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.

As of December 31, 2015, the Company’s research facility in Madison, Wisconsin is leased through February 28, 2019. Monthly rental expense is approximately $26,000. Other monthly rental expenses include common area maintenance and real estate taxes totaling approximately $18,000 per month. Utilities costs are approximately $16,000 per month. Total monthly costs are approximately $79,000 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 May 2016. Monthly rental expense for the additional space is approximately $4,000. Other monthly rental expenses include common area maintenance and real estate taxes totaling approximately $2,000 per month.

Facility rent expense for the three months ended December 31, 2015 and 2014 was $198,600 and $171,500, respectively.

As of December 31, 2015, future minimum lease payments due in fiscal years under capitalized leases are as follows:

2016 (remainder of)....................................	$	171,315
2017 ..............................................		228,420
2018 ..............................................		228,420
2019 ..............................................		95,175
2020 ..............................................		-
2021 and thereafter.....................................		-
Less interest.........................................		(19,041	)
Principal............................................		704,289
Less current portion....................................		(218,447	)
Noncurrent portion.....................................	$	485,842

As of December 31, 2015, future minimum lease payments due in fiscal years under operating leases are as follows:

2016 (remainder of).......................................	$	470,846
2017 ................................................		613,664
2018 ................................................		637,897
2019 ................................................		459,633
2020 ................................................		-
2021 and thereafter.......................................		-
Total.................................................	$	2,182,040

In January 2016, the Company entered into a new lease for a Madison, Wisconsin research facility. This lease will replace the Company’s current research facility office leases. The increased capacity of this new facility compared to the current research facilities will accommodate increased research and development personnel for the Company’s expanding pipeline of current and future drug candidates. See Footnote 9 – Subsequent Events for additional discussion of this new lease agreement.

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 and two of its former executives have been 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, currently pending 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 has alleged that the Company and its former executives acted fraudulently 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 meritorious defenses 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 costs 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 December 31, 2015, these future commitments were approximately $47.5 million, of which approximately $25.2 million is expected to be incurred in the remainder of fiscal 2016, and $23.3 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 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.