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Fair Value Measurements & Derivative Instruments | 9 Months Ended
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Jun. 30, 2012
Fair Value Measurements & Derivative Instruments [Abstract] |
FAIR VALUE MEASUREMENTS & DERIVATIVE INSTRUMENTS | NOTE 9. FAIR VALUE MEASUREMENTS & DERIVATIVE INSTRUMENTS The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows: Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly. Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date. The following table summarizes fair value measurements at June 30, 2012 and September 30, 2011 for assets and liabilities measured at fair value on a recurring basis: June 30, 2012:
|  | Level I |  |  | Level II |  |  | Level III |  |  | Total |
Cash and cash equivalents |  | $ | 2,282,641 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,282,641 |
Marketable securities |  | $ | 108,965 |  |  | $ | — |  |  | $ | — |  |  | $ | 108,965 |
Derivative assets |  | $ | — |  |  | $ | — |  |  | $ | 312,250 |  |  | $ | 312,250 |
Derivative liabilities |  | $ | — |  |  | $ | — |  |  | $ | 869,766 |  |  | $ | 869,766 |
September 30, 2011: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Level I |  |  | Level II |  |  | Level III |  |  | Total |
Cash and cash equivalents |  | $ | 7,507,389 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,507,389 |
Marketable securities |  | $ | 634,585 |  |  | $ | — |  |  | $ | — |  |  | $ | 634,585 |
Derivative assets |  | $ | — |  |  | $ | — |  |  | $ | 161,125 |  |  | $ | 161,125 |
Derivative liabilities |  | $ | — |  |  | $ | — |  |  | $ | 944,980 |  |  | $ | 944,980 |
As part of the sale of proceeds from the sale of Unidym in January 2011, Arrowhead received a bond from Wisepower in the face amount of $2.5 million. The bond is convertible to Wisepower common stock at a price of $2.00 per share. The conversion feature is subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the conversion feature on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative asset. The fair value of the conversion feature is estimated at the end of each reporting period and the change in the fair value of the conversion feature is recorded as a nonoperating gain/loss as change in value of derivatives in Company’s Consolidated Statement of Operations. A portion of the bond is owed to a third party, as such the company records a derivative asset for the entire conversion feature and records a derivative liability for the portion related to the third party. The original fair value of the derivative relating to the third party was $26,310; the fair value at September 30, 2011 was $6,854, and the fair value at June 30, 2012 was $13,282. The gain from the change in value of the derivative asset, net of the derivative liability, for the nine months ended June 30, 2012 was $144,697, and is reflected in the change in value of derivatives in the Company’s consolidated statement of operations. During the nine months ended June 30, 2012, the Company recorded a gain from the change in fair value of the derivative asset, net of $151,125. The assumptions used in valuing the derivative asset as of June 30, 2012 were as follows:
Risk free interest rate |  |  | 0.33 | %
Expected life |  |  | 1.6 Years |
Dividend yield |  |  | none |
Volatility |  |  | 72 | %
The following is a reconciliation of the derivative asset for the nine months ended June 30, 2012:
Value at October 1, 2011 |  | $ | 161,125 |
Receipt of instruments |  |  | — |
Increase in value |  |  | 151,125 |
Net settlements |  |  | — |
Value at June 30, 2012 |  | $ | 312,250 |
As part of the equity financing on June 17, 2010, Arrowhead issued warrants to acquire up to 329,649 shares of Common Stock (the “Warrants”) which contain a mechanism to adjust the strike price upon the issuance of certain dilutive equity securities. If during the term of the Warrants, the Company issues Common Stock at a price lower than the exercise price of the Warrants, the exercise price of the Warrants would be reduced to the amount equal to the issuance price of the Common Stock. As a result of this feature, the Warrants are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the Warrants on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative liability. The fair value of the Warrants is estimated at the end of each reporting period and the change in the fair value of the Warrants is recorded as a nonoperating gain or loss in the Company’s consolidated statement of operations. During the nine months ended June 30, 2012, the Company recorded a non-cash loss from the change in fair value of the derivative liability of $74,330. The assumptions used in valuing the derivative liability as of June 30, 2012 were as follows:
Risk free interest rate |  |  | 0.41 | %
Expected life |  |  | 3.5 Years |
Dividend yield |  |  | none |
Volatility |  |  | 100 | %
The following is a reconciliation of the derivative liability related to these warrants through June 30, 2012:
Value at September 30, 2011 |  | $ | 907,233 |
Receipt of instruments |  |  | — |
Change in value |  |  | (74,330 | )
Net settlements |  |  | — |
Value at June 30, 2012 |  | $ | 832,903 |
In conjunction with the financing of Ablaris during the year ended September 30, 2011, Arrowhead sold exchange rights to certain investors whereby the investors have the right to exchange their shares of Ablaris for a prescribed number of Arrowhead shares based upon a predefined ratio. The exchange rights have a seven-year term. During the first year, the exchange right allows the holder to exchange one Ablaris share for 0.06 Arrowhead shares (as adjusted for a subsequent reverse stock split). This ratio declines to 0.04 in the second year, 0.03 in the third year and 0.02 in the fourth year. In the fifth year and beyond the exchange ratio is 0.01. Exchange rights for 675,000 Ablaris shares were sold during the year ended September 30, 2011, and remain outstanding at June 30, 2012. The exchange rights are subject to derivative accounting as prescribed under ASC 815. Accordingly, the fair value of the exchange rights on the date of issuance was estimated using an option pricing model and recorded on the Company’s consolidated balance sheet as a derivative liability. The fair value of the exchange rights is estimated at the end of each reporting period and the change in the fair value of the exchange rights is recorded as a nonoperating gain or loss in the Company’s Consolidated Statement of Operations. During the nine months ended June 30, 2012, the Company recorded a non-cash gain from the change in fair value of the derivative liability of $7,312. The assumptions used in valuing the derivative liability as of June 30, 2012 were as follows:
Risk free interest rate |  |  | 0.72 | %
Expected life |  |  | 5.5 Years |
Dividend yield |  |  | none |
Volatility |  |  | 100 | %
The following is a reconciliation of the derivative liability related to these exchange rights through June 30, 2012:
Value at September 30, 2011 |  | $ | 30,892 |
Receipt of instruments |  |  | — |
Change in value |  |  | (7,312 | )
Net settlements |  |  | — |
Value at June 30, 2012 |  | $ | 23,580 |
The carrying amounts of the Company’s other financial instruments, which include accounts receivable, accounts payable, and accrued expenses approximate their respective fair values due to the relatively short-term nature of these instruments.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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