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ARROWHEAD PHARMACEUTICALS, INC. - Quarter Report: 2006 June (Form 10-Q)

Form 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 June 30, 2006.

 

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

Commission file number 000-21898

 


ARROWHEAD RESEARCH CORPORATION

(Name of small business issuer in its charter)

 


 

Delaware   46-0408024
(State of incorporation)   (I.R.S. Employer Identification No.)

201 South Lake Avenue, Suite 703

Pasadena, California 91101

(626) 304-3400

(Address and telephone number of principal executive offices)

 


Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨                    Accelerated filer  x                    Non-accelerated filer  ¨

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 33,860,690 as of August 9, 2006.

Transitional Small Business Disclosure Format (Check one): Yes ¨    No x

 



Table of Contents
     Page(s)

PART I—FINANCIAL INFORMATION

  

ITEM 1. FINANCIAL STATEMENTS

  

Condensed Consolidated Balance Sheets as of June 30, 2006 (unaudited) and September 30, 2005

   1

Condensed Consolidated Statements of Operations for the three months and nine months ended June 30, 2006 and 2005 and from inception through June 30, 2006 (unaudited)

   2

Condensed Consolidated Statement of Stockholders’ Equity for the period from inception to June 30, 2006 (unaudited)

   3

Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2006 and 2005 and from inception through June 30, 2006 (unaudited)

   4

Notes to Condensed Consolidated Financial Statements (unaudited)

   5

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

   14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   18

ITEM 4. CONTROLS AND PROCEDURES

   18

PART II—OTHER INFORMATION

  

ITEM 1. LEGAL PROCEEDINGS

   19

ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS

   19

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   19

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   19

ITEM 5. OTHER INFORMATION

   19

ITEM 6. EXHIBITS

   20

SIGNATURES

   21


Table of Contents

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Balance Sheets

As of June 30, 2006 and September 30, 2005

 

     (Unaudited)        
    

June 30,

2006

    September 30,
2005
 
ASSETS     

CURRENT ASSETS

    

Cash and cash equivalents

   $ 16,688,051     $ 22,467,016  

Marketable securities at fair market value - US Treasury Bills

     13,945,260       76,880  

Grant receivable, net of allowance for doubtful account of $0

     34,377       25,748  

Other receiviables

     2,200       7,700  

Prepaid sponsored research, Note 6.

     138,135       10,000  

Other prepaid research

     223,288       81,666  

Other prepaid expenses

     310,711       144,985  
                

TOTAL CURRENT ASSETS

     31,342,022       22,813,995  

PROPERTY AND EQUIPMENT

    

Computers, office equipment and furniture

     502,912       392,164  

Research equipment

     1,125,794       860,759  

Software

     52,023       52,023  

Leasehold improvement

     369,699       324,690  
                
     2,050,428       1,629,636  

Less: Accumulated depreciation and amortization

     (972,260 )     (551,514 )
                

NET PROPERTY AND EQUIPMENT

     1,078,168       1,078,122  

INTANGIBLE AND OTHER ASSETS

    

Rent deposit

     164,425       110,379  

Patents, Note 1.

     3,490,730       3,276,075  

Goodwill

     4,507,427       1,762,150  
                

TOTAL OTHER ASSETS

     8,162,582       5,148,604  

TOTAL ASSETS

   $ 40,582,772     $ 29,040,721  
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES

    

Accounts payable, Note 1.

   $ 209,343     $ 471,943  

Accrued expenses

     1,184,752       264,541  

Payroll liabilities

     334,543       181,330  

Deferred revenue

     —         106,250  
                

TOTAL CURRENT LIABILITIES

     1,728,638       1,024,064  
                

Minority interests

     1,229,462       1,889,190  

Commitment and contingencies, Note 6.

    

STOCKHOLDERS’ EQUITY, Note 4.

    

Common stock

     33,829       27,997  

Preferred stock

     —         —    

Deferred compensation

     (4,971,396 )     (1,976,353 )

Additional paid-in capital

     62,259,035       37,554,933  

Accumulated deficit during the development stage

     (19,696,796 )     (9,479,110 )
                

TOTAL STOCKHOLDERS’ EQUITY

     37,624,672       26,127,467  

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 40,582,772     $ 29,040,721  
                

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

 

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Table of Contents

Arrowhead Research Corporation and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Operations

(unaudited)

 

     Three Months
Ended
June 30, 2006
    Three Months
Ended
June 30, 2005
    Nine Months
Ended June 30,
2006
    Nine Months
Ended
June 30, 2005
    Period from
May 7, 2003
(Date of inception)
to June 30, 2006
 

REVENUE

   $ 246,229     $ 173,304     $ 556,229     $ 380,408     $ 1,343,218  

OPERATING EXPENSES

          

Salaries

     2,036,639       700,891       4,866,443       1,787,531       8,295,294  

Consulting

     171,375       136,482       439,727       536,509       1,787,009  

General and administrative expenses

     1,439,881       796,191       3,791,033       1,764,822       7,422,581  

Research and development

     1,081,332       1,344,781       3,939,906       2,431,724       8,530,012  
                                        

TOTAL OPERATING EXPENSES

     4,729,227       2,978,345       13,037,109       6,520,586       26,034,896  
                                        

OPERATING LOSS

     (4,482,998 )     (2,805,041 )     (12,480,880 )     (6,140,178 )     (24,691,678 )

OTHER INCOME (EXPENSES)

          

Gain on sale of stock in subsidiary

     —         —           2,292,800       2,292,800  

Realized and unrealized gain (loss) in marketable securities

     124,549       (6,685 )     261,010       67,969       327,658  

Interest income

     223,443       4,586       581,270       20,641       763,663  

Other income

       —         —         3,221       3,308  

Minority interests

     221,298       496,430       1,602,234       1,010,813       3,354,955  

Patents - amortization

     (60,440 )     (393 )     (181,320 )     (2,551 )     (329,600 )
                                        

TOTAL OTHER INCOME (EXPENSES)

     508,850       493,938       2,263,194       3,392,893       6,412,784  
                                        

Loss from continuing operations

     (3,974,148 )     (2,311,103 )     (10,217,686 )     (2,747,285 )     (18,278,894 )

Loss from operation of discontinued Nanotechnica, Inc.

       (654,598 )       (1,234,233 )     (1,342,505 )

Loss on disposal of Nanotechnica, Inc. (July 2005 - September 2005)

             (73,797 )

Provision for income taxes

     —           —           (1,600 )
                                        

NET INCOME (LOSS)

   $ (3,974,148 )   $ (2,965,701 )   $ (10,217,686 )   $ (3,981,518 )   $ (19,696,796 )
                                        

Income (loss) from continuing operations per share, undiluted

     (0.12 )     (0.12 )     (0.33 )     (0.18 )  

Loss from discontinued operations

     —         (0.04 )     —         (0.08 )  

Net income (loss) per share, undiluted

     (0.12 )     (0.16 )     (0.33 )     (0.26 )  

Weighted average shares outstanding, undiluted

     33,810,131       18,760,122       31,265,796       15,605,038    

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

 

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Table of Contents

Arrowhead Research Corporation and Subsidiaries

( A Development Stage Company )

Consolidated Statement of Stockholders Equity

from inception to June 30, 2006

(unaudited)

Common Stock

 

     Shares    Amount    Additional
Paid-in-Capital
    Deferred
Compensation
    Accumulated Deficit
during the
Development Stage
    Totals  

Initial Issuance of Stock:

              

Common stock & warrants issued for cash @ $0.001 per unit

   3,000,000    $ 3,000    $ —       $ —       $ —       $ 3,000  

Common stock & warrants issued for cash @ $1.00 per unit

   1,680,000      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

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

Exercise of stock options @ $0.20 per share

   75,000      75      14,925       —         —         15,000  

Common stock & warrants issued for cash @ $1.00 per unit

   475,000      475      474,525       —         —         475,000  

Common stock & warrants issued for marketable securities @ $1.00 per unit

   500,000      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 @ $1.50 per unit

   6,608,788      6,609      9,906,573       —         —         9,913,182  

Common stock issued in reverse acquisition

   705,529      706      (151,175 )     —         —         (150,469 )

Common stock issued as a gift for $1.09 per share

   150,000      163      162,587       —         —         162,750  

Common stock and warrants issued as stock issuance cost @ $1.50 per unit

   356,229      356      533,988       —         —         534,344  

Stock issuance cost charged to additional paid-in capital

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

Exercise of stock option @ $0.20 per share

   75,000      75      14,925       —         —         15,000  

Exercise of stock options @ $1.00 per share

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

Issuance of stock options

   —        —        612,507       (612,507 )     —         —    

Amortization of deferred compensation expense

   —        —        —         175,653       —         175,653  

Net loss for the year ended September 30, 2004

   —        —        —         —         (2,530,023 )     (2,530,023 )
                                            

Balance at September 30, 2004

   13,631,546      13,645      12,496,851       (436,854 )     (2,625,261 )     9,448,381  
             —         —         —    

Exercise of warrants @ $1.50 per share

   13,812,888      13,813      20,705,522       —         —         20,719,335  

Exercise of stock options @ $1.00 per share

   25,000      25      24,975       —         —         25,000  

Purchase of Insert Therapeutics shares @ $0.28/share

   502,260      502      1,999,498       —         —         2,000,000  

Common stock issued for services

   12,500      12      49,988       —         —         50,000  

Issuance of stock options

   —        —        2,048,012       (2,048,012 )     —         —    

Amortization of deferred compensation expense

   —        —        —         508,513       —         508,513  

Change in percentage of ownership in subsidiary

   —        —        230,087       —         —         230,087  

Net loss for the year ended September 30, 2005

   —        —        —         —         (6,853,849 )     (6,853,849 )
                                            

Balance at September 30, 2005

   27,984,194      27,997      37,554,933       (1,976,353 )     (9,479,110 )     26,127,467  

Exercise of stock options @ $1.00 per share

   4,000      4      3,996       —         —         4,000  

Common stock issued @ $3.84 per share to Dr. M. Moskovits as payment for application of patents

   15,000      15      57,585       —         —         57,600  

Issuance of stock options

   —        —        1,510,173       (1,510,173 )     —         —    

Amortization of deferred compensation expense

   —        —        —         278,777       —         278,777  

Net loss for the three months ended December 31, 2005

   —        —        —         —         (3,136,953 )     (3,136,953 )
                                            

Balance at December 31, 2005

   28,003,194      28,016      39,126,687       (3,207,749 )     (12,616,063 )     23,330,891  

Common stock issued @ $3.50 per share

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

Purchase of Calando Pharmaceuticals, Inc. @ $5.17/share

   208,382      208      1,077,125       —         —         1,077,333  

Issuance of stock options

   —        —        218,987       (218,987 )     —         —    

Amortization of deferred compensation expense

   —        —        —         352,986       —         352,986  

Net loss for the three months ended March 31, 2006

   —        —        —         —         (3,106,585 )     (3,106,585 )
                                            

Balance at March 31, 2006

   33,801,576      33,814      59,962,209       (3,073,750 )     (15,722,648 )     41,199,625  

Exercise of stock options

   15,500      15      33,465           33,480  

Issuance of stock options

   —        —        2,164,222       (2,164,222 )     —         —    

Amortization of deferred compensation expense

             266,576         266,576  

Accelerated stock options

           99,139           99,139  

Net loss for the three months ended June 30, 2006

               (3,974,148 )     (3,974,148 )
                                            

Balance at June 30, 2006

   33,817,076      33,829      62,259,035       (4,971,396 )     (19,696,796 )     37,624,672  
                                            

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

 

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Table of Contents

Arrowhead Research Corporation and Subsidiaries

( A Development Stage Company )

Consolidated Statements of Cash Flows

For the six months ended June 30, 2006 and 2005 and from inception through June 30, 2006

 

    

Nine Months
Ended

June 30, 2006

    Nine Months
Ended
June 30, 2005
    Period from May 7,
2003 ( Date of
inception) to
June 30, 2006
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net Loss

   $ (10,217,686 )   $ (3,981,518 )   $ (19,696,796 )

Realized and unrealized (gain) loss on investment

     (261,010 )     (67,969 )     (327,658 )

Stock issued as gift to Caltech

     —         —         162,750  

Stock issued for professional services

     —         50,000       50,000  

Compensation expense related to stock option issuance

     997,539       233,034       1,681,644  

Depreciation and amortization

     634,869       405,907       1,353,705  

Gain on sale of stock in subsidiary

     —         (2,292,800 )     (2,292,800 )

Minority interests

     (1,602,234 )     (1,010,814 )     (3,373,996 )

Decrease/increase in:

         —    

Receivables

     (3,129 )     (39,364 )     (36,577 )

Prepaid research expense

     (269,757 )     181,855       (361,424 )

Other prepaid expenses

     (165,726 )     (167,061 )     (310,711 )

Restricted cash

       50,773       —    

Deposits

     (54,046 )     (77,061 )     (154,467 )

Accounts payable

     (262,600 )     (299,828 )     9,453  

Accrued expenses

     920,211       247,209       1,151,649  

Deferred revenue

     153,213       143,750       259,463  

Other liabilities

     (106,250 )     110,261       77,769  
         —    
                        

NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES

     (10,236,666 )     (6,513,626 )     (21,807,996 )

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchase of marketable securities - US Treasury Bills

     (18,575,915 )     —         (18,575,915 )

Purchase of property and equipment

     (420,792 )     (709,492 )     (1,761,133 )

Cash paid for interest in Nanotechnica

       —         (4,000,000 )

Cash paid for interest in Aonex

     (1,000,000 )     (1,000,000 )     (5,000,000 )

Cash paid for interest in Insert

       (1,000,000 )     (5,000,000 )

Cash paid for interest in Calando

     (2,890,668 )     (2,000,000 )     (4,890,668 )

Cash paid for interest in NanoPolaris

     (3,000,000 )     (1,000 )     (3,001,000 )

Cash obtained from interest in Nanotechnica

       —         4,000,000  

Cash obtained from interest in Aonex

     1,000,000       1,000,000       5,001,250  

Cash obtained from interest in Insert

       1,000,000       5,379,594  

Cash obtained from interest in Calando

     2,000,000       2,000,000       4,000,000  

Cash obtained from interest in NanoPolaris

     3,000,000       1,000       3,001,000  

Proceeds from sale of marketable securities - US Treasury Bills

     4,888,399       —         4,888,399  

Proceeds from sale of stock in subsidiary

     —         2,640,000       2,424,924  

Proceeds from sale of investments

     80,146       489,768       569,914  

Proceeds from sale of investments Payment for patents

     (205,948 )     (48,373 )     (304,321 )

Restricted cash

       —         50,773  
                        

NET CASH USED IN INVESTING ACTIVITIES

     (15,124,778 )     2,371,903       (13,217,183 )

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from issuance of common stock and warrants, net

     19,582,479       20,706,764       51,713,230  
                        

NET CASH PROVIDED BY FINANCING ACTIVITIES

     19,582,479       20,706,764       51,713,230  
                        

NET INCREASE (DECREASE) IN CASH

     (5,778,965 )     16,565,041       16,688,051  

CASH AT BEGINNING OF PERIOD

     22,467,016       8,552,667       —    
                        

CASH AT END OF PERIOD

   $ 16,688,051     $ 25,117,708     $ 16,688,051  
                        

Supplementary disclosures:

      

Interest paid

   $ —       $ —       $ —    

Income tax paid

   $ —       $ 2,400     $ 11,100  

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 502,260 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 $850,668 and 208,382 newly issued shares of Arrowhead Common Stock valued at $1,077,333. The 208,382 shares of Arrowhead common stock were valued based on the average closing price of Arrowhead’s Common Stock on NASDAQ during the last ten days prior to the date of the closing.

On June 13, 2005, NanoPolaris, Inc. purchased the net assets and name of Unidym, Inc. for $25,000 in cash, the assumption of certain liabilities not to exceed $75,000 and 735,000 of newly issued shares of NanoPolaris Common Stock with a preliminary value, estimated by management, of $154,350.

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

 

4


Table of Contents

Arrowhead Research Corporation

Notes to Consolidated Financial Statements

June 30, 2006

Unless otherwise noted, (1) the term “Arrowhead Research” refers to Arrowhead Research Corporation, a Delaware corporation formerly known as InterActive Group, Inc., (2) the terms “Arrowhead,” the “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its subsidiaries, whether conducted through Arrowhead Research or a subsidiary of the company, (3) the term “ARC” refers to Arrowhead Research Corporation, a privately-held California corporation, the shareholders of which Arrowhead Research consummated a stock exchange transaction in January 2004 (the “Share Exchange”), (4) the term “Common Stock” refers to Arrowhead Research’s common stock, (5) the term “Warrant” refers to warrants to purchase Company Common Stock, and the term “stockholder(s)” refers to the holders of Common Stock, Warrants, and any other security convertible into Common Stock.

NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Arrowhead is a development stage nanotechnology company commercializing products and technologies through majority-owned subsidiaries and partnerships with universities and government labs. Currently, operations conducted by Arrowhead and its subsidiaries consist primarily of technological research and development.

Nanotechnology generally refers to the investigation, design, and manipulation of matter at the atomic, molecular, or macromolecular levels. Due to their size and unique properties, nanoscale materials, devices, and systems are being used in a variety of commercial applications and are expected to have broad impact across many industries.

Arrowhead has three strategic components to its business model:

 

    Outsourced R&D Program: Arrowhead identifies patented or patent-pending technologies at universities or government labs and funds additional development of those technologies in exchange for the exclusive right to license and commercialize the resulting prototypes. Leveraging the resources and infrastructure of these institutions provides Arrowhead with a cost-effective development pipeline. At June 30, 2006, Arrowhead is supporting efforts in drug discovery tools, stem cell technology and, nanoelectronics, at the California Institute of Technology, Stanford University and, Duke University. On August 3, 2006, Arrowhead announced a collaboration with the University of Florida to further develop flexible thin film electronic devices.

 

    Commercialization Program: After prototypes have been sufficiently developed in the laboratories, Arrowhead forms or acquires majority-owned subsidiaries to commercialize the technology and provides the subsidiaries with strategic, managerial and operational support. By doing so, each research team is able to maintain focus on its specific technology and each management team can focus on specific markets, increasing the likelihood of successful technological development and commercialization. At June 30, 2006, Arrowhead owns majority interest in subsidiaries commercializing diverse technologies, including anti-cancer drugs, RNAi therapeutics, compound semiconductor materials and nanotube technology.

 

    The Patent Toolbox: Arrowhead has acquired or exclusively licensed patents and patent applications covering a broad range of nanotechnology. The Company actively adds to and manages its intellectual property portfolio.

Arrowhead is incorporated in Delaware and its principal executive offices are located in Pasadena, California.

The Company has had no revenue from product sales since its inception. The Company has generated some revenue from collaboration agreements, licensing and grants.

Summary of Significant Accounting Policies

Basis of Presentation—This report on Form 10-Q for the quarter ended June 30, 2006 should be read in conjunction with the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2005 filed with the SEC on December 22, 2005. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended June 30, 2006 are not necessarily indicative of the results that might be expected for the year ending September 30, 2006.

 

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Principles of Consolidation—The consolidated financial statements of the Company include the accounts of Arrowhead and its subsidiaries, Aonex Technologies, Inc. (“Aonex”), Calando Pharmaceuticals, Inc. (“Calando”), Insert Therapeutics, Inc. (“Insert”) and NanoPolaris, Inc. (“NanoPolaris”), which name has been changed to Unidym. Nanotechnica, Inc. (“Nanotechnica”), which the majority of its stockholders voted to dissolve on June 3, 2005, is included in the results for the three months and nine months ended June 30, 2005 only as Loss from Discontinued Operations of Nanotechnica, Inc. All significant intercompany accounts and transactions are eliminated in consolidation and minority interests were accounted for in the condensed consolidated statements of operations and the balance sheets.

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. Significant estimates made in preparing these financial statements include the allowance for doubtful accounts, deferred tax asset valuation allowance, patents, goodwill, minority- interest common stock and useful lives for depreciable and amortizable assets. Actual results could differ from those estimates.

Cash and Cash Equivalents—For purposes relating to the statement of cash flows, the Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Concentration of Credit Risk—The Company maintains checking accounts for Arrowhead and separate accounts for each subsidiary at one financial institution. These accounts are insured by the Federal Deposit Insurance Corporation (FDIC), up to $100,000. The Company has a portion of its excess cash in two “Diversifier Accounts” at the same financial institution. The “Diversifier Accounts” invest in other bank issued CD’s in amounts of $100,000, each of which are fully insured by FDIC. The Company has a Wealth Management Account at the same financial institution which invests in higher yield money market accounts and in government securities. At June 30, 2006, the Company had uninsured cash deposits totaling $21,963,990, which includes $14,320,488 invested in U.S. government securities. The Company has not experienced any losses in such accounts and management believes it has placed its cash on deposit with financial institutions that are financially stable.

Property and Equipment—Property and equipment are recorded at cost. Depreciation of property and equipment is recorded on the straight-line method over the respective useful lives of the assets ranging from 3 to 7 years. Leasehold improvements are amortized over the life of the lease.

Intellectual Property—At June 30, 2006, intellectual property consists of patents and patent applications licensed or purchased totaling $570,983. The purchased patent applications are being amortized over three years. The Company’s additional capital investment in Insert has been recorded as an increase in the value of the patent held by Insert. The additional patent value is $3,301,190 and is being amortized over the life of this patent. As of June 30, 2006, the patent has 147 months until its expiration. The accumulated amortization of patents totaled $381,444 at June 30, 2006. The majority of the Nanotechnica patents were transferred from Nanotechnica to Arrowhead in June 2005. The transferred patents were returned to the California Institute of Technology in January 2006.

Goodwill—Goodwill represents the excess of cost over the value of net assets of businesses acquired pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and is carried at cost unless write-downs for impairment are required. The Company evaluates the carrying value of goodwill on an annual basis and whenever events and changes in circumstances indicate that the carrying amount may not be recoverable, an adjustment is then made. To date, no such impairment has been recorded. Goodwill at June 30, 2006 consisted of $999,000 for Aonex and $3,508,427 for Calando in accordance with the preliminary purchase accounting for the March 31, 2006 transaction described in Note 3: Investment in Subsidiaries.

Revenue Recognition—The Company recognizes license fee revenue on a straight-line basis over the term of the license. Development fees, milestone fees, collaboration fees and grant revenues are recognized upon the completion and payment of services or achievement of the mutually agreed upon milestones.

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 statement No. 2, “Accounting for Research and Development Costs.”

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 is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares

 

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primarily consist of stock options issued to employees and consultants and warrants of the Company. For three-month period ended June 30, 2006 and nine-month periods ended June 30, 2006 and 2005 respectively, their effect was anti-dilutive.

Accounting for Stock-Based Compensation. The Company has adopted the retrospective method of implementing SFAS 123R. Therefore, the financials for the three month and nine month periods ended June 30, 2006 have been adjusted to reflect the accounting and expensing of the fair value of the stock based awards.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This statement applies to all voluntary changes in accounting principle and requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless this would be impracticable. This statement also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is evaluating the effect the adoption of this interpretation will have on its financial position, cash flows and results of operations.

NOTE 2: BASIS OF CONSOLIDATION

The consolidated financial statements for the three month and nine month periods ended June 30, 2006 and 2005 respectively include the accounts of Arrowhead and its subsidiaries, Aonex, Calando, Insert and NanoPolaris/Unidym. Nanotechnica (which a majority of its shareholders voted to dissolve on June 3, 2005) is included in the results for the three month and nine month periods ended June 30, 2005 only as Loss from Discontinued Operations of Nanotechnica, Inc. All significant intercompany accounts and transactions are eliminated in consolidation and minority interests were accounted for in the consolidated statements of operations and the balance sheets.

NOTE 3. INVESTMENT IN SUBSIDIARIES

Aonex Technologies, Inc.

On April 20, 2004, Arrowhead purchased 1,000,000 shares of Series A Preferred Stock in a newly-formed entity, Aonex, for $2,000,000. The 1,000,000 shares of Series A Preferred stock represent 80% of the outstanding, voting shares of Aonex and allow Arrowhead to elect a majority of Aonex’s Board of Directors. Since its initial investment on April 20, 2004, Arrowhead has provided $3,000,000 of additional capital to Aonex, including $1,000,000 provided in February 2006.

Insert Therapeutics, Inc.

On June 4, 2004, Arrowhead purchased 24,496,553 shares of Series B Preferred Stock of Insert, a Pasadena, California based company for $1,000,000. The Series B Preferred Stock allows Arrowhead to elect a majority of Insert’s Board of Directors. On March 29, 2005, Arrowhead exchanged 4,000,000 shares of its Series B Preferred Stock for 4,000,000 shares of Series C Preferred Stock. The Series C Preferred Stock has a liquidation preference senior to Series B Preferred Stock.

On March 23, 2005, Arrowhead purchased 7,375,000 shares of Insert common stock from two minority stockholders of Insert for 502,260 newly issued shares of Arrowhead Common Stock. The Arrowhead Common Stock was valued at $2,000,000 based on the closing market price of Arrowhead Common Stock on NASDAQ on March 23, 2005.

On June 30, 2005, Arrowhead sold 2,640,000 shares of its Series C Preferred Stock to qualified investors for $1.00 per share. Net proceeds of the sale were $2,424,924.

As of June 30, 2006, Arrowhead owns 68.3% of the outstanding, voting securities of Insert. Since its initial investment on June 4, 2004, Arrowhead has provided $4,000,000 of additional capital to Insert.

Calando Pharmaceuticals, Inc.

On February 22, 2005, Arrowhead purchased 4,000,000 shares of common stock in a newly-formed entity, Calando, for $250,000. Calando and Insert have entered into a license agreement giving Calando exclusive rights to Insert’s technology for the delivery and therapeutic use of RNAi in Calando’s research, development and business efforts. A voting agreement between Arrowhead and certain shareholders in Calando gives the Company the right to designate a majority of Calando’s Board of Directors. Arrowhead has provided $3,750,000 in additional capital to Calando, including $2,000,000 contributed in February 2006.

On March 31, 2006, Arrowhead purchased 5,000,000 shares of Calando’s Series A Preferred Stock for $3,000,000. The preferred shares are convertible to common stock on a one to one basis, are entitled to a non-cumulative dividend of eight percent (8%) and have a liquidation preference over the common stock. Concurrent with the Series A purchase, Arrowhead

 

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purchased 964,000 shares of common stock for $2.00 per share from minority shareholders. The $1,928,000 payment for the purchase of Calando common stock consisted of $850,667 in cash and 208,382 in shares of Arrowhead common stock with an estimated value of $1,077,333 or $5.17 per share based on the average closing price of Arrowhead’s common stock during the last ten days prior to the transaction closing. At March 31, 2006, the $850,667 cash portion of the payment was included in accounts payable until payment was made on April 10, 2006.

As a result of the transactions described above, Arrowhead increased its ownership from 58.2% to 83.2% of the outstanding, voting stock of Calando. Arrowhead has direct ownership of 80.6% of the outstanding, voting stock of Calando and indirectly, through Insert, controls another 2.6% of the outstanding, voting stock. Two of Calando’s founders have warrants for Calando common stock that, if exercised, would reduce Arrowhead’s direct and indirect ownership from 83.2% to 68.3%.

On March 31, 2006, Arrowhead entered into an Agreement with Calando to provide up to $7,000,000 of additional capital to Calando subject to the attainment of certain milestones in its preclinical testing, clinical testing and related approval processes. Should Arrowhead elect not to make the additional capital contributions, the preferred stock conversion right of one to one will be adjusted to approximately three to one.

NanoPolaris, Inc./ Unidym, Inc.

On April 4, 2005, Arrowhead founded NanoPolaris as a wholly owned subsidiary of Arrowhead. NanoPolaris was initially capitalized with $1,000.

On June 13, 2006, NanoPolaris acquired substantially all of the net assets and the name of Unidym, a Los Angeles company that develops carbon nanotube-based electronics. The net assets acquired include Unidym’s intellectual property, prototypes, and equipment, for a purchase price consisting of $25,000 in cash and assumption of $75,000 of liabilities and shares of NanoPolaris common stock, with an estimated value of $154,350, equal to 11.9% (10% on a fully diluted basis) of NanoPolaris' outstanding voting stock, at closing. At the closing, Arrowhead Research invested $3,000,000 in NanoPolaris and committed up to $4 million of additional capital to NanoPolaris, with $2 million to be paid on the first anniversary of closing and the remaining $2,000,000 to be paid on the second anniversary of the closing. Subsequent to June 30, 2006, NanoPolaris has changed its name to Unidym, Inc.

Nanotechnica, Inc.—Discontinued Operations

In the third quarter of FY 2005, the Company determined that the progress being made by Nanotechnica in commercializing microfluidics technology was not progressing satisfactorily and the market potential was uncertain. Therefore, on June 3, 2005, a majority of the stockholders of Nanotechnica voted to dissolve the company. Because of Arrowhead’s liquidation preference as Series A Preferred Stockholders, $2.8 million in cash was remitted to Arrowhead along with $213,000 of the other remaining assets. Arrowhead has discontinued development efforts related to microfluidics and returned the applicable patents to Caltech. The losses incurred by Nanotechnica are segregated on the Consolidated Statement of Operations as Loss from Operation of Discontinued Nanotechnica, Inc. Nanotechnica had no revenue in either FY 2004 or FY 2005.

NOTE 4: STOCKHOLDERS’ EQUITY

On January 26, 2005, after stockholder approval, the Company’s Certificate of Incorporation was amended to increase the number of authorized shares of the Company to a total of 75,000,000 shares, consisting of 70,000,000 authorized shares of common stock, par value $0.001, and 5,000,000 shares of authorized preferred stock. The number of authorized shares of the Company, prior to this Amendment, was 60,000,000 shares, consisting of 50,000,000 shares of authorized common stock and 10,000,000 shares of authorized preferred stock.

At June 30, 2006, 33,817,076 shares of common stock were outstanding. At June 30, 2006, 1,748,500 shares and 5,000,000 shares were reserved for issuance upon exercise of options granted under Arrowhead’s 2000 Stock Option Plan and 2004 Equity Incentive Plan, respectively. Through June 30, 2006, options to purchase 1,748,500 shares were outstanding under the 2000 Stock Option Plan and options to purchase 2,891,833 shares were outstanding under the 2004 Equity Incentive Plan.

In connection with the formation of the Company and two private placements, the Company issued approximately 13.8 million common stock purchase warrants, which were called on May 4, 2005. Substantially all of the outstanding warrants were exercised by June 2005, and the Company received approximately $20.7 million in total exercise proceeds. The warrants not exercised were redeemed by the Company for $0.001 per share.

 

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On January 24, 2006, the Company completed a private placement of 5,590,000 shares of restricted common stock at $3.50 per share that generated $19.6 million in total proceeds. The purchasers received warrants, exercisable after July 25, 2006, to purchase an additional 1,397,500 shares of restricted common stock at $5.04 per share. The exercise price of the warrants at closing was at a premium to the closing market price of the common stock on January 24, 2006. The warrants may be called by the Company any time after July 25, 2006 if the closing price of the Company’s Common stock is $6.50 or above for the previous 30 trading days.

The following table summarizes information about warrants outstanding at June 30, 2006:

 

Exercise prices

   Number of Warrants   

Weighted Average

Remaining

Life in Years

  

Weighted Average

Exercise Price

$5.04    1,397,500    9.6    $ 5.04

NOTE 5: LEASES

The Company leases the following facilities:

 

    

Lab/Office

Space

  

Monthly

Rent

  

Lease

Commencement

   Lease Term

Arrowhead

           

Pasadena (1)

   7,388 sq ft    $ 16,992    March 1, 2006    62 Months

Pasadena

   3,653 sq ft    $ 6,575    December 27, 2004    25 Months

New York (2)

   130 sq ft    $ 3,350    September 15, 2005    12 Months

Aonex

   4,000 sq ft    $ 7,211    July 1, 2004    48 Months

Calando (3)

   2,755 sq ft    $ 4,821    May 16, 2005    24 Months

Calando

   7,000 sq ft    $ 12,944    June 1, 2006    18 Months

Insert

   4,354 sq ft    $ 11,761    June 1, 2006    36 Months

(1) Arrowhead leased new corporate office space in Pasadena, which it occupied beginning March 1, 2006. The new lease agreement provides Arrowhead with two months free rent which was recorded as a deferred liability and is being amortized over the life of the lease. The lease for the prior corporate office space terminated on February 28, 2006.

 

(2) In September, Arrowhead opened an office in New York City and has one employee working out of that office. The rent for the first six months is $1,675 per month. For the second six months, the rent is $3,350 per month.

 

(3) Calando is in the process of moving into laboratory space previously occupied by Insert. Calando’s previous landlord and agreed to accept a $25,000 payment in exchange for early termination of this lease agreement.

The Company has no plans to own any real estate and expects all facility leases will be operating leases.

At June 30, 2006, the future minimum commitments by Fiscal Year remaining under leases are as follows:

 

     Facilities Leases    Equipment Leases

FY 2006 (3 months)

   $ 202,751    $ 5,227

FY 2007

   $ 624,883    $ 19,222

FY 2008

   $ 452,782    $ 7,550

FY 2009

   $ 302,813    $ 3,460

FY 2010 & Beyond

   $ 348,344      —  

Facility and equipment rent expense for the three-month and nine-month periods ended June 30, 2006 was $185,587 and 495,265, respectively. Facility and equipment rent expense for the three-month and nine-month periods ended June 30, 2005 was $92,547 and $248,089 respectively. From inception to date, rent expense totals $947,190.

 

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NOTE 6: COMMITMENTS AND CONTINGENCIES—SUBSIDIARIES AND SPONSORED RESEARCH

Subsidiaries

As of June 30, 2006, Arrowhead held a majority of the voting stock of the following four subsidiaries (the “Subsidiaries”):

 

Subsidiary

   %Ownership    

Technology/Product Focus

Aonex Technologies, Inc.

founded April 20, 2004

   80.0 %   Semiconductor nanomaterial process with initial emphasis on high efficiency solar cells

Insert Therapeutics, Inc.

acquired June 4, 2004

   68.3 %   Nano-engineered drug delivery system, beginning clinical trials with first anti-cancer compound

Calando Pharmaceuticals, Inc.

founded February 20, 2005

   83.2 %*   Nano-engineered RNAi Therapeutics

NanoPolaris, Inc./Unidym, Inc.

founded April 4, 2005

   88.1 %   Developing strategic opportunities for the commercialization of nanotube-based products.

* Arrowhead has direct ownership of 80.6% of the outstanding, voting stock of Calando and indirectly, through Insert, controls another 2.6% of the outstanding, voting stock.

Arrowhead holds a majority interest in each of Aonex, Insert, Calando and NanoPolaris/Unidym and provided capital to each company in exchange for Arrowhead’s ownership interest in each subsidiary, as well as the right to appoint a majority of each Subsidiary’s Board of Directors. Arrowhead has made all capital contributions pursuant to its original investments and capital contribution agreements with each subsidiary.

On March 31, 2006, Arrowhead and Calando entered into a second Agreement to Provide Additional Capital which provides for the contribution of $7,000,000, subject to the attainment of certain milestones. If Arrowhead elects not to provide additional capital pursuant to this agreement, Arrowhead would forfeit approximately 7% of its interest in Calando.

On June 13, 2006 , Arrowhead and NanoPolaris/Unidym entered into an Agreement to Provide Additional Capital which provides for the contribution of $4,000,000, subject to the attainment of certain milestones. If Arrowhead elects not to provide additional capital pursuant to this agreement, Arrowhead would forfeit approximately 21.7% of its interest in NanoPolaris/Unidym on a fully diluted basis.

Outsourced Research and Development

Outsourced sponsored research expense for the three month and nine month periods ended June 30, 2006 was $406,412 and $890,681, respectively. Outsourced sponsored research expense for the three month and nine month periods ended June 30, 2005 was $254,761 and $588,690, respectively.

Sponsored Research Agreement—Duke University

The terms of the sponsored research agreement between Arrowhead and Duke University (“Duke”) are summarized in the following table:

 

Research Project

  

Total estimated

project cost

   Annual Cost   

Amount paid

as of

June 30, 2006

  

Prepaid Amt
as of

June 30, 2006

CVD Growth of Well-Aligned Individual Single Walled Carbon Nanotubes

           

(Dr. Jie Liu)

           

Dec. 1, 2005-Nov. 30, 2007 (2 years)

   $ 600,000    $ 300,000    $ 231,730    $ 0

The initial payment of $108,974 was paid in February 2006 with eight quarterly payments of $61,378 beginning March 1, 2006.

 

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Sponsored Research Agreement—California Institute of Technology

The terms of the sponsored research agreement between Arrowhead and the California Institute of Technology (“Caltech”) are summarized in the following table:

 

Research Project

  

Total estimated

project cost

   Annual Cost   

Amount paid

as of

June 30, 2006

  

Prepaid Amt

as of

June 30, 2006

Drug Discovery & Diagnostics

           

(Dr. C. Patrick Collier)

           

Oct. 1, 2003-Sept. 30, 2008 (5 years)

   $ 1,393,806    $ 280,292    $ 736,228    $ 73,135

During the second quarter of FY 2005, the agreement was amended to allow for quarterly rather than annual funding for these research projects. The agreement calls for funding, as indicated above, to subsidize all direct and indirect costs incurred in the performance of the research, not to exceed total estimated project cost. If this agreement is extended, the dollar value of costs that will be reimbursed may be modified by mutual agreement to cover additional work performed during the extension. The research agreement is terminable by either party on 60-days written notice with an obligation to satisfy outstanding obligations at the time of cancellation.

Sponsored Research Agreement—Stanford University

Arrowhead has exclusively licensed intellectual property from Stanford University (“Stanford”) for a nanotech device designed to control the behavior of stem cells. Arrowhead has agreed to fund additional research involving the device at Stanford in exchange for the right to exclusively license and commercialize the technology.

 

Research Project

  

Total estimated

project cost

   Annual Cost   

Amount paid

as of

June 30, 2006

  

Prepaid Amt

as of

June 30, 2006

Microchip-based Biological Signal Delivery

           

(Dr. Nicholas Melosh)

           

July 1, 2005 – June 30, 2007 (2 years)

   $ 600,000    $ 300,000    $ 390,000    $ 65,000

Sponsored Research Agreement—Lucile Packard Children’s Hospital

Arrowhead agreed to contribute $100,000 to Stanford’s Lucile Packard Children’s Hospital to fund a project to identify how new technologies, such as nanotechnology and stem cell technology, can address existing clinical needs. This amount was paid at a rate of $25,000 per quarter commencing July 1, 2005 through June 30, 2006. As of June 30, 2006, the full $100,000 has been contributed.

NOTE 7. STOCK OPTIONS

Stock-Based Compensation—Arrowhead has two plans that provide for equity-based compensation. Under the 2000 Stock Option Plan, 1,748,500 shares of Arrowhead’s Common Stock are reserved for issuance upon exercise of non-qualified stock options. The 2004 Equity Incentive Plan reserves 5,000,000 shares 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 expected to provide significant services to Arrowhead. The Company’s stockholders approved the 2004 Equity Incentive Plan on January 20, 2005. Pursuant to this approval, no further grants may be made under the 2000 Stock Option Plan.

Arrowhead accounts for employee stock option grants in accordance with Statement of Financial Accounting Standards (SFAS) No. 123R, Accounting for Stock-Based Compensation.

 

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The following tables summarize information about stock options:

 

    

Number of

Options

Outstanding

   

Weighted

Average Exercise

Price Per Share

Balance at May 7, 2003

   —       —  

Granted

   150,000     0.20

Canceled

   —       —  

Exercised

   —       —  
          

Balance at September 30, 2003

   150,000     0.20

Granted

   1,570,000     1.00

Canceled

   (25,000 )   1.00

Exercised

   (156,000 )   0.23
          

Balance at September 30, 2004

   1,539,000     1.00

Granted

   2,095,000     2.53

Canceled

   (170,000 )   1.00

Exercised

   (25,000 )   1.00
          

Balance at September 30, 2005

   3,439,000     1.93
          

Granted

   775,000     3.89

Canceled

   —       1.00

Exercised

   (4,000 )   1.00
          

Balance at December 31, 2005

   4,210,000     2.29
          

Granted

   165,000     4.70

Canceled

   —       —  

Exercised

   —       —  
          

Balance at March 31, 2006

   4,375,000     2.38

Granted

   925,000     5.74

Canceled

   (644,167 )   3.78

Exercised

   (15,500 )   2.16
          

Balance at June 30, 2006

   4,640,333     2.86

Exercisable at June 30, 2006

   1,902,553     1.98

 

Exercise Prices

  

Number of

Options

  

Weighted Average

Remaining

Life in Years

  

Weighted Average

Exercise Price

$1.00 – $6.36

   4,640,333    8.8    $ 2.86

The Company has applied SFAS 123R on a retrospective basis for FY 2006. Therefore, the loss for the three months of FY 2005, ended June 30, 2005, has been increased from $2,917,116 to $2,965,701. The loss for the first nine months of FY 2005 has been increased from $3,880,146 to $3,981,518 to reflect amortization of the fair value of options awarded to employees prior to the adoption of SFAS 123R. Arrowhead’s accumulated deficit at September 30, 2005 has been adjusted by $262,106 to reflect the retrospective application of SFAS 123R. For the three month and nine month periods ended June 30, 2006, the stock based compensation expense is $365,712 and $997,539, respectively.

The estimated fair value of the options granted by Arrowhead and the value for the accelerated stock options for the three month and nine month periods ended June 30, 2006 is $2,263,361 and $3,992,521, respectively.

The aggregate fair value of options granted by Aonex, Calando, or Insert for the nine month period ended June 30, 2006 is $8,702.

The fair value of options granted during the nine months ended June 30, 2006 was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%, expected volatility of 25% to 50%, risk-free interest rate of 4.94% to 5.25%, and expected life of five years. The weighted-average fair value of options granted by Arrowhead for the nine months ended June 30, 2006 was estimated at $2.30 and the weighted-average exercise price was estimated at $4.74.

 

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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. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. 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.

NOTE 8. INCOME TAXES

The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred 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 year-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 tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

For the three month and nine month periods ended June 30, 2006, the Company had consolidated losses of $3,974,148 and $10,217,686, respectively. For the nine month period ended June 30, 2005, the Company had a consolidated loss of $3,981,518. The losses result in a deferred income tax benefit of approximately $1,569,788 and $4,035,986 for the three months and nine months ended June 30, 2006 and $1,549,127 for the nine months ended June 30, 2005, offset by an increase in the valuation allowance for the same amount for Arrowhead. Management has chosen to take a 100% valuation allowance against the tax benefit until such time as management believes that its projections of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates could result in material differences in the realization of these assets.

NOTE 9: SEGMENT AND GEOGRAPHIC REPORTING

The Company accounts for segments and geographic product and licensing revenues in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.” The Company’s reportable segments are strategic business units that offer different products and services.

Grant and collaboration agreements are not considered to be product or licensing revenue as the Company’s plan of operations is to sell products and/or license technology. The grant revenue is a way to fund and to offset development costs. In the quarter ended June 30, 2005, Calando accrued the first commercial license agreement revenue totaling $150,000 covering the period June 15, 2005 through June 14, 2006. License fees from Calando’s commercial license fees recorded as revenue were $31,250 and $106,250 for the three month and nine month periods ended June 30, 2006. The customer is located in North America.

NOTE 10. RELATED PARTY TRANSACTIONS

There were no related party transactions in the first nine months of FY 2006 or FY 2005.

NOTE 11. SUBSEQUENT EVENTS

On June 2, 2006, by mutual agreement, Mr. Leon Ekchian stepped down from his position as President and Director of the Company. On August 9, 2006, a Severance Agreement and General Release between the Company and Mr. Ekchian became effective and it provides Mr. Ekchian with a lump sum payment of $280,000 and extends Mr. Ekchian’s vested options to purchase 50,000 shares of the Company’s Common Stock until the close of business on December 31, 2006, and immediately vests Mr. Ekchian’s unvested options in the amount of 83,333 shares of the Common Stock with an exercise price of $3.90 per share of Common Stock, which options will be immediately exercisable until the close of business on December 31, 2006, after which time, these options shall expire and shall not be exercisable. The total estimated value of the payments and options is $379,140 and that amount has been accrued in the operating results of the Company as of June 30, 2006.

On July 25, 2006 Arrowhead announced is majority owned subsidiary, NanoPolaris Inc., changed its name to Unidym, Inc.

On August 3, 2006 the Company announced the beginning of a collaboration with Dr. Andrew Rinzler to further develop flexible electronic devices made at the University of Florida. Arrowhead will have the first option to exclusively license and commercialize the technology. Under the sponsored research agreement with the University of Florida, Arrowhead will provide $647,000 over a two year period to develop optimized thin film transistors devices and prototypes of thin film transistor arrays.

 

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

Overview

Arrowhead is a development stage nanotechnology company commercializing products and technologies through majority-owned subsidiaries and partnerships with universities and government labs. Currently, operations conducted by Arrowhead and its subsidiaries consist primarily of technological research and development. It could take a long time to bring products to market, and success is uncertain.

Nanotechnology generally refers to the investigation, design, and manipulation of matter at the atomic, molecular, or macromolecular levels. Due to their size and unique properties, nanoscale materials, devices, and systems are being used in a variety of commercial applications and are expected to have broad impact across many industries.

Arrowhead is a development-stage company and has three strategic components to its business model:

 

    Outsourced R&D Program: Arrowhead identifies patented or patent-pending technologies at universities or government labs and funds additional development of those technologies in exchange for exclusive rights to commercialize the resulting prototypes. Leveraging the resources and infrastructure of these institutions provides Arrowhead with a cost-effective development pipeline. At June 30, 2006, Arrowhead is supporting efforts in drug discovery tools, stem cell technology and nanoelectronics at the California Institute of Technology, Stanford University, and Duke University, respectively. On August 3, 2006, Arrowhead announced a collaboration with the University of Florida to further develop flexible thin film electronic devices.

 

    Commercialization Program: After prototypes have been sufficiently developed in the laboratories, Arrowhead forms or acquires majority-owned subsidiaries to commercialize the technology and provides the subsidiaries with strategic, managerial and operational support. By doing so, each research team is able to maintain focus on its specific technology and each management team can focus on specific markets, increasing the likelihood of successful technological development and commercialization. At June 30, 2006, Arrowhead owns majority interest in subsidiaries commercializing diverse technologies, including anti-cancer drugs, RNAi therapeutics, compound semiconductor materials and nanotube technology.

 

    The Patent Toolbox: Arrowhead has acquired or exclusively licensed patents and patent applications covering a broad range of nanotechnology. The Company actively adds to its intellectual property portfolio.

The Company was founded in May 2003. Since inception, the Company has generated significant losses. Operations have been funded primarily through the sale of common stock. Since inception, the Company’s accumulated deficit is approximately $19.7 million. Revenues have come primarily from grants, development fees and a license agreement as the Company has no products ready for sale or broad commercial licensing. Since inception, the Company has focused on establishing or acquiring operating subsidiaries, sponsoring internal and external research and development, acquiring intellectual property rights, hiring management and technical staff and raising capital. At June 30, 2006, the Company has four majority owned operating Subsidiaries, Aonex Technologies, Inc. (“Aonex”), Calando Pharmaceuticals, Inc. (“Calando”), Insert Therapeutics, Inc. (“Insert”), and NanoPolaris, Inc. which name was changed to Unidym.

Aonex’s technology development efforts are directed toward commercializing a method for manufacturing semiconductor nanomaterials.

Insert has developed Cyclosert™, a proprietary drug delivery platform technology based on a nano-engineered class of linear cyclodextrin-containing polymers. Insert’s first investigational new drug application for its first drug candidate, IT-101, was approved by the U.S. Food and Drug Administration in March 2006. IT-101 is a conjugate of Insert’s patented nano-engineered drug delivery polymer and camptothecin, a potent anti-cancer compound. A Phase I study for IT-101 is being conducted at the City of Hope, in Duarte, California.

Calando is designing, developing and commercializing novel RNAi therapeutics to treat diseases and other medical conditions by combining effective RNAi therapeutics with patented and proprietary delivery technologies.

NanoPolaris/Unidym assembled exclusive commercial rights to nanotube materials and processes developed at several universities. NanoPolaris continues to consolidate technologies and intellectual property in this field. On June 13, 2006, NanoPolaris acquired the net assets, including the name, of Unidym, a Los Angeles-based company that develops carbon nanotube electronics. On August 3, 2006, NanoPolaris changed its name to Unidym, Inc.

 

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The Company had a consolidated loss of $3,974,148 for the quarter ended June 30, 2006 versus a consolidated loss of $2,965,701 for the same period of the previous fiscal year. During the second quarter of FY 2005, the company recognized a gain of $2.3 million applicable to the sale to third parties of a portion of Arrowhead’s ownership in Insert Therapeutics, Inc.

The consolidated loss for the nine month period ended June 30, 2006 was $10,217,686 versus a consolidated loss of $3,981,518 for the same period of the previous year. The consolidated net loss for the nine month period ended June 30, 2005 would have been $6,274,318 but the loss was reduced by the gain mentioned above.

The increase in the consolidated loss adjusted for the one time gain occurred primarily in four areas. First, staffing has increased as the Company has grown. Staff has been added at all levels within the company to accommodate the increase in development efforts, the addition of Unidym and the increase in general and administrative responsibilities and the need to comply with Sarbanes Oxley. Second, Insert incurred major expenses during the first nine months of FY 2006 related to preclinical research, to filing the Investigational New Drug Application with the U.S. Food and Drug Administration, to obtaining sufficient IT-101 drug inventories to be able to enter Phase I Clinical Trials and finally to pay for all the advance preparation required to enter the trials. Third, legal expenses increased as the company completed a private placement, recapitalized Calando, acquired the net assets of Unidym, examined or reviewed new potential deals and maintained patents licensed from Caltech. Fourth, facilities cost increased due to moving facilities, expanding existing space and the establishment of new facilities to meet growth of or to house new subsidiaries.

The analysis below details the operating expenses and discusses the increased expenditures within the major categories.

For purposes of comparison, the amounts for the three month and nine month periods ended June 30, 2006 and 2005 are shown in the tables below. Certain prior period amounts have been reclassified to conform with current period presentation.

The amounts for each period have been adjusted to include the adoption of SFAS 123R and to eliminate Nanotechnica from continuing operations.

Salary & Wage Expenses

(in thousands)

 

    

Three Months

Ended

June 30 2006

  

% of

expense

category

   

Three Months

Ended

June 30 2005

  

% of

expense

category

    Increase (Decrease)  
               $    %  

G&A – compensation-related

   $ 1,052    52 %   $ 433    62 %   $ 619    143 %

Stock-based compensation

   $ 366    18 %   $ 59    8 %   $ 307    522 %

R&D – compensation-related

   $ 619    30 %   $ 209    30 %   $ 410    196 %
                                       

Total

   $ 2,037    100 %   $ 701    100 %   $ 1,336    191 %
                                       
    

Nine months

Ended

June 30 2006

  

% of

expense

category

   

Nine months

Ended

June 30 2005

  

% of

expense

category

    Increase (Decrease)  
               $    %  

G&A – compensation-related

   $ 2,131    44 %   $ 734    41 %   $ 1,397    190 %

Stock-based compensation

   $ 997    20 %   $ 230    13 %   $ 767    333 %

R&D – compensation-related

   $ 1,738    36 %   $ 823    46 %   $ 915    111 %
                                       

Total

   $ 4,866    100 %   $ 1,787    100 %   $ 3,079    172 %
                                       

The increase in G&A related compensation is the result of hiring and subsequent departure of a new President for Arrowhead and the associated severance. Hiring other executive management for Arrowhead and its subsidiaries and additional support staff to service the Company and its Subsidiaries in the areas of Sarbanes-Oxley implementation, human resources and accounts payable. The increase in stock based compensation is related to the issuance of stock options to existing and new employees and expense booked pursuant to the adoption of SFAS 123R which requires expensing of stock-based compensation for all options granted. Finally, the R&D compensation increase is the result of hiring additional technical staff as the Company’s Subsidiaries increase the pace of development. The Company expects that Salaries & Wages will continue to grow during FY 2006 as more people are hired to support development and administration of the Company.

 

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Table of Contents

General & Administrative Expenses

(in thousands)

 

    

Three Months

Ended

June 30 2006

  

% of

expense

category

   

Three Months
Ended

June 30 2005

  

% of

expense

category

    Increase (Decrease)  
               $    %  

Professional/outside services

   $ 594    41 %     299    38 %   $ 295    99 %

Facilities

   $ 247    17 %     173    22 %   $ 74    43 %

Patent expense

   $ 134    9 %     10    1 %   $ 124    1,240 %

Travel

   $ 72    5 %     34    4 %   $ 38    112 %

Business insurance

   $ 105    8 %     47    6 %   $ 58    123 %

Depreciation

   $ 86    6 %     70    9 %   $ 16    23 %

Other

   $ 202    14 %     163    20 %   $ 39    24 %
                                       

Total

   $ 1,440    100 %   $ 796    100 %   $ 644    81 %
                                       
    

Nine months

Ended

June 30 2006

  

% of

expense

category

   

Nine months

Ended

June 30 2005

  

% of

expense

category

    Increase (Decrease)  
               $    %  

Professional/outside services

   $ 1,325    35 %     612    35 %   $ 713    117 %

Facilities

   $ 702    18 %     429    24 %   $ 273    64 %

Patent expense

   $ 568    15 %     45    3 %   $ 523    1,162 %

Travel

   $ 182    5 %     105    6 %   $ 77    73 %

Business insurance

   $ 195    5 %     99    6 %   $ 96    97 %

Depreciation

   $ 251    7 %     200    11 %   $ 51    26 %

Other

   $ 568    15 %     275    15 %   $ 293    107 %
                                       

Total

   $ 3,791    100 %   $ 1,765    100 %   $ 2,026    115 %
                                       

The major increases in non-compensation related general and administrative expenses are the result of legal and professional fees associated with subsidiary stock purchases, capital contributions to subsidiaries, the acquisition of the net assets of Unidym and strategic initiatives and Sarbanes-Oxley compliance. Arrowhead has incurred additional expense for new or expanded leases as subsidiaries are established or expanded. Facilities related expenses are expected to increase in FY 2006 with the Company’s move to larger corporate offices and from both Insert’s and Calando’s moves into new laboratory facilities. The increase in patent expense during the nine month period relates primarily to the accrual of $300,000 of patent expenses owed to Caltech for patent & patent applications that Insert licenses from Caltech and NanoPolaris/Unidym related activities. Insurance increased as a result of increases in limits and coverages. Travel increased as the Company management pursues new initiatives and collaborations with others.

Research and Development Expenses

(in thousands)

 

    

Three Months

Ended

June 30, 2006

  

% of

expense

category

   

Three Months

Ended

June 30, 2005

  

% of

expense

category

    Increase (Decrease)  
               $    %  

R&D contract labor

   $ 346    32 %   $ 155    11 %   $ 191    123 %

Laboratory supplies & services

   $ 326    30 %   $ 787    59 %   $ -461    -59 %

Sponsored research

   $ 306    28 %   $ 255    19 %   $ 51    20 %

Depreciation-R&D-related

   $ 56    5 %   $ 58    4 %   $ -2    -3 %

Other research expenses

   $ 47    5 %   $ 90    7 %   $ -43    -48 %
                                       

Total

   $ 1,081    100 %   $ 1,345    100 %   $ -264    -20 %
                                       
    

Nine months

Ended

June 30, 2006

  

% of

expense

category

   

Nine months

Ended

June 30, 2005

  

% of

expense

category

    Increase (Decrease)  
               $    %  

R&D contract labor

   $ 1,687    43 %   $ 525    21 %   $ 1,162    221 %

Laboratory supplies & services

   $ 1,027    26 %   $ 1,089    45 %   $ -62    -6 %

Sponsored research

   $ 891    23 %   $ 589    24 %   $ 302    51 %

Depreciation-R&D-related

   $ 170    4 %   $ 136    6 %   $ 34    25 %

Other research expenses

   $ 165    4 %   $ 93    4 %   $ 72    77 %
                                       

Total

   $ 3,940    100 %   $ 2,432    100 %   $ 1,508    62 %
                                       

 

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Table of Contents

Insert received approval for its Investigational New Drug (IND) application from the Federal Drug Administration (FDA) for its lead anti-cancer therapeutic, IT-101 on March 14, 2006 and began Phase I clinical trails in the third quarter of calendar 2006. In advance of the clinical trials, Insert was required to pay the cost to manufacture the entire amount of, IT-101 necessary to complete the Phase I clinical trial. It is the company’s policy to expense the cost of the supplies when received. Laboratory supplies & services decreased compared to the same period in the prior year as the cost of the supplies necessary for the clinical trials, of approximately $1,283,000 were expensed in prior quarters. Also, Insert completed the large mammal studies, begun in FY 2005, required as part of the IND process and those expenses are included in earlier quarters. While a purchase of supplies and animal studies of this magnitude is not a normal recurring expense, the continued development of new products in Insert, Calando, Aonex, NanoPolaris/Unidym will result in increased R&D expenses in the future.

The Company continues to sponsor research at Caltech, Duke, Stanford and has entered into a new sponsored research agreement with the University of Florida. The number of research projects can fluctuate from time to time as the Company adds or terminates projects. The increase in sponsored research expense in the three month and nine month periods ended June 30, 2006 compared to the three month and nine month periods ended June 30, 2005 is in large part due to the expense of the Duke and the Stanford projects. Each project has an annual cost of $300,000 over two years and neither project was in place in FY 2005.

Leveraged Technology and Revenue Strategy

Arrowhead continues to follow its strategy to leverage technology which is being or has been developed at universities. By doing so, Arrowhead benefits from work done at those universities and through majority-owned subsidiaries, which can commercialize the most promising technologies developed from sponsored research and other sources. Although the Company is likely to produce prototypes and develop manufacturing processes, it may not ultimately manufacture products developed. The Company has three primary strategies to potentially generate product sales revenue:

 

    License the products and processes to a third party for a royalty or other payment. By licensing, the Company would not be required to allocate resources to build a sales or a production infrastructure and could use those resources to develop additional products.

 

    Retain the rights to the products and processes, but contract with a third party for production. The Company would then market the finished products. This approach would require either the establishment of a sales and distribution network or collaboration with a supplier who has an established sales and distribution network, but would not require investment in production equipment.

 

    Build production capability in order to produce and market the end products. This last approach would likely require the most capital to build the production, sales and distribution infrastructure.

On a case-by-case basis, the Company will choose the strategy, which in the opinion of management, will generate the highest return for the Company.

The Company seeks and has been awarded grants from private and public entities. While the ultimate goal of the Company is to generate revenue through the sale of products and/or the licensing of technology, the Company does record revenue from grants and from development fees. Revenue from grants and development fees are considered to be reimbursements for efforts performed on behalf of third parties and not part of the Company’s primary strategy to generate revenue.

In June 2005, Calando entered into the Company’s first commercial licensing deal whereby Calando granted an exclusive worldwide license to Benitec Ltd. (ASX:BLT) for the combination of Calando’s polymeric RNA interference (“RNAi”) delivery technology with Benitec’s RNAi-based therapeutic for the hepatitis C virus (“HCV”). Under this license agreement, Calando received an upfront payment of $150,000, which was amortized over 12 months. For the quarter ended June 30, 2006, the Company recognized $37,750 in revenue applicable to this agreement. The Company is actively pursuing other license deals.

For the three month and nine month periods ended June 30, 2006, $181,250 and $406,250, respectively, in revenue was generated primarily related to development fees paid to Calando by Benitec. The $150,000, license fee was recognized ratably over the past 4 quarters a rate of approximately $31,250 per quarter. During the quarter, Aonex recognized another $20,000 related to an SBIR grant. Year to date Aonex has recognized $70,000 in SBIR grant revenue. Grants and development fees continue into FY 2006, but there can be no assurance that subsequent grants will be forthcoming.

The Company does not expect any product sales in FY 2006. Therefore, losses can be expected to increase before any substantial revenue is generated. To partially offset these losses, the Company is pursuing other means of funding such as licenses, government grants, contracts and collaborations with third parties. The award of such grants and contracts depends on numerous factors, many of which are not in the Company’s control, and therefore it is difficult to predict if this will be successful.

 

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Table of Contents

Liquidity and Capital Resources

Since inception in May 2003, the Company has generated significant losses. As of June 30, 2006, the Company’s accumulated deficit including minority interest was $23.1 million. As of June 30, 2006, the Company had $30.6 million in cash and marketable securities compared to $22.5 million in cash and marketable securities at September 30, 2005. The Company’s investment objectives are primarily to preserve capital and liquidity and secondarily to obtain investment income. The Company invests excess cash in certificates of deposit, U.S. government obligations and high grade commercial paper.

The Company’s operating activities have required significant amounts of cash. This trend will continue through FY 2006 as the Company’s Subsidiaries continue to develop and refine their products and technology. During this period the Company does not expect to generate significant amounts of revenue. It is projected that the Company and its subsidiaries will continue to add staff, property, and equipment during FY 2006. In addition, the Company expects to continue to invest in new sponsored research projects and new business opportunities. At June 30, 2006, the Company had a commitment to provide an additional $7 million to Calando, and $4 million to NanoPolaris/Unidym if certain milestones are reached. The Company believes that the cash on hand at June 30, 2006 is sufficient to meet all existing obligations and fund existing operations beyond the end of FY 2007.

Since inception, the Company has funded operations and acquisitions through the issuance of equity. As of June 30, 2006, the Company had raised approximately $52 million through the sale of Common Stock and the exercise of Warrants. New business opportunities may require additional cash resources. In the future, the Company may seek additional funding through public or private financing, through collaborations and/or through private and U.S. government grants.

Except for copy machines, the Company does not lease any equipment and purchases all of its required capital assets. To date, when leasing facility space, the Company has been successful in having most leasehold improvements paid for by the landlord and included in the lease cost. The Company may not be able to do so in all cases going forward.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships.

Contractual Obligations and Commitments

None.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to changes in interest rates primarily from our investments in certain short-term investments. We invest our excess cash in highly liquid short-term investments that are typically held for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

 

ITEM 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and the Chief Financial Officer of the Company conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-14 and 3a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer, President, and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are functioning effectively to provide reasonable assurance that that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period prescribed by the Securities and Exchange Commission. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

No change in the Company’s internal controls in financial reporting occurred during the Company’s most recent three month period that have materially affected, or is reasonably likely to materially affect, these controls subsequent to the date this evaluation was carried out.

 

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Table of Contents

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

None.

 

ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS.

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

 

ITEM 5. OTHER INFORMATION.

On June 2, 2006, by mutual agreement, Mr. Leon Ekchian stepped down from his position as President and Director of the Company. On August 9, 2006, a Severance Agreement and General Release entered into between the Company and Mr. Ekchian became effective and it provides Mr. Ekchian with a lump sum payment of $280,000 and extends Mr. Ekchian’s vested options to purchase 50,000 shares of the Company’s Common Stock until the close of business on December 31, 2006, and immediately vests Mr. Ekchian’s unvested options in the amount of 83,333 shares of the Common Stock with an exercise price of $3.90 per share of Common Stock, which options will be immediately exercisable until the close of business on December 31, 2006, after which time, these options shall expire and shall not be exercisable.

 

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Table of Contents
ITEM 6. EXHIBITS.

 

Exhibit

Number

  

Document Description

  3.1       

Certificate of Incorporation of InterActive, Inc., a Delaware company, dated February 8, 2001 (1)

  3.2       

Certificate of Amendment of Certificate of Incorporation of InterActive Group, Inc., dated January 12, 2004 (effecting, among other things a change in the corporation’s name to “Arrowhead Research Corporation”) (2)

  3.3       

Certificate of Amendment to Certificate of Incorporation, dated January 25, 2005 (3)

  3.4       

Bylaws (1)

  4.1       

Form of Registration Rights Agreement dated January 24, 2006 (4)

  4.2       

Form of Warrant to Purchase Common Stock issued January 24, 2006 (4)

10.1**   

Copy of the Arrowhead Research Corporation (fka InterActive, Inc.) 2000 Stock Option Plan, the Arrowhead Research Corporation Stock Option Agreement (Incentive Stock Option) and the Arrowhead Research Corporation Stock Option Agreement (Nonstatutory Option) (5)

10.2**   

Copy of the Arrowhead Research Corporation 2004 Stock Option Plan (6)

10.3**   

Copy of the Arrowhead Research Corporation Non-employee Director Compensation Policy (7)

10.4       

Common Stock and Warrant Purchase Agreement, dated as of January 11, 2006, among Arrowhead, York, Knott and certain affiliates (4)

10.5       

Series A Preferred Stock Purchase Agreement between Arrowhead Research and Calando Pharmaceuticals, Inc. dated June 30, 2006 (8)

10.6       

Agreement to Provide Additional Capital between Arrowhead Research and Calando Pharmaceuticals, Inc. (8)

10.7       

Common Stock Transfer Agreement among Arrowhead Research, Mark Davis, John Petrovich and John Rossi (8)

10.8       

Severance Agreement and General Release between Arrowhead Research Corporation and Leon Ekchian*

31.1       

Section 302 Certification of Chief Executive Officer*

31.2       

Section 302 Certification of President & Chief Financial Officer *

32.1       

Section 1350 Certification by Principal Executive Officer*

32.2       

Section 1350 Certification by President & Principal Financial Officer*


* Filed herewith.

 

** Indicates compensation plan, contract or arrangement.

 

(1) Incorporated by reference from the Schedule 14C filed by registrant on December 22, 2000.

 

(2) Incorporated by reference from the Schedule 14C filed by registrant on December 22, 2003.

 

(3) Incorporated by reference from the Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004, filed by registrant on February 11, 2005.

 

(4) Incorporated by reference from the Current Report on Form 8-K, filed by registrant on January 18, 2006.

 

(5) Incorporated by reference from the Registration Statement on Form S-8, filed by registrant on October 29, 2004.

 

(6) Incorporated by reference from Annex A to the definitive Schedule 14C filed by registrant on December 16, 2005.

 

(7) Incorporated by reference from the Annual Report on Form 10-KSB for the year ended September 30, 2005, filed by registrant on December 22, 2005.

 

(8) Incorporated by reference from the Current Report on Form 8-K filed by registrant on April 6, 2006.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Issuer has caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 9, 2006

 

ARROWHEAD RESEARCH CORPORATION

BY:

  /s/    JOSEPH T. KINGSLEY        
  Joseph T. Kingsley
  President & Chief Financial Officer

 

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