NOTE 8. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office space for its corporate headquarters in Pasadena, California. In March 2014, the Company signed a lease addendum to expand its corporate headquarters, and the new space became available in September 2014. The leases for the expansion space and the current space will expire in September 2019. Rental costs, including the expansion space are approximately $23,000 per month, increasing approximately 3% annually.

The Company’s research facility in Madison, Wisconsin is leased through February 28, 2019. Monthly rental expense is approximately $25,000. Other monthly rental expenses include common area maintenance and real estate taxes totaling approximately $16,000 per month. Utilities costs are approximately $15,000 per month. Total monthly costs are approximately $75,000 per month, including monthly payments recorded under a capital lease of approximately $19,000.

Facility rent expense, related to continuing operations, for the years ended September 30, 2014, 2013 and 2012 was $554,000, $534,000 and $480,000, respectively.

As of September 30, 2014, future minimum lease payments due in fiscal years under capitalized leases are as follows:

2015	$	228,420
2016		228,420
2017		228,420
2018		228,420
2019		95,175
2020 and thereafter		-
Less interest		(36,524)
Principal		972,331
Less current portion		(213,991	)
Noncurrent portion	$	758,340

As of September 30, 2014, future minimum lease payments due in fiscal years under operating leases are as follows:

2015	$	580,306
2016		596,877
2017		613,664
2018		637,897
2019		459,633
2020 and thereafter		-
Total	$	2,888,377

Litigation

The Company, Christopher R. Anzalone, and Bruce D. Given have been named as defendants in putative securities class actions filed in the Central District of California regarding certain public statements in connection with the Company’s hepatitis B drug research. Two suits are currently pending: Wang v. Arrowhead Research Corp., et al., No. 2:14-cv-07890, filed October 10, 2014, and Eskinazi v. Arrowhead Research Corp., et al., No. 2:14-cv-07911, filed October 13, 2014 (collectively, the “Securities Claims”). Both cases are assigned to the Hon. Consuelo B. Marshall. Both plaintiffs bring claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seek damages in an unspecified amount. Motions for appointment of lead plaintiff and lead counsel are due December 9, 2014, pursuant to the Private Securities Litigation Reform Act of 1995. On November 20, 2014, a putative stockholder derivative action was filed in 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. The complaint, Weisman v. Anzalone et al., No. 2:14-cv-08982, seeks unspecified damages and attorneys’ fees.

The Company has been named as a defendant in a complaint filed by William Marsh Rice University (“Rice University”) in the District Court of Harris County, Texas relating to alleged breaches of a license agreement between Rice University and the Company’s former subsidiary, Unidym, Inc. The suit, captioned, William Marsh Rice University vs. Unidym, Inc. and Arrowhead Research Corporation, No. 2014-66088, was filed November 11, 2014. The plaintiff has alleged that the Company fraudulently induced Rice University to take certain actions with respect to Unidym’s license from Rice University and seeks injunctive relief, damages, including unspecified compensatory and punitive damages, and attorneys’ fees.

The Company believes it has a meritorious defense and intends to vigorously defend itself in each of the above matters. The Company makes provisions for liabilities when it is both probable that a liability has been incurred and the amount can be reasonably estimated. No such liability has been recorded related to these matters. The Company does not expect these matters to have any material effect on its Consolidated Financial Statements. With regard to legal fees, such as attorney fees related to these matters or any other legal matters, the Company’s accounting policy is to recognize such cost as incurred.

Purchase Commitments

In the normal course of business, we enter into various purchase commitments for the manufacture of drug components, toxicology studies, and for clinical studies. As of September 30, 2014, these future commitments were approximately $21.4 million, of which approximately $19.5 million is expected to be incurred in fiscal 2015, and $1.9 million is expected to be incurred beyond fiscal 2015.

Technology License Commitments

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