014 |
|
As of March 31, 2015, future minimum lease payments due in fiscal years under operating leases are as follows:
2015 (remainder of) |
$ |
292,119 |
|
2016 |
|
596,877 |
|
2017 |
|
613,664 |
|
2018 |
|
637,897 |
|
2019 |
|
459,633 |
|
2020 and thereafter |
|
- |
|
Total |
$ |
2,600,190 |
|
11
Litigation
The Company, its Chief Executive Officer and its Chief Operating Officer have been named as defendants in two securities class actions filed in the United States District Court for the Central District of California regarding certain public statements in connection with the Company’s hepatitis B drug research. Both actions assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seek damages in an unspecified amount. Two actions with similar claims under California State law are currently pending in Los Angeles Superior Court. Additionally, three putative stockholder derivative actions have been filed in the United States District Court for the Central District of California, alleging breach of fiduciary duty by the Company’s Board of Directors in connection with the facts underlying the Securities Claims. Each of these seven suits seeks damages in unspecified amounts and some seek various forms of injunctive relief.
The Company and two of its former executives have been named as defendants in a complaint filed by William Marsh Rice University (“Rice University”) currently pending in the United States District Court for the Southern District of Texas relating to alleged breaches of a license agreement between Rice University and the Company’s former subsidiary, Unidym, Inc. The plaintiff has alleged that the Company and its former executives acted fraudulently with respect to Unidym’s license from Rice University and seeks injunctive relief, damages, including unspecified compensatory and punitive damages, and attorneys’ fees.
The Company believes it has meritorious defenses and intends to vigorously defend itself in each of the above matters. The Company makes provisions for liabilities when it is both probable that a liability has been incurred and the amount can be reasonably estimated. No such liability has been recorded related to these matters. The Company does not expect these matters to have any material effect on its Consolidated Financial Statements. With regard to legal fees, such as attorney fees related to these matters or any other legal matters, the Company’s accounting policy is to recognize such cost as incurred.
Purchase Commitments
In the normal course of business, we enter into various purchase commitments for the manufacture of drug components, toxicology studies, and for clinical studies. As of March 31, 2015, these future commitments were approximately $49.7 million, of which approximately $29.5 million is expected to be incurred in the remainder of fiscal 2015, and $20.2 million is expected to be incurred beyond fiscal 2015.
Technology License Commitments
The Company has licensed from third parties the rights to use certain technologies that it uses in its research and development activities, as well as in any products the Company may develop using these licensed technologies. These agreements and other similar agreements often require milestone and royalty payments. Milestone payments, for example, may be required as the research and development process progresses through various stages of development, such as when clinical candidates enter or progress through clinical trials, upon NDA and upon certain sales level milestones. These milestone payments could amount to the mid to upper double digit millions of dollars. In certain agreements, the Company may be required to make mid to high single digit percentage royalty payments based on a percentage of the sales of the relevant products.
NOTE 8. STOCK-BASED COMPENSATION
Arrowhead has two plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and 2013 Incentive Plan, as of March 31, 2015, 2,546,018 and 5,094,314 shares, respectively, of Arrowhead’s 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. No further grants may be made under the 2004 Equity Incentive Plan. As of March 31, 2015, there were options granted and outstanding to purchase 2,546,018 and 2,306,000 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were 1,080,000 restricted stock units granted and outstanding under the 2013 Incentive Plan. Also, as of March 31, 2015, there were 547,322 shares reserved for options and 70,000 restricted stock units issued as inducement grants to new employees outside of equity compensation plans. During the three months ended March 31, 2015, no options were granted under the 2004 Equity Incentive Plan, 625,000 options and 675,000 restricted stock units were granted under the 2013 Incentive Plan, and no options and restricted stock units were granted as inducement awards to new employees outside of equity incentive plans. During the six months ended March 31, 2015, no options were granted under the 2004 Equity Incentive Plan, 1,489,000 options and 675,000 restricted stock units were granted under the 2013 Incentive Plan, and 120,000 options and 30,000 restricted stock units were granted as inducement awards to new employees outside of equity incentive plans. Additionally, the Company’s 2000 Stock Option Plan and the 38,000 stock options that were outstanding under the 2000 Stock Option Plan expired during the six months ended March 31, 2015.
12
The following tables summarize information about stock options:
|
Number of |
|
|
Weighted- |
|
|
Weighted- |
|
|
Aggregate |
|
||||
Balance At September 30, 2013 |
|
3,419,285 |
|
|
$ |
4.68 |
|
|
|
|
|
|
|
|
|
Granted |
|
1,039,000 |
|
|
|
14.05 |
|
|
|