NOTE 6. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases approximately 8,500 square feet of office space for its corporate headquarters in Pasadena, California. The lease will expire in September 2019. Rental costs are approximately $24,000 per month, increasing approximately 3% annually.

On January 8, 2016, the Company entered into a new lease for a Madison, Wisconsin research facility. The 10-year office building lease between the Company’s subsidiary, Arrowhead Madison Inc., and University Research Park, Incorporated is for approximately 60,000 square feet of office and laboratory space located at 502 South Rosa Road, Madison, Wisconsin. This lease will replace the Company’s current research facility lease, also with University Research Park, Incorporated for property located at 465 Science Drive, Madison Wisconsin. The larger facility is designed to accommodate increased research and development personnel for the Company’s expanding pipeline of current and future drug candidates.

The initial term of the lease commenced on January 1, 2016 with expected occupancy in late 2016, after certain leasehold improvements have been completed. The lease payments and payments against a note payable for a tenant improvement allowance, which begin on October 1, 2016, will total approximately $15.4 million over the initial 10-year term. The Company also estimates payments for the Company’s pro rata share of certain real estate taxes, operating expenses and common area maintenance expenses to be approximately $0.9 million for the first year of the lease, and these payments will continue throughout the initial 10-year term. The Company expects to pay approximately $7.3 million for leasehold improvements, net of tenant improvement allowances which are accounted for as deferred rent and a note payable on the Company’s Consolidated Balance Sheet. Pursuant to the lease, within six months of the expiration of the initial 10-year term, the Company has the option to extend the lease for up to two additional five-year terms, with certain annual increases in base rent.

Additionally, on January 8, 2016 and in conjunction with signing the new lease agreement as discussed above, the Company entered into an amendment to the Company’s current research facility lease for property located at 465 Science Drive, Madison, Wisconsin with University Research Park, Incorporated that provides for an early termination of such lease effective on October 31, 2016.

Current rental expense is approximately $26,000. Other monthly rental expenses include common area maintenance and real estate taxes totaling approximately $20,000 per month. Utilities costs are approximately $18,000 per month. Total monthly costs are approximately $83,000 per month, including monthly payments recorded under a capital lease of approximately $19,000.

The Company leased additional research facility space in Middleton, Wisconsin, and this space is leased through December 2016. Monthly rental expense for the additional space is approximately $13,000. Other monthly rental expenses include common area maintenance and real estate taxes totaling approximately $4,000 per month.

Facility rent expense for the three and nine months ended June 30, 2016 was $232,000 and $659,000, respectively. Facility rent expense for the three and nine months ended June 30, 2015 was $182,000 and $544,000, respectively.

As of June 30, 2016, future minimum lease payments due in fiscal years under capitalized leases are as follows:

2016 (remainder of)	$	57,105
2017		228,420
2018		228,420
2019		95,175
2020		-
2021 and thereafter		-
Less interest		(13,605	)
Principal		595,515
Less current portion		(216,653	)
Noncurrent portion	$	378,862

As of June 30, 2016, future minimum lease payments due in fiscal years under operating leases are as follows:

2016 (remainder of)	$	192,220
2017		1,330,839
2018		1,303,345
2019		1,340,234
2020		1,044,431
2021 and thereafter		6,836,991
Total	$	12,048,060

Litigation

The Company and certain of its officers and directors have been named as defendants in a consolidated class action pending before the United States District Court for the Central District of California regarding certain public statements in connection with the Company’s hepatitis B drug research. The consolidated class action, initially filed as Wang v. Arrowhead Research Corp., et al., No. 2:14-cv-07890 (C.D. Cal., filed Oct. 10, 2014), and Eskinazi v. Arrowhead Research Corp., et al., No. 2:14-cv-07911 (C.D. Cal., filed Oct. 13, 2014), asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks damages in an unspecified amount. Additionally, three putative stockholder derivative actions captioned Weisman v. Anzalone et al., No. 2:14-cv-08982 (C.D. Cal., filed Nov. 20, 2014), Bernstein (Backus) v. Anzalone, et al., No. 2:14-cv-09247 (C.D. Cal., filed Dec. 2, 2014); and Johnson v. Anzalone, et al., No. 2:15-cv-00446 (C.D. Cal., filed Jan. 22, 2015), were filed in the United States District Court for the Central District of California, alleging breach of fiduciary duty by the Company’s Board of Directors in connection with the facts underlying the securities claims. An additional consolidated derivative action asserting similar claims is pending in Los Angeles County Superior Court, initially filed as Bacchus v. Anzalone, et al., (L.A. Super., filed Mar. 5, 2015); and Jackson v. Anzalone, et al. (L.A. Super., filed Mar. 16, 2015). Each of these suits seeks damages in unspecified amounts and some seek various forms of injunctive relief. The Company believes it has a meritorious defense and intends to vigorously defend itself in this matter. The Company makes provisions for liabilities when it is both probable that a liability has been incurred and the amount can be reasonably estimated. No such liability has been recorded related to this matter. The Company does not expect this matter to have a material effect on its Consolidated Financial Statements. With regard to legal fees, such as attorney fees related to this matter or any other legal matters, the Company’s recognizes such costs as incurred.

The Company and two of its former executives were named as defendants in a complaint filed on November 11, 2014 and captioned William Marsh Rice University vs. Unidym, Inc. and Arrowhead Research Corporation, No. 2014-66088, in the United States District Court for the Southern District of Texas relating to alleged breaches of a license agreement between Rice University and the Company’s former subsidiary, Unidym, Inc. The plaintiff alleged that the Company and its former executives acted fraudulently with respect to Unidym’s license from Rice University and sought injunctive relief, damages, including unspecified compensatory and punitive damages, and attorneys’ fees. In May 2016, the Company and the plaintiff agreed to a settlement under which the Company admitted no liability and paid a confidential settlement amount and the plaintiff agreed to a permanent dismissal of claims. The amount of the settlement was recorded during the three months ended March 31, 2016 and did not have a material effect on the Company’s Consolidated Financial Statements.

Purchase Commitments

In the normal course of business, we enter into various purchase commitments for the manufacture of drug components, for toxicology studies, and for clinical studies. As of June 30, 2016, these future commitments were approximately $49.8 million, of which approximately $8.0 million is expected to be incurred in the remainder of fiscal 2016, and $41.8 million is expected to be incurred beyond fiscal 2016.

Technology License Commitments

The Company has licensed from third parties the rights to use certain technologies for its research and development activities, as well as in any products the Company may develop using these licensed technologies. These agreements and other similar agreements often require milestone and royalty payments. Milestone payments, for example, may be required as the research and development process progresses through various stages of development, such as when clinical candidates enter or progress through clinical trials, upon NDA and upon certain sales level milestones. These milestone payments could amount to the mid to upper double digit millions of dollars. In certain agreements, the Company may be required to make mid to high single digit percentage royalty payments based on a percentage of the sales of the relevant products.