Stock-Based Compensation

6 Months Ended

Mar. 31, 2012

NOTE 8. STOCK-BASED COMPENSATION

Arrowhead has two plans that provide for equity-based compensation. Under the 2000 Stock Option Plan, 153,200 shares of Arrowhead's Common Stock are reserved for issuance upon exercise of non-qualified stock options. No further grants can be made under the 2000 Stock Option Plan. The 2004 Equity Incentive Plan reserves 1,965,860 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. As of March 31, 2012, there were options granted and outstanding to purchase 153,200 and 1,201,694 shares of Common Stock under the 2000 Stock Option Plan and the 2004 Equity Incentive Plan, respectively. During the six months ended March 31, 2012, 660,000 options were granted under the 2004 Equity Incentive Plan. All share and per share data in this footnote has been adjusted to reflect the 1 for 10 reverse stock split effected on November 17, 2011.

The following tables summarize information about stock options:


	Number of Options Outstanding			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance At September 30, 2010		812,334		$	10.62
Granted		20,000			5.86
Cancelled		(100,539	)		21.32
Exercised		(2,699	)		5.10

Balance At September 30, 2011		729,096			9.03
Granted		924,500			4.96
Cancelled		(29,619	)		14.99
Exercised		(4,583	)		5.20

Balance At March 31, 2012		1,619,394		$	6.61		8.4 years	$	1,718,770

Exercisable At March 31, 2012		624,822		$	8.67		6.4 years	$	429,300

Stock-based compensation expense for the six months ended March 31, 2012 and 2011 was $421,268 and $732,244, respectively. For the six months ended March 31, 2012 and 2011, $0 and $27,519, respectively, of this expense is included in discontinued operations. There is no income tax benefit as the company is currently operating at a loss and an actual income tax benefit may not be realized. The result of the loss creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The fair value of the options granted by Arrowhead for the six months ended March 31, 2012 is estimated at $3,505,912. The aggregate fair value of options granted by Calando during the six months ended March 31, 2012 is estimated at $33,690. No Arrowhead or Calando options were issued during the six months ended March 31, 2011.

The intrinsic value of the options exercised during the six months ended March 31, 2012 was $0; no options were exercised during the six months ended March 31, 2011.

As of March 31, 2012, the pre-tax compensation expense for all unvested stock options at Arrowhead in the amount of approximately $2,074,971 will be recognized in our results of operations over a weighted average period of 3.2 years. As of March 31, 2012, the pre-tax compensation expense for all unvested stock options at Calando in the amount of approximately $82,397 will be recognized in our results of operations over a weighted average period of 3.1 years.

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


	Six Months Ended March 31,
	2012	2011
Dividend yield	—	—
Risk-free interest rate	0.9% to 1.7%	N/A
Volatility	90% - 100%	N/A
Expected life (in years)	6.25	N/A
Weighted average grant date fair value per share of options granted	$3.79	N/A

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

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

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

- Definition

Tabular disclosure of components of a stock option or other award plan under which equity-based compensation is awarded to employees, typically comprised of the amount of unearned compensation (deferred compensation cost), compensation expense, and changes in the quantity and fair value of the shares (or other type of equity) granted, exercised, forfeited, and issued and outstanding pertaining to that plan. Disclosure may also include nature and general terms of such arrangements that existed during the period and potential effects of those arrangements on shareholders, effect of compensation cost arising from equity-based payment arrangements on the income statement, method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period, cash flow effects resulting from equity-based payment arrangements and, for registrants that accelerate vesting of out of the money share options, reasons for the decision to accelerate.

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