Stock-Based Compensation

9 Months Ended

Jun. 30, 2022

Share-Based Payment Arrangement [Abstract]

Stock-Based Compensation

STOCK-BASED COMPENSATIONArrowhead has three plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, as of June 30, 2022, 216,607 and 4,114,999 shares, respectively, of Arrowhead’s Common Stock are reserved for the grant of stock options, stock appreciation rights, and restricted stock unit awards to employees, consultants and others. No further grants may be made under the 2004 Equity Incentive Plan. As of June 30, 2022, there were options granted and outstanding to purchase 216,607 and 1,806,987 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were 2,308,012 restricted stock units granted and outstanding under the 2013 Incentive Plan. As of June 30, 2022, there were 816,248 shares reserved for options and 682,500 shares reserved for restricted stock units issued as inducement grants to new employees outside of equity compensation plans. As of June 30, 2022, there were 3,000 shares of Common Stock reserved for options and 1,507,267 shares of Common Stock reserved for restricted stock units granted and outstanding under the 2021 Incentive Plan. As of June 30, 2022, the total number of shares available under the 2021 Incentive Plan was 6,627,845 shares, which includes 119,612 shares that were forfeited under the 2013 Incentive Plan.

Stock Options

The following table summarizes 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, 2021	3,456,239	$	19.60
Granted	—	—
Cancelled	(106,801)	43.68
Exercised	(506,596)	8.45
Balance at June 30, 2022	2,842,842	$	20.60	5.1 years	$	55,434,252
Exercisable at June 30, 2022	2,370,089	$	16.14	4.6 years	$	52,941,990

Stock-based compensation expense related to stock options for the three months ended June 30, 2022 and 2021 was $2.6 million and $3.2 million, respectively. Stock-based compensation expense related to stock options for the nine months ended June 30, 2022 and 2021 was $8.3 million and $9.6 million, respectively. For non-qualified stock options, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The grant date fair value of the options granted by the Company for the three months ended June 30, 2022 and 2021 was $0 and $0.9 million, respectively. The grant date fair value of the options granted by the Company for the nine months ended June 30, 2022 and 2021 was $0 and $9.0 million, respectively.

The intrinsic value of the options exercised during the three months ended June 30, 2022 and 2021 was $1.6 million and $10.2 million, respectively. The intrinsic value of the options exercised during the nine months ended June 30, 2022 and 2021 was $24.9 million and $63.0 million, respectively.

As of June 30, 2022, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $14.9 million will be recognized in the Company’s results of operations over a weighted average period of 1.7 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 the Company’s 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:

	Nine Months Ended June 30,
	2022	2021
Dividend yield	N/A	—
Risk-free interest rate	N/A	0.4% - 1.1%
Volatility	N/A	86% - 90.4%
Expected life (in years)	N/A	6.25
Weighted average grant date fair value per share of options granted	N/A	$	48.64

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

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

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

Restricted Stock Units

Restricted stock units (“RSUs”), including time-based, market condition-based, and performance condition-based awards, have been granted under the Company’s 2013 Incentive Plan, 2021 Incentive Plan, and as inducements grants granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules. At vesting, each outstanding RSU will be exchanged for one share of the Company’s Common Stock. RSU awards generally vest subject to the satisfaction of service requirements or the satisfaction of both service requirements and achievement of certain performance targets.

The following table summarizes the activity of the Company’s RSUs:

	Number of RSUs	Weighted- Average Grant Date Fair Value Per Share
Unvested at September 30, 2021	3,831,850	$	61.24
Granted	1,691,367	56.73
Vested	(962,188)	49.10
Forfeited	(95,625)	69.32
Unvested at June 30, 2022	4,465,404	$	61.97

During the three months ended June 30, 2022 and 2021, the Company recorded $33.7 million and $15.4 million of expense related to RSUs, respectively. During the nine months ended June 30, 2022 and 2021, the Company recorded $83.4 million and $32.5 million of expense related to RSUs, respectively. Such expense is included in stock-based compensation expense in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). For RSUs, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

For RSUs, the grant date fair value of the award is based on the Company’s closing stock price at the grant date, with consideration given to the probability of achieving performance conditions for performance-based awards. The grant date fair value of the RSUs granted by the Company for the three months ended June 30, 2022 and 2021 was $42.5 million and $3.1 million, respectively. The grant date fair value of the RSUs granted by the Company for the nine months ended June 30, 2022 and 2021 was $95.2 million and $112.1 million, respectively.

As of June 30, 2022, the pre-tax compensation expense for all unvested RSUs in the amount of $190.3 million will be recognized in the Company’s results of operations over a weighted average period of 2.7 years.