ARROWHEAD PHARMACEUTICALS, INC. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) of the Exchange Act, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. Management’s Annual Report on Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its Consolidated Financial Statements for external purposes in accordance with GAAP. This process includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to risk that controls may become inadequate because either conditions change or the degree of compliance with policies or procedures may deteriorate. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2023. In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2023. Rose, Snyder and Jacobs LLP, the independent registered public accounting firm that audited the Consolidated Financial Statements included in this 2023 Annual Report on Form 10-K, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2023 , which is included herein. Changes in Internal Control Over Financial Reporting There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s process for evaluating controls and procedures is continuous and encompasses consistent improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process. 70 ITEM 9B. OTHER INFORMATION (b) Trading Plans During the quarter ended September 30, 2023, the following directors and officers (as defined in Exchange Act Rule 16a-1(f)) adopted certain trading plans intended to satisfy Rule 10b5-1(c): Name Title Adoption or Termination Date Plan Start Date Plan End Date Shares Vesting and Subject to Sell-To-Cover (1) Other Shares Being Sold (Subject to Certain Conditions) Mauro Ferrari Board Member 09/28/2023 01/11/2024 01/31/2024 n/a 3,147 Douglass Given Board Member 09/26/2023 01/11/2024 01/31/2024 n/a 2,911 James Hamilton (2) Chief Discovery and Translational Medicine 08/15/2023 01/03/2024 01/31/2024 52,500 n/a James Hamilton Chief Discovery and Translational Medicine 08/22/2023 12/01/2023 11/29/2024 n/a 35,000 Ken Myszkowski Chief Financial Officer 09/07/2023 01/05/2024 01/31/2024 30,000 n/a Patrick O ’ Brien Chief Operating Officer and General Counsel 09/03/2023 01/03/2024 01/05/2024 n/a 4,000 Tracie Oliver Chief Commercial Officer 08/28/2023 01/05/2024 07/31/2024 17,625 n/a Victoria Vakiener Board Member 09/28/2023 01/11/2024 05/31/2024 n/a 6,519 William Waddill Board Member 08/29/2023 01/11/2024 01/31/2024 n/a 3,934 (1) This column indicates the total number of shares vesting, but the 10b5-1 Plan provides for the sale of only those shares necessary to satisfy payment of applicable withholding taxes. (2) Termination of a trading plan that was intended to satisfy Rule 10b5-1(c). ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information called for by this Item will be incorporated by reference from the Company’s Definitive Proxy Statement, under the headings Proposal One — Election of Directors, Equity Compensation Plan Information, Corporate Governance, Environmental and Social Commitment, and, if applicable, Delinquent Section 16(a) Reports, to be filed for the Company’s 2024 Annual Meeting of Stockholders, which proxy statement will be filed no later than January 26, 2024 (the “Definitive Proxy Statement”). ITEM 11. EXECUTIVE COMPENSATION The information called for by this Item will be incorporated by reference from the Definitive Proxy Statement, under the heading Executive Compensation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information called for by this Item will be incorporated by reference from the Definitive Proxy Statement, under the heading Voting Securities of Principal Stockholders and Management. ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information called for by this Item will be incorporated by reference from the Definitive Proxy Statement, under the headings Review and Approval of Related-Party Transactions and Certain Relationships and Related Transactions, and Director Independence. 71 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by this Item will be incorporated by reference from the Definitive Proxy Statement, under the heading Audit Fees. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements. See Index to Financial Statements and Schedule on page F-1. (2) Financial Statement Schedules. See Index to Financial Statements and Schedule on page F-1. All other schedules are omitted as the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or notes thereto. (3) Exhibits. The following exhibits are filed (or incorporated by reference herein) as part of this Annual Report on Form 10-K: Incorporated by Reference Herein Exhibit Number Description Form Date 1.1 Open Market Sale Agreement, dated as of December 2, 2022, by and between Arrowhead Pharmaceuticals, Inc. and Jefferies LLC Current Report on Form 8-K as Exhibit 1.1 December 2, 2022 2.1† Stock and Asset Purchase Agreement between Arrowhead Research Corporation and Roche entities, dated October 21, 2011 Annual Report on Form 10-K as Exhibit 2.1 December 20, 2011 2.2† Asset Purchase and Exclusive License Agreement between Arrowhead Research Corporation and Novartis Institutes for BioMedical Research, Inc., dated March 3, 2015 Quarterly Report on Form 10-Q, as Exhibit 2.1 May 11, 2015 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.3 of the Company’s Form 8-K filed on April 6, 2016) Current Report on Form 8-K as Exhibit 3.3 April 6, 2016 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Arrowhead Pharmaceuticals, Inc. (incorporated by reference from Exhibit 3.2 of the Company’s Form 10-Q filed on May 2, 2023) Quarterly Report on Form 10-Q, as Exhibit 3.2 May 2, 2023 3.3 Second Amended and Restated Bylaws (incorporated by reference from Exhibit 3.1 of the Company’s Form 8-K filed on January 30, 2023) Current Report on Form 8-K as Exhibit 3.2 January 30, 2023 4.1 Form of Common Stock Certificate of Arrowhead Pharmaceuticals, Inc. Current Report on Form 8-K, as Exhibit 4.1 April 6, 2016 4.2 Form of Indenture Registration Statement on Form S-3, as Exhibit 4.2 December 2, 2019 4.3 Rights Agreement dated as of March 21, 2017, between the Company and Computershare Trust Company, N.A., as rights agent, which includes as Exhibit B the Form of Rights Certificate Current Report on Form 8-K, as Exhibit 4.1 March 23, 2017 4.4 Description of Registrant’s Securities Annual Report on Form 10-K, as Exhibit 4.4 November 25, 2019 4.5 Registration Rights Agreement by and between Arrowhead Pharmaceuticals, Inc. and Johnson & Johnson Innovation-JJDC, Inc., dated October 3, 2018 Quarterly Report on Form 10-Q, as Exhibit 10.4 February 7, 2019 72 Incorporated by Reference Herein Exhibit Number Description Form Date 10.1** Arrowhead Research Corporation 2004 Equity Incentive Plan, as amended Schedule 14C, as Annex B January 12, 2012 10.2** Arrowhead Research Corporation 2013 Incentive Plan Schedule 14C, as Annex A December 20, 2013 10.3** Form of Stock Option Agreement for use with the 2013 Incentive Plan Current Report on Form 8-K, as Exhibit 10.1 February 12, 2014 10.4** Form of Restricted Stock Unit Agreement for use with the 2013 Incentive Plan Current Report on Form 8-K, as Exhibit 10.2 February 12, 2014 10.5** Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan Schedule 14A, Exhibit A January 28, 2021 10.6** Form of RSU Agreement for Officers and Certain Other Employees (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan- Inducement Award) Registration Statement on Form S-8, Exhibit 99.1 December 22, 2021 10.7*, ** Form of RSU Agreement for Officers and Certain Other Employees (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan) 10.8** Form of RSU Agreement for Employees (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan- Inducement Award) Registration Statement on Form S-8, Exhibit 99.2 December 22, 2021 10.9*, ** Form of RSU Agreement for Employees (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan) 10.10** Form of Stock Option Grant (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan- Inducement Award) Registration Statement on Form S-8, Exhibit 99.3 December 22, 2021 10.11*, ** Form of Stock Option Grant (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan) 10.12** Executive Incentive Plan, adopted December 12, 2006 Annual Report on Form 10-K, as Exhibit 10.11 December 14, 2006 10.13** Employment Agreement between Arrowhead and Dr. Christopher Anzalone, dated June 11, 2008 Current Report on Form 8-K, as Exhibit 10.1 June 13, 2008 10.14** Amendment to Employment Agreement between Arrowhead and Dr. Christopher Anzalone, effective May 12, 2009 Annual Report on Form 10-K, as Exhibit 10.8 December 22, 2009 10.15† Collaboration Agreement by and among Alnylam Pharmaceuticals, Inc. and F. Hoffmann-La Roche Ltd and Hoffman-La Roche Inc., dated October 29, 2009 † Annual Report on Form 10-K, as Exhibit 10.36 December 20, 2011 10.16† Non-Exclusive License Agreement between Arrowhead Research Corporation and Roche entities, dated October 21, 2011† Annual Report on Form 10-K, as Exhibit 10.33 December 20, 2011 10.16† License Agreement by and between Alnylam Pharmaceuticals, Inc., Arrowhead Research Corporation and Arrowhead Madison, Inc.† Quarterly Report on Form 10-Q, as Exhibit 10.1 August 12, 2014 10.17† Second Collaboration and Licensing Agreement between Arrowhead Pharmaceuticals, Inc. and Amgen Inc., dated September 28, 2016† Annual Report on Form 10-K, as Exhibit 10.19 December 14, 2016 10.18 Common Stock Purchase Agreement between the Company and Amgen Inc., dated September 28, 2016 Amendment No. 1 to the Registration Statement on Form S-3, as Exhibit 10.1) November 25, 2016 10.19† License Agreement by and between Arrowhead Pharmaceuticals, Inc. and Janssen Pharmaceuticals, Inc., dated October 3, 2018† Quarterly Report on Form 10-Q, as Exhibit 10.1 February 7, 2019 73 Incorporated by Reference Herein Exhibit Number Description Form Date 10.20† Amendment No. 1 to License Agreement by and between Arrowhead Pharmaceuticals, Inc. and Janssen Pharmaceuticals, Inc., dated December 18, 2018† Annual Report on Form 10-K, as Exhibit 10.19 November 25, 2019 10.21† Amendment No. 2 to License Agreement by and between Arrowhead Pharmaceuticals, Inc. and Janssen Pharmaceuticals, Inc., dated February 4, 2019† Annual Report on Form 10-K, as Exhibit 10.20 November 25, 2019 10.22 Stock Purchase Agreement by and between Johnson & Johnson Innovation-JJDC, Inc. and Arrowhead Pharmaceuticals, Inc., dated October 3, 2018 Quarterly Report on Form 10-Q, as Exhibit 10.3 February 7, 2019 10.23† Exclusive License and Co-Funding Agreement by and between Arrowhead Pharmaceuticals, Inc. and Takeda Pharmaceuticals U.S.A., Inc., dated October 7, 2020 † Quarterly Report on Form 10-Q, as Exhibit 10.1 February 4, 2021 10.24 First Amendment to Exclusive License and Co-Funding Agreement by and between Arrowhead Pharmaceuticals, Inc. and Takeda Pharmaceuticals U.S.A., Inc. dated March 15, 2022 Quarterly Report on Form 10-Q, as Exhibit 10.1 May 10, 2022 10.25† Collaboration and License Agreement by and between Arrowhead Pharmaceuticals, Inc. and Horizon Therapeutics Ireland DAC, dated June 18, 2021 † Quarterly Report on Form 10-Q, as Exhibit 10.4 August 5, 2021 10.26 Collaboration and License Agreement by and between Arrowhead Pharmaceuticals, Inc. and Glaxosmithkline Intellectual Property, dated November 22, 2021 Quarterly Report on Form 10-Q, as Exhibit 10.1 February 2, 2022 10.27 Royalty Purchase Agreement, dated as of November 9, 2022, by and between Arrowhead Pharmaceuticals, Inc. and Royalty Pharma Investments 2019 ICAV Quarterly Report on Form 10-Q, as Exhibit 10.1 February 6, 2023 10.28 Lease Agreement between University Research Park, Incorporated and Arrowhead Madison, Inc., dated January 8, 2016 Quarterly Report on Form 10-Q, as Exhibit 10.1 February 9. 2016 10.29 Amendment No. 1 to Lease Agreement between Arrowhead Pharmaceuticals, Inc. and University Research Park, Incorporated, dated October 22, 2018 Annual Report on Form 10-K, as Exhibit 10.23 November 23, 2020 10.30 Amendment No. 2 to Lease Agreement between Arrowhead Pharmaceuticals, Inc. and University Research Park, Incorporated, dated January 10, 2019 Annual Report on Form 10-K, as Exhibit 10.24 November 23, 2020 10.31 Amendment No. 3 to Lease Agreement between Arrowhead Pharmaceuticals, Inc. and University Research Park, Incorporated, dated January 11, 2019 Annual Report on Form 10-K, as Exhibit 10.25 November 23, 2020 10.32 Amendment No. 4 to Lease Agreement between Arrowhead Pharmaceuticals, Inc. and University Research Park, Incorporated, dated September 19, 2019 Annual report on Form 10-K, as Exhibit 10.26 November 23, 2020 10.33 Amendment No. 5 to Lease Agreement between Arrowhead Pharmaceuticals, Inc. and University Research Park, Incorporated, dated May 14, 2020 Annual report on Form 10-K, as Exhibit 10.27 November 23, 2020 10.34 Amendment No. 6 to Lease Agreement by and between Arrowhead Pharmaceuticals, Inc. and University Research Park, dated November 23, 2020 Quarterly Report on Form 10-Q, as Exhibit 10.3 February 4, 2021 10.35 Amendment No. 7 to Lease Agreement by and between Arrowhead Pharmaceuticals, Inc. and University Research Park, dated December 9, 2020 Quarterly Report on Form 10-Q, as Exhibit 10.4 February 4, 2021 10.36 Office Lease by and between 177 Colorado Owner LLC and Arrowhead Pharmaceuticals, Inc., dated April 17, 2019 Quarterly Report on Form 10-Q, as Exhibit 10.1 August 5, 2019 74 Incorporated by Reference Herein Exhibit Number Description Form Date 10.37 First Amendment to Office Lease by and between Arrowhead Pharmaceuticals, Inc. and 177 Colorado Owner LLC., dated October 23, 2020 Quarterly Report on Form 10-Q, as Exhibit 10.2 February 4, 2021 10.38 Lease Agreement by and between Arrowhead Pharmaceuticals, Inc. and ARE-SD Region No. 72, LLC, dated November 19, 2021 Quarterly Report on Form 10-Q, as Exhibit 10.2 February 2, 2022 10.39* First Amendment to Lease Agreement by and between Arrowhead Pharmaceuticals, Inc. and ARE-SD Region No. 72, LLC, dated September 26, 2023 21.1* List of Subsidiaries 23.1* Consent of Independent Public Registered Accounting Firm 31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1*** Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2*** Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 97*, ** Arrowhead Pharmaceuticals, Inc. Compensation Recoupment (Clawback) Policy, dated November 20, 2023 101.INS* Inline XBRL Taxonomy Extension Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 104* The cover page from the Company’s Annual Report on Form 10-K for the year ended September 30, 2023, formatted in Inline XBRL (included as Exhibit 101) * Filed herewith ** Indicates compensation plan, contract or arrangement. *** Furnished herewith † Certain portions of this exhibit were redacted by means of marking such portions with asterisks because the identified portions are (i) not material and (ii) treated as private or confidential by the Company. ITEM 16. FORM 10-K SUMMARY None. 75 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 29, 2023 ARROWHEAD PHARMACEUTICALS, INC. By: /s/ Christopher Anzalone Christopher Anzalone Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Christopher Anzalone Chief Executive Officer, President and Director (Principal Executive Officer) November 29, 2023 Christopher Anzalone /s/ Kenneth A. Myszkowski Chief Financial Officer (Principal Financial and Accounting Officer) November 29, 2023 Kenneth A. Myszkowski /s/ Douglass Given Director, Chairman of the Board of Directors November 29, 2023 Douglass Given /s/ Mauro Ferrari Director November 29, 2023 Mauro Ferrari /s/ Michael S. Perry Director November 29, 2023 Michael S. Perry /s/ William Waddill Director November 29, 2023 William Waddill /s/ Adeoye Olukotun Director November 29, 2023 Adeoye Olukotun /s/ Victoria Vakiener Director November 29, 2023 Victoria Vakiener 76 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Reports of Independent Registered Public Accounting Firm (PCAOB ID: 468 ) F- 2 Consolidated Balance Sheets as of September 30, 202 3 and 2022 F- 5 Consolidated Statements of Operations and Comprehensive Loss for the years ended September 30, 2023, 2022 and 2021 F- 6 Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2023, 2022 and 2021 F- 7 Consolidated Statements of Cash Flows for the years ended September 30, 2023, 2022 and 2021 F- 8 Notes to Consolidated Financial Statements F- 9 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Arrowhead Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Arrowhead Pharmaceuticals, Inc. and Subsidiaries (the Company) as of September 30, 2023 and 2022, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2023, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 29, 2023, expressed an unqualified opinion. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Revenue Recognized Over Time Description of the Matter As discussed in Note 1 and Note 2 to the Consolidated Financial Statements, the Company earns its revenue through license and collaboration agreements. For performance obligations related to services that are required to be recognized over time, the Company measures its progress to completion using various measures, including an input measure of total labor costs incurred divided by total labor costs expected to be incurred, time elapsed, and an output measure of total patient visits divided by total patient visits expected. The selection of measurement criteria is based on the nature and phase of trials being conducted. F-2 Auditing revenue recognition is complex and highly judgmental due to the variability and uncertainty associated with the Company’s assessment of measure of progress. Changes in these estimates would have a significant effect on the amount of revenue recognized. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risk of material misstatement of license and collaboration agreement revenue including those associated with cost to complete estimates. We tested controls over management’s process to collect, review, and approve the data used in assessing revenue recognized over time. To test the measures of progress used for performance obligations related to services that are required to be recognized over time, our audit procedures included, among others, evaluating the appropriateness of the Company’s accounting policy for each type of arrangement, testing the identified measure of performance by reading contracts with customers, including all amendments, and reviewing the contract analyses prepared by management. We evaluated whether the selected measures of progress towards satisfaction of performance obligations were applied consistently. We also tested the completeness and accuracy of the underlying data used for the measure of progress by testing and or analyzing the underlying data. Rose, Snyder & Jacobs LLP We have served as the Company’s auditor since 2004. Encino, California November 29, 2023 F-3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Arrowhead Pharmaceuticals, Inc. Opinion on Internal Control over Financial Reporting We have audited Arrowhead Pharmaceuticals, Inc. and its Subsidiaries (the Company’s) internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of September 30, 2023 and 2022 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2023 and related notes, and our report dated November 29, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Rose, Snyder & Jacobs LLP Encino, CA November 29, 2023 F-4 Arrowhead Pharmaceuticals, Inc. Consolidated Balance Sheets (in thousands, except per share amounts) September 30, 2023 2022 ASSETS Current assets: Cash, cash equivalents and restricted cash $ 110,891 $ 108,005 Accounts receivable — 1,410 Available-for-sale securities, at fair value 292,735 — Held-to-maturity securities, at amortized cost — 268,391 Prepaid expenses 8,813 7,289 Other current assets 7,082 20,204 Total current assets 419,521 405,299 Property and equipment, net 290,262 110,297 Intangible assets, net 10,262 11,962 Held-to-maturity securities, at amortized cost — 105,872 Right-of-use assets 45,297 58,291 Other assets 210 218 Total Assets $ 765,552 $ 691,939 LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 35,866 $ 2,868 Accrued expenses 39,763 46,856 Accrued payroll and benefits 17,963 12,251 Lease liabilities 10,563 2,776 Deferred revenue 866 74,099 Other liabilities 435 — Total current liabilities 105,456 138,850 Long-term liabilities: Lease liabilities, net of current portion 104,608 78,800 Deferred revenue, net of current portion — 55,950 Liability related to the sale of future royalties 268,326 — Total long-term liabilities 372,934 134,750 Commitments and contingencies (Note 7) Noncontrolling interest and stockholders' equity: Common stock, $ 0.001 par value: Authorized 290,000 shares; issued and outstanding 107,312 and 105,960 shares 200 198 Additional paid-in capital 1,300,395 1,219,213 Accumulated other comprehensive loss ( 3,222 ) ( 136 ) Accumulated deficit ( 1,026,030 ) ( 820,755 ) Total Arrowhead Pharmaceuticals, Inc. stockholders' equity 271,343 398,520 Noncontrolling interest 15,819 19,819 Total noncontrolling interest and stockholders' equity 287,162 418,339 Total Liabilities, Noncontrolling Interest and Stockholders' Equity $ 765,552 $ 691,939 The accompanying notes are an integral part of these consolidated financial statements. F-5 Arrowhead Pharmaceuticals, Inc. Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts) Year Ended September 30, 2023 2022 2021 Revenue $ 240,735 $ 243,231 $ 138,287 Operating expenses: Research and development 353,188 297,307 206,342 General and administrative 92,549 124,431 80,981 Total operating expenses 445,737 421,738 287,323 Operating loss ( 205,002 ) ( 178,507 ) ( 149,036 ) Other income (expense): Interest income 15,299 5,033 6,120 Interest expense ( 18,326 ) — — Other, net 1,538 765 2,070 Total other (expense) income ( 1,489 ) 5,798 8,190 Loss before income tax expense and noncontrolling interest ( 206,491 ) ( 172,709 ) ( 140,846 ) Income tax expense 2,784 3,785 2 Net loss including noncontrolling interest ( 209,275 ) ( 176,494 ) ( 140,848 ) Net loss attributable to noncontrolling interest, net of tax ( 4,000 ) ( 431 ) — Net loss attributable to Arrowhead Pharmaceuticals, Inc. $ ( 205,275 ) $ ( 176,063 ) $ ( 140,848 ) Net loss per share attributable to Arrowhead Pharmaceuticals, Inc.: Basic $ ( 1.92 ) $ ( 1.67 ) $ ( 1.36 ) Diluted $ ( 1.92 ) $ ( 1.67 ) $ ( 1.36 ) Weighted-average shares used in calculating Basic 106,750 105,426 103,745 Diluted 106,750 105,426 103,745 Other comprehensive loss, net of tax: Unrealized losses on available-for-sale securities ( 2,964 ) — — Foreign currency translation adjustments ( 122 ) ( 67 ) ( 87 ) Comprehensive loss $ ( 212,361 ) $ ( 176,561 ) $ ( 140,935 ) The accompanying notes are an integral part of these consolidated financial statements. F-6 Arrowhead Pharmaceuticals, Inc. Consolidated Statements of Stockholders’ Equity (in thousands) Common Stock Amount ($) Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Non- controlling Interest Totals Balance at September 30, 2020 102,376 $ 195 $ 965,410 $ 18 $ ( 503,844 ) $ — $ 461,779 Stock-based compensation — — 76,673 — — — 76,673 Exercise of stock options 1,052 1 11,304 — — — 11,305 Common stock - restricted stock units vesting 899 1 ( 1 ) — — — — Foreign currency translation adjustments — — — ( 87 ) — — ( 87 ) Net loss — — — — ( 140,848 ) — ( 140,848 ) Balance at September 30, 2021 104,327 $ 197 $ 1,053,386 $ ( 69 ) $ ( 644,692 ) $ — $ 408,822 Common Stock Amount ($) Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Non- controlling Interest Totals Balance at September 30, 2021 104,327 $ 197 $ 1,053,386 $ ( 69 ) $ ( 644,692 ) $ — $ 408,822 Stock-based compensation — — 120,893 — — — 120,893 Exercise of stock options 606 — 5,185 — — — 5,185 Common stock - restricted stock units vesting 1,027 1 ( 1 ) — — — — Foreign currency translation adjustments — — — ( 67 ) — — ( 67 ) Interest in joint venture — — 39,750 — — 20,250 60,000 Net loss — — — — ( 176,063 ) ( 431 ) ( 176,494 ) Balance at September 30, 2022 105,960 $ 198 $ 1,219,213 $ ( 136 ) $ ( 820,755 ) $ 19,819 $ 418,339 Common Stock Amount ($) Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Non- controlling Interest Totals Balance at September 30, 2022 105,960 $ 198 $ 1,219,213 $ ( 136 ) $ ( 820,755 ) $ 19,819 $ 418,339 Stock-based compensation — — 78,130 — — — 78,130 Exercise of stock options 439 1 3,053 — — — 3,054 Common stock - restricted stock units vesting 913 1 ( 1 ) — — — — Unrealized losses on available-for-sale securities — — — ( 2,964 ) — — ( 2,964 ) Foreign currency translation adjustments — — — ( 122 ) — — ( 122 ) Net loss — — — — ( 205,275 ) ( 4,000 ) ( 209,275 ) Balance at September 30, 2023 107,312 $ 200 $ 1,300,395 $ ( 3,222 ) $ ( 1,026,030 ) $ 15,819 $ 287,162 The accompanying notes are an integral part of these consolidated financial statements. F-7 Arrowhead Pharmaceuticals, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended September 30, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 209,275 ) $ ( 176,494 ) $ ( 140,848 ) Adjustments to reconcile net loss to net cash flow from operating activities: Stock-based compensation 78,130 120,893 76,673 Depreciation and amortization 12,493 10,421 8,267 (Accretion) amortization of note premiums/discounts ( 2,017 ) 2,910 266 Non-cash interest expense on liability related to the sale of future royalties 18,326 — — Net loss (gain) from investments — 4,432 ( 1,708 ) Changes in operating assets and liabilities: Accounts receivable 1,410 8,845 ( 9,409 ) Prepaid expenses and other current assets 11,603 ( 19,291 ) ( 360 ) Accounts payable 32,998 ( 6,589 ) 2,628 Accrued expenses ( 14,965 ) 17,750 9,522 Deferred revenue ( 129,183 ) ( 112,501 ) 223,258 Operating lease, net 46,590 13,428 3,192 Other — 65 ( 169 ) Net cash provided by (used in) operating activities ( 153,890 ) ( 136,131 ) 171,312 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 176,737 ) ( 52,777 ) ( 23,567 ) Purchases of investments ( 246,141 ) ( 223,391 ) ( 240,703 ) Proceeds from sales and maturities of investments 326,723 270,751 122,592 Net cash used in investing activities ( 96,155 ) ( 5,417 ) ( 141,678 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercises of stock options 3,053 5,186 11,305 Proceeds from the sale of future royalties 250,000 — — Proceeds from investment in joint venture — 60,000 — Net cash provided by financing activities 253,053 65,186 11,305 Net increase (decrease) in cash, cash equivalents and restricted cash 3,008 ( 76,362 ) 40,939 Effect of exchange rate on cash, cash equivalents and restricted cash ( 122 ) ( 67 ) ( 88 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH: BEGINNING OR PERIOD 108,005 184,434 143,583 END OF PERIOD $ 110,891 $ 108,005 $ 184,434 Supplementary disclosures: Interest paid $ — $ — $ — Income Taxes Paid $ — $ ( 2 ) $ ( 2 ) The accompanying notes are an integral part of these consolidated financial statements. F-8 Arrowhead Pharmaceuticals, Inc. Notes to Consolidated Financial Statements NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES General Arrowhead Pharmaceuticals, Inc. and its subsidiaries (referred to herein collectively as the “Company”) are primarily engaged in developing medicines that treat intractable diseases by silencing the genes that cause them. Using a broad portfolio of RNA chemistries and efficient modes of delivery, the Company’s therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes. RNA interference (“RNAi”) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. The Company’s RNAi-based therapeutics may leverage this natural pathway of gene silencing to target and shut down specific disease-causing genes. The following table presents the Company’s current pipeline: Therapeutic Area Name Stage Product Rights Cardiometabolic Plozasiran (ARO-APOC3) Two Phase 2b and one Phase 3 Arrowhead Zodasiran (ARO-ANG3) Two Phase 2b Arrowhead Olpasiran Phase 3 Amgen Pulmonary ARO-RAGE Phase 1/2a Arrowhead ARO-MUC5AC Phase 1/2a Arrowhead ARO-MMP7 Phase 1/2a Arrowhead Liver GSK-4532990 Phase 2b GSK Fazirsiran Phase 3 Takeda and Arrowhead JNJ-3989 Phase 2 Janssen (1) HZN-457 Phase 1 Horizon (2) ARO-C3 Phase 1/2a Arrowhead ARO-PNPLA3 Phase 1 Arrowhead Muscle ARO-DUX4 Pre-Clinical Arrowhead Central Nervous System (CNS) ARO-SOD1 Pre-Clinical Arrowhead (1) On October 30, 2023, the Company entered into an Assignment and Consent Agreement with Janssen. See Note 15. (2) On October 6, 2023, Amgen announced that it has completed its acquisition of Horizon. The Company operates lab facilities in San Diego, California and Madison, Wisconsin, where its research and development activities, including the development of RNAi therapeutics, take place. The Company’s principal executive offices are located in Pasadena, California. Consolidation and Basis of Presentation The Consolidated Financial Statements include the accounts of Arrowhead Pharmaceuticals, Inc. and its subsidiaries (wholly-owned subsidiaries and a variable interest entity for which the Company is the primary beneficiary). Subsidiaries refer to Arrowhead Madison, Inc., Visirna Therapeutics, Inc. (“Visirna”), and Arrowhead Australia Pty Ltd. For subsidiaries in which the Company owns or is exposed to less than 100% of the economics, the Company records net loss attributable to noncontrolling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interests retained in such entity by the respective noncontrolling party. The Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). All intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform with the current period presentation. Liquidity The Company’s primary sources of financing have been through the sale of its securities, revenue from its licensing and collaboration agreements and the sale of certain future royalties. Research and development activities have required significant capital investment since the Company’s inception and are expected to continue to require significant cash expenditure in the future, particularly as the Company’s pipeline of drug candidates and its headcount have both expanded F-9 significantly. Additionally, significant capital investment will be required as the Company’s pipeline matures into later stage clinical trials and as the Company plans to increase its internal manufacturing capabilities. At September 30, 2023, the Company had $ 110.9 million in cash, cash equivalents and restricted cash ($ 7.9 million in restricted cash) and $ 292.7 million in available-for-sale debt securities to fund operations. During the year ended September 30, 2023, the Company’s cash, cash equivalents and restricted cash and investments balance decreased by $ 78.6 million which was primarily due to cash used to fund its operations, offset by the $ 250.0 million upfront payment received from Royalty Pharma (Note 13) and $ 110.0 million in milestone payments from the Company’s collaboration and license agreements (Note 2). In total, the Company is eligible to receive up to $ 2.8 billion in developmental, regulatory and sales milestones, and may receive various royalties on net sales from its licensing and collaboration agreements, subject to the terms and conditions of those agreements. The revenue recognition for these collaboration agreements is discussed further in Note 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, judgments and assumptions. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expense. Actual results could materially differ from those estimates. Variable Interest Entity (“VIE”) A VIE is an entity that, by design, either (i) lacks sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties; or (ii) has equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. The primary beneficiary of a VIE is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE through its interest in the VIE. On April 25, 2022, the Company entered into a license agreement with Visirna (Note 2) and consolidated Visirna’s financial statements in which the Company has a direct controlling financial interest based on the VIE model. The Company considers all the facts and circumstances, including its role in establishing Visirna and its ongoing rights and responsibilities to assess whether the Company has the power to direct the activities of Visirna. In general, the parties that make the most significant decisions affecting a VIE and have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE. The Company also considers all of its economic interests to assess whether the Company has the obligation to absorb losses of Visirna or the right to receive benefits from it that could potentially be significant to Visirna. This assessment requires the Company to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to Visirna. Factors considered in assessing the significance include: the design of the Visirna, including its capitalization structure, subordination of interests, payment priority, and the reasons why the interests are held by the Company. At Visirna’s inception, the Company determined whether it was the primary beneficiary and if Visirna should be consolidated based on the facts and circumstances. The Company performs ongoing reassessments of the VIE based on reconsideration events and reevaluates whether a change to the consolidation is required. As of September 30, 2023, there were no events to be reconsidered in the consolidation. Cash, Cash Equivalents and Restricted Cash All highly liquid interest-bearing investments are classified as cash equivalents. These investments mainly include commercial paper with maturities of three months or less when purchased. The carrying value of these cash equivalents approximate fair value. There was $ 7.9 million and $ 7.3 million restricted cash at September 30, 2023 and 2022, respectively, that is primarily held as collateral associated with letters of credit for the Company’s facility leases. F-10 Concentration of Credit Risk Financial instruments that potentially expose the Company to concentration of credit risk primarily consist of cash, cash equivalents and restricted cash and investments. As of September 30, 2023 and 2022, the Company’s investments were primarily invested in money market funds, certificates of deposit, commercial paper, and corporate debt securities through highly rated financial institutions. The Company also maintains several bank accounts primarily at three financial institutions for its operations. These accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $ 250,000 per institution. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held. Investments Investment securities are mainly held-to-maturity investments, available-for-sale, and marketable securities. These held-to-maturity investments may consist of investment-grade interest bearing instruments, primarily money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper, which are stated at amortized cost. The Company does not intend to sell these investment securities and the contractual maturities are not greater than 36 months. Those with maturities less than twelve months are included in short-term investments on the Company’s consolidated balance sheets, while those with remaining maturities in excess of twelve months are included in long-term investments on its consolidated balance sheets. Discounts and premiums to par value of the debt securities are amortized to interest income/expense over the term of the security, and no gains or losses on held-to-maturity investment are realized until they are sold. The Company reassesses the classification of held-to-maturity at each reporting period. The available-for-sale investments may consist of investment-grade interest bearing instruments, primarily money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper, which are accounted for at fair value. Changes in fair values are reported as unrealized gains or losses and are recorded in the Company’s consolidated statement of operations and comprehensive loss. On September 30, 2023, the Company changed the classification of debt securities to available-for-sale from held-to-maturity. As a result, these debt securities are carried at fair value. The Company’s marketable debt securities consisted of mutual funds that primarily invest in U.S. government bonds, U.S. government agency bonds, and corporate bonds. Dividends from these funds were automatically re-invested. These securities were recorded at fair value, and all unrealized gains/losses were recorded in the Company’s consolidated statement of operations and comprehensive loss. In April 2022, the Company sold all of its investments in mutual funds for $ 122.3 million. The Company monitors its investments closely. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the consolidated statements of operations and comprehensive loss. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors, including the length of time to maturity and the extent to which the fair value has been less than the cost, recoverability of future cash flows as compared to carrying value of the security, the financial condition and the near-term prospects of the issuer, and the Company’s ability and intent to hold the security. If a decline in fair value of investments is determined to be other-than-temporary, the securities are written down to fair value as the new cost basis and the amount of the write down is accounted for as realized losses. The Company did not recognize any other-than-temporary impairments of its investment for the years ended September 30, 2023, 2022, and 2021. Property and Equipment Property and equipment are recorded at cost. Depreciation of property and equipment is recorded using the straight-line method over the respective useful lives of the assets ranging from three to seven years . Leasehold improvements are amortized over the lesser of the expected useful life or the remaining lease term. The Company periodically assesses long-lived assets or asset groups, including property and equipment, for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the Company identifies an indicator of impairment, the Company assesses recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. F-11 An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. There were no impairment charges during the years ended September 30, 2023, 2022, and 2021. Intangible Assets Subject to Amortization Intangible assets subject to amortization include certain patents and license agreements. The Company qualitatively evaluates intangible assets for impairment annually or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of intangible assets may exceed their implied fair values. As of September 30, 2023 and 2022, intangible impairment assessments indicated that there was no impairment. Leases The Company determines whether a contract is, or contains, a lease at inception. All of the Company’s leases are classified as operating leases. Leases with terms greater than one-year are recognized on the Company’s consolidated balance sheets as right-of-use assets that represent the Company’s right to use an underlying asset for the lease term, and lease liabilities that represent its obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis an amount equal to the lease payments over a similar term and in a similar economic environment. The Company records expense to recognize lease payments on a straight-line basis over the expected lease term. Costs determined to be variable and not based on an index or rate are not included in the measurement of the lease liability and are expensed as incurred. Revenue Recognition The revenue standard provides a five-step framework for recognizing revenue as control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that it determines are within the scope of the revenue standard, the Company performs the following five steps: (i) identify the contract; (ii) identify the performance obligations; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. At contract inception, the Company assesses whether the goods or services promised within each contract are distinct and, therefore, represent a separate performance obligation, or whether they are not distinct and are combined with other goods and services until a distinct bundle is identified. The Company then determines the transaction price, which typically includes upfront payments and any variable consideration that it determines is probable to not cause a significant reversal in the amount of cumulative revenue recognized when the uncertainty associated with the variable consideration is resolved. The Company then allocates the transaction price to each performance obligation and recognizes the associated revenue when (or as) each performance obligation is satisfied. The Company recognizes the transaction price allocated to upfront license payments as revenue upon delivery of the license to the customer and resulting ability of the customer to use and benefit from the license, if the license is determined to be distinct from the other performance obligations identified in the contract. These other performance obligations are typically to perform research and development services for the customer, often times relating to the candidate that the customer is licensing. If the license is not considered to be distinct from other performance obligations, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied at a point in time or over time. If the performance obligation is satisfied over time, the Company then determines the appropriate method of measuring progress for purposes of recognizing revenue from license payments. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the related revenue recognition. F-12 Typically, the Company’s collaboration agreements entitle it to additional payments upon the achievement of milestones or royalties on sales. The milestones are generally categorized into three types: development milestones, generally based on the initiation of toxicity studies or clinical trials; regulatory milestones, generally based on the submission, filing or approval of regulatory applications such as a Clinical Trial Application (“CTA”) or a New Drug Application (“NDA”) in the United States; and sales-based milestones, generally based on meeting specific thresholds of sales in certain geographic areas. The Company evaluates whether it is probable that the consideration associated with each milestone or royalty will not be subject to a significant reversal in the cumulative amount of revenue recognized. Amounts that meet this threshold are included in the transaction price using the most likely amount method, whereas amounts that do not meet this threshold are excluded from the transaction price until they meet this threshold. At the end of each subsequent reporting period, the Company re-evaluates the probability of a significant reversal of the cumulative revenue recognized for its milestones and royalties, and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and net income in the Company’s consolidated statements of operation and comprehensive loss. Typically, milestone payments and royalties are achieved after the Company’s performance obligations associated with the collaboration agreements have been completed and after the customer has assumed responsibility for the respective clinical or preclinical program. Milestones or royalties achieved after the Company’s performance obligations have been completed are recognized as revenue in the period the milestone or royalty was achieved. If a milestone payment is achieved during the performance period, the milestone payment would be recognized as revenue to the extent performance had been completed at that point, and the remaining balance would be recorded as deferred revenue. The revenue standard requires the Company to assess whether a significant financing component exists in determining the transaction price. The Company performs this assessment at the onset of its licensing or collaboration agreements. Typically, a significant financing component does not exist because the customer is paying for a license or services in advance with an upfront payment. Additionally, future royalty payments are not substantially within the control of the Company or the customer. Further, the revenue standard requires the Company to allocate the arrangement consideration on a relative standalone selling price basis for each performance obligation after determining the transaction price of the contract and identifying the performance obligations to which that amount should be allocated. The relative standalone selling price is defined in the revenue standard as the price at which an entity would sell a promised good or service separately to a customer. If other observable transactions in which the Company has sold the same performance obligation separately are not available, the Company estimates the standalone selling price of each performance obligation. Key assumptions to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. Whenever the Company determines that goods or services promised in a contract should be accounted for as a combined performance obligation over time, the Company determines the period over which the performance obligations will be performed and revenue will be recognized. Revenue is recognized using the input method; Labor hours, costs incurred or patient visits in clinical trials are typically used as the measure of performance. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations. If the Company determines that the performance obligation is satisfied over time, any upfront payment received is initially recorded as deferred revenue on its consolidated balance sheets. Certain judgments affect the application of the Company’s revenue recognition policy. For example, the Company records short-term (less than one year) and long-term (over one year) deferred revenue based on its best estimate of when such revenue will be recognized. This estimate is based on the Company’s current operating plan and, the Company may recognize a different amount of deferred revenue over the next 12-month period if its plan changes in the future. Collaborative Arrangements The Company analyzes its collaborative arrangements to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards, and therefore are within the scope of Financial Accounting Standards Board (“FASB”) Topic 808 - Collaborative Arrangements . For collaborative arrangements that contain multiple elements, the Company determines which units of account are deemed to be within the scope of Topic 808 and which units of account are more reflective of a vendor-customer relationship, and therefore are within the scope of Topic 606. For units of account that are accounted for pursuant to Topic 808, an appropriate recognition method is determined and applied consistently, either by analogy to appropriate accounting literature or by applying a reasonable accounting policy election. For collaborative arrangements that are within the scope of Topic 808, the Company evaluates the income statement classification for presentation of amounts due to or owed from other participants associated with multiple units of account in a collaborative arrangement based on the nature F-13 of each activity. Payments or reimbursements that are the result of a collaborative relationship instead of a customer relationship, such as co-development and co-commercialization activities, are recorded as increases or decreases to research and development expense or general and administrative expense, as appropriate. Research and Development Costs and expenses that can be clearly identified as research and development are charged to expense as incurred. Included in research and development costs are operating costs, facilities, supplies, external services, clinical trial and manufacturing costs, overhead directly related to the Company’s research and development operations, and costs to acquire technology licenses. Stock-Based Compensation Share-based compensation expenses for all stock grants are based on their estimated grant-date fair value. The fair value of stock option awards is estimated using the Black-Scholes option valuation model which requires the input of subjective assumptions to calculate the value of stock options. For restricted stock units, the value of the award is based on the Company’s stock price at the grant date. For performance-based restricted stock unit awards, the value of the award is based on the Company’s stock price at the grant date, with consideration given to the probability of the performance condition being achieved. The Company uses historical data and other information to estimate the expected price volatility and the expected forfeiture rate for stock option awards. Expense is recognized over the vesting period for all awards and commences at the grant date for time-based awards and upon the Company’s determination that the achievement of such performance conditions is probable for performance-based awards. This determination requires significant judgment by management. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of the Company’s assets and liabilities, and expected benefits of utilizing net operating loss, capital loss, and tax-credit carryforwards. The Company assesses the likelihood that its deferred tax assets will be realized and, to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in earnings in the period that includes the enactment date. Earnings per Share Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options and restricted stock units outstanding. During the years ended September 30, 2023, 2022 and 2021, the calculation of the effect of dilutive stock options and restricted stock units excluded all stock options and restricted stock units outstanding during the period due to their anti-dilutive effect. Foreign currency translation adjustments One of the Company’s wholly-owned subsidiaries’ functional currencies are not the United States dollar, which is the Company’s reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included in the accumulated other comprehensive loss. Recent Accounting Pronouncements There have been no recent accounting pronouncements that have significantly impacted this Annual Report on Form 10-K. F-14 NOTE 2. COLLABORATION AND LICENSE AGREEMENTS The following table provides a summary of revenue recognized: Year Ended September 30, 2023 2022 2021 (in thousands) GSK $ 29,657 $ 124,764 $ — Horizon 23,206 29,181 6,816 Takeda 162,516 85,834 90,784 Janssen 356 3,452 40,687 Amgen 25,000 — — Total $ 240,735 $ 243,231 $ 138,287 The following table summarizes the balance of receivables and contract liabilities related to the Company’s collaboration and license agreements: September 30, 2023 2022 (in thousands) Receivables included in accounts receivable $ — $ 1,410 Contract liabilities included in deferred revenue $ 866 $ 130,049 Glaxosmithkline Intellectual Property (No. 3) Limited (“GSK”) On November 22, 2021, GSK and the Company entered into an Exclusive License Agreement (the “GSK License Agreement”). Under the GSK License Agreement, GSK has received an exclusive license for GSK-4532990 (formerly ARO-HSD). The exclusive license is worldwide with the exception of greater China. GSK is wholly responsible for all clinical development and commercialization of GSK-4532990 in its territory. At the inception of the GSK License Agreement, the Company identified one distinct performance obligation. The Company determined that the key deliverables included the license and certain R&D services, including the Company’s responsibility to complete the Phase 1/2 study (the “GSK R&D Services”). Due to the specialized and unique nature of the GSK R&D Services and their direct relationship with the license, the Company determined that these deliverables represented one distinct bundle and, thus, one performance obligation. The Company determined the initial transaction price totaled $ 120.0 million, including the upfront payment, which was collected in January 2022. The Company has excluded any future estimated milestones or royalties from this transaction price to date. The Company has allocated the total $ 120.0 million initial transaction price to its one distinct performance obligation for the GSK-4532990 license and the associated GSK R&D Services. As the Company has completed its performance obligation related to this agreement, the upfront payment of $ 120.0 million was fully recognized in the year ended September 30, 2022. Further, GSK dosed the first patient in a Phase 2b trial in March 2023, triggering a $ 30.0 million milestone payment to the Company which was paid in the third quarter of fiscal 2023. The Company is also eligible for an additional payment of $ 100.0 million upon achieving the first patient dosed in a Phase 3 trial. Furthermore, should the Phase 3 trial read out positively, and the potential new medicine receives regulatory approval in major markets, the deal provides for commercial milestone payments to the Company of up to $ 190.0 million at first commercial sale, and up to $ 590.0 million in sales-related milestone payments. The Company is further eligible to receive tiered royalties on net product sales in a range of mid-teens to twenty percent. The Company has also performed certain development and manufacturing activities, including the manufacture of drug substance and drug product under GMP conditions, for GSK pursuant to the GSK License Agreement, for which the Company has been reimbursed for its costs. The Company recognized $ 0.3 million and $ 4.8 million in connection with these efforts for the years ended September 30, 2023 and 2022, respectively. Horizon Therapeutics Ireland DAC (“Horizon”) On June 18, 2021, Horizon and the Company entered into a collaboration and license agreement (the “Horizon License Agreement”). Under the terms of the Horizon License Agreement, Horizon received a worldwide exclusive license for HZN-457, a clinical-stage medicine being developed by Horizon as a potential treatment for people with uncontrolled F-15 gout. Horizon is wholly responsible for clinical development and commercialization of HZN-457. On October 6, 2023, Amgen completed its acquisition of Horizon. At the inception of the Horizon License Agreement, the Company identified one distinct performance obligation. The Company determined that the key deliverables included the license and certain R&D services, including the Company’s responsibilities to conduct all activities through the preclinical stages of development of HZN-457 (the “Horizon R&D Services”). Due to the specialized and unique nature of these Horizon R&D Services and their direct relationship with the license, the Company determined that these deliverables represented one distinct bundle and, thus, one performance obligation. Beyond the Horizon R&D Services, which are the responsibility of the Company, Horizon will be responsible for managing future clinical development and commercialization of HZN-457. The Company conducted all activities through the preclinical stages of development of HZN-457. Under the terms of the agreement, the Company received an upfront payment of $ 40.0 million in July 2021. The Company determined the initial transaction price totaled $ 40.0 million and has excluded any future estimated milestones or royalties from this transaction price to date. The Company allocated the total $ 40.0 million initial transaction price to its one distinct performance obligation for the HZN-457 license and the associated Horizon R&D Services. Revenue was recognized on a straight-line basis over the timeframe for completing the Horizon R&D Services. The Company determined that the straight-line basis was appropriate as its efforts were expended evenly over the course of completing its performance obligation. Further, Horizon enrolled the first subject in December 2022 in a Phase 1 randomized, placebo-controlled trial to assess the safety, tolerability, pharmacokinetics and pharmacodynamics of HZN-457, triggering a $ 15.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023. On November 21, 2023, the Company received notice from Horizon that it has elected to terminate the Horizon License Agreement. Horizon exercised its right to terminate the Horizon License Agreement for convenience. The termination will take effect on December 21, 2023. In addition, the Company has performed certain development and manufacturing activities, including drug substance and drug product manufacture under GMP conditions, for Horizon pursuant to the Horizon License Agreement. The Company recognized $ 1.5 million and $ 2.5 million in connection with these efforts for the years ended September 30, 2023 and 2022, respectively. Takeda Pharmaceutical Company Limited (“Takeda”) On October 7, 2020, Takeda and the Company entered into an Exclusive License and Co-Funding Agreement (the “Takeda License Agreement”). Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s Fazirsiran program (formerly TAK-999 and ARO-AAT), the Company’s second-generation subcutaneously administered RNAi therapeutic candidate being developed as a treatment for liver disease associated with alpha-1 antitrypsin deficiency. Within the United States, fazirsiran, if approved, will be co-commercialized under a 50/50 profit sharing structure. Outside the United States, Takeda received an exclusive license to commercialize fazirsiran and will lead the global commercialization strategy, while the Company will be eligible to receive tiered royalties of 20 % to 25 % on net sales. At the inception of the Takeda License Agreement, the Company identified one distinct performance obligation. The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to complete the initial portion of the SEQUOIA study, to complete the ongoing Phase 2 AROAAT2002 study and to ensure certain manufacturing of fazirsiran drug product is completed and delivered to Takeda (the “Takeda R&D Services”). Due to the specialized and unique nature of these Takeda R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation. Beyond the Takeda R&D Services, which are the responsibility of the Company, Takeda will be responsible for managing future clinical development and commercialization outside the United States. Within the United States, the Company will also participate in co-development and co-commercialization efforts and will co-fund these efforts with Takeda as part of the 50/50 profit sharing structure within the United States. The Company considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of account within Topic 808, and as such, these co-funding amounts are recorded as research and development expenses or general and administrative expenses, as appropriate. Under the terms of the Takeda License Agreement, the Company received $ 300.0 million as an upfront payment in January 2021 and an additional $ 40.0 million upon Takeda’s initiation of a Phase 3 REDWOOD clinical study of fazirsiran in March 2023, and is eligible to receive up to $ 527.5 million in additional potential development, regulatory and commercial milestones. F-16 The Company has allocated the total $ 300.0 million initial transaction price to its one distinct performance obligation for the fazirsiran license and the associated Takeda R&D Services. Revenue is recognized using the input method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies). The Company previously expected these clinical trials to extend to September 2025 in order to demonstrate long term safety and efficacy in the open label extension (OLE) part of the studies; however, in August 2023, Takeda initiated a Phase 3 OLE study available to patients participating in these Phase 2 studies. Based on this new information, patients enrolled in the SEQUOIA and AROAAT2002 studies are expected to complete their Phase 2 study visits between June 2023 and December 2023, shortening the Company’s performance obligation. As a result, effective the second quarter of fiscal 2023, the Company changed its estimates of the revenue recognition to better reflect this newly estimated performance period. The effect of these changes in estimates resulted in accelerated revenue by $ 70.5 million, or $ 0.66 per share (diluted) for the year ended September 30, 2023. There were $ 0.9 million of contract liabilities recorded as current deferred revenue as of September 30, 2023. The Company also recorded $ 4.5 million as accrued expenses as of September 30, 2023 that was primarily driven by co-development and co-commercialization activities. Janssen Pharmaceuticals, Inc. (“Janssen”) On October 3, 2018, Janssen, part of the Janssen Pharmaceutical Companies of Johnson & Johnson, and the Company entered into a License Agreement (the “Janssen License Agreement”). The Company also entered into a stock purchase agreement with JJDC, Inc. (“JJDC”), Johnson & Johnson’s venture capital arm (the “JJDC Stock Purchase Agreement”). Under the Janssen License Agreement, Janssen received a worldwide, exclusive license to the Company’s JNJ-3989 (formerly ARO-HBV) program, the Company’s third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potential therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s Phase 1/2 study of JNJ-3989, which the Company was responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989. Under the terms of the Janssen License Agreement, the Company received $ 175.0 million as an upfront payment, $ 75.0 million in the form of an equity investment by JJDC in the Company’s common stock under the JJDC Stock Purchase Agreement, and milestone and option payments totaling $ 73.0 million, and the Company may receive up to $ 825.0 million in development and sales milestone payments for the Janssen License Agreement. The Company is further eligible to receive tiered royalties on product sales up to mid-teens under the Janssen License Agreement. At the inception of the Janssen License Agreement, the Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibility to complete the Phase 1/2 study of JNJ-3989 and the Company’s responsibility to ensure certain manufacturing of JNJ-3989 drug product is completed and delivered to Janssen (the “Janssen R&D Services”). Due to the specialized and unique nature of these Janssen R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation. The Company determined the transaction price totaled approximately $ 252.7 million, which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, two $ 25.0 million milestone payments related to JNJ-3989, and estimated payments for reimbursable Janssen R&D Services to be performed. The Company has allocated the total $ 252.7 million initial transaction price to its one distinct performance obligation for the JNJ-3989 license and the associated Janssen R&D Services. The Company recognized this transaction price in its entirety as of September 30, 2021, as its performance obligations were substantially completed. There were no contract assets and liabilities recorded as of September 30, 2023. On April 7, 2023, Janssen voluntarily terminated its collaboration agreement with the Company, dated October 3, 2018. Upon termination of the collaboration agreement, the Company regained full rights to ARO-PNPLA3, formerly called JNJ-75220795. ARO-PNPLA3 is in Phase 1 clinical trials that are now being developed by the Company. Amgen Inc. (“Amgen”) On September 28, 2016, Amgen and the Company entered into two collaboration and license agreements and a common stock purchase agreement. Under the Second Collaboration and License Agreement (the “Olpasiran Agreement”), Amgen received a worldwide, exclusive license to the Company’s novel RNAi olpasiran (previously referred to as AMG- 890 or ARO-LPA) program. These RNAi molecules are designed to reduce elevated lipoprotein(a), which is a genetically validated, independent risk factor for atherosclerotic cardiovascular disease. Under the Olpasiran Agreement, Amgen is wholly responsible for clinical development and commercialization. Under the Olpasiran Agreement, the Company has received $ 35.0 million in upfront payments and $ 21.5 million in the form of an equity investment by Amgen in the Company’s common stock. Further, the Company received additional an F-17 $ 55.0 million in milestone payments; $ 10.0 million upon Amgen’s initiation of a Phase 1 study in September 2018, $ 20.0 million upon its initiation of a Phase 2 clinical study in July 2020, and $ 25.0 million upon its first subject enrollment in a Phase 3 trial in December 2022. The Company has substantially completed its performance obligations under the Olpasiran Agreement. There were no contract assets and liabilities recorded as of September 30, 2023. In November 2022, Royalty Pharma Investments 2019 ICAV (“Royalty Pharma”) and the Company entered into a Royalty Purchase Agreement (the “Royalty Pharma Agreement”). In consideration for the payments under the Royalty Pharma Agreement, Royalty Pharma is entitled to receive all royalties otherwise payable by Amgen to the Company under the Olpasiran Agreement. The Company remains eligible to receive up to an additional $ 535.0 million in remaining development, regulatory and sales milestone payments payable from Amgen and Royalty Pharma. See Note 13. Joint Venture and License Agreement with Visirna Therapeutics, Inc. (“Visirna”) On April 25, 2022, the Company entered into a License Agreement with Visirna (the “Visirna License Agreement”), pursuant to which Visirna received an exclusive license to develop, manufacture and commercialize four of the Company’s RNAi-based investigational cardiometabolic medicines in Greater China (including the People’s Republic of China, Hong Kong, Macau and Taiwan). Pursuant to a Share Purchase Agreement entered into simultaneously with the Visirna License Agreement (the “Visirna SPA”), the Company acquired a majority stake in Visirna (after accounting for shares reserved for Visirna’s employee stock ownership plan) as partial consideration for the Visirna License Agreement. Under the Visirna SPA, entities affiliated with Vivo Capital also acquired a minority stake in Visirna in exchange for $ 60.0 million in upfront capital to support the operations of Visirna. As further consideration under the Visirna License Agreement, the Company is also eligible to receive potential royalties on commercial sales. NOTE 3. PROPERTY AND EQUIPMENT The following table summarizes the Company’s major classes of property and equipment: September 30, 2023 2022 (in thousands) Computers, software, office equipment and furniture $ 2,240 $ 2,182 Land 2,996 2,996 Research equipment 56,509 38,283 Leasehold improvements 103,813 42,017 Construction in progress 166,655 56,373 332,213 141,851 Less: Accumulated depreciation and amortization ( 41,951 ) ( 31,554 ) Property and equipment, net $ 290,262 $ 110,297 Depreciation and amortization expense for property and equipment for the years ended September 30, 2023, 2022, and 2021 was $ 10.7 million, $ 8.7 million and $ 6.6 million respectively. The increase in the construction in progress during 2023 was mainly due to the continuing developments of manufacturing, laboratory and office facilities in Verona, Wisconsin. In May 2023, the Company completed the development of the San Diego facility, which resulted in the reclassification of related construction in progress to leasehold improvements as of September 30, 2023. F-18 NOTE 4. INVESTMENTS The Company’s investments consisted of the following: As of September 30, 2023 (in thousands) Adjusted Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Available-for-sale debt securities $ 295,699 $ — $ ( 2,964 ) $ 292,735 Total current investments $ 295,699 $ — $ ( 2,964 ) $ 292,735 On September 30, 2023, the Company changed the classification of its investment securities from held-to-maturity to available-for-sale. This change enables the Company’s need to be able to respond to market and liquidity risks in managing its portfolio. Such investments are carried at fair value with any unrealized gains and losses reported as a component of other accumulated comprehensive loss. At the date of the transfer, the carrying value of the Company’s held-to-maturity securities was $ 295.7 million, and net unrealized losses of $ 3.0 million were recognized in accumulated other comprehensive loss. The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position have any credit loss impairment as of September 30, 2023. As of September 30, 2022 (in thousands) Adjusted Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Short-term investments (due within one year) Held-to-maturity debt securities $ 218,391 $ — $ ( 3,661 ) $ 214,730 Held-to-maturity certificate of deposit 50,000 — — 50,000 Total current investments $ 268,391 $ — $ ( 3,661 ) $ 264,730 Long-term investments (Due within one through three years) Held-to-maturity debt securities $ 105,872 $ — $ ( 5,569 ) $ 100,303 Total long-term investments $ 105,872 $ — $ ( 5,569 ) $ 100,303 F-19 NOTE 5. INTANGIBLE ASSETS Intangible assets subject to amortization include patents and a license agreement capitalized as part of the Novartis RNAi asset acquisition in March 2015. The following table presents the components of intangible assets: Gross Carrying Amount Accumulated Amortization Impairment Net Carrying Amount Useful Lives (in thousands) (in years) As of September 30, 2023 Patents $ 21,728 $ 13,321 $ — $ 8,407 14 License 3,129 1,274 — 1,855 21 Total intangible assets, net $ 24,857 $ 14,595 $ — $ 10,262 As of September 30, 2022 Patents $ 21,728 $ 11,770 $ — $ 9,958 14 License 3,129 1,125 — 2,004 21 Total intangible assets, net $ 24,857 $ 12,895 $ — $ 11,962 Intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during 2023 and 2022. Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Intangible assets amortization expense in each of 2023, 2022, and 2021 was $ 1.7 million. None of the intangible assets with definite useful lives are anticipated to have a residual value. The following table presents the estimated future amortization expense related to intangible assets as of September 30, 2023: Amortization Expense Year Ending September 30, (in thousands) 2024 $ 1,700 2025 1,700 2026 1,700 2027 1,700 2028 1,700 Thereafter 1,762 Total $ 10,262 NOTE 6. STOCKHOLDERS’ EQUITY The following table summarizes the Company’s shares of common stock and preferred stock: F-20 Shares Par Value Authorized Issued Outstanding (in thousands) As of September 30, 2023 Common stock $ 0.001 290,000 107,312 107,312 Preferred stock $ 0.001 5,000 — — As of September 30, 2022 Common stock $ 0.001 145,000 105,960 105,960 Preferred stock $ 0.001 5,000 — — On March 16, 2023, the Company’s stockholders approved an increase in authorized common shares, par value $ 0.001 per share, from 145,000,000 to 290,000,000 . The amendment to the Amended and Restated Certificate of Incorporation was filed on April 27, 2023. As of September 30, 2023 and 2022, respectively, 12,709,837 and 14,000,392 shares of common stock were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under the Company’s 2004 Equity Incentive Plan, 2013 Incentive Plan, and 2021 Incentive Plan, as well as for inducement grants made to new employees under Rule 5635(c)(4) of the Nasdaq Listing Rules. On December 2, 2022, the Company entered into an open market sale agreement (the “Open Market Sale Agreement”), pursuant to which the Company may, from time to time, sell up to $ 250,000,000 in shares of the Company’s common stock through Jefferies LLC, acting as the sales agent and/or principal, in an at-the-market offering (“ATM Offering”). The Company is not required to sell shares under the Open Market Sale Agreement. The Company will pay Jefferies LLC a commission of up to 3.0 % of the aggregate gross proceeds received from all sales of the common stock under the Open Market Sale Agreement. Unless otherwise terminated, the ATM Offering shall terminate upon the earlier of (i) the sale of all shares of common stock subject to the Sales Agreement and (ii) the termination of the Sales Agreement as permitted therein. The Company and Jefferies may each terminate the Open Market Sale Agreement at any time upon prior notice. As of September 30, 2023, no shares have been issued under the Open Market Sale Agreement. NOTE 7. COMMITMENTS AND CONTINGENCIES Litigation From time to time, the Company may be subject to various claims and legal proceedings in the ordinary course of business. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimable, the Company will accrue a liability for the estimated loss. There were no contingent liabilities recorded as of September 30, 2023 and 2022. Commitments On December 20, 2021, the Company completed a purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin, which is being developed into an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility which will support the Company’s process development and analytical activities. As of September 30, 2023, the Company has incurred $ 166.2 million and intends to spend an additional $ 120.0 million to $ 130.0 million to complete the build out of the facilities. As part of this land acquisition, the Company entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the tax increment district and will be reimbursed up to $ 16.0 million by the City of Verona by future tax increment revenue generated from the developed property. The total amount of funding that City of Verona will pay under the Tax Increment Financing program is not guaranteed and will depend on future tax revenues generated from the developed property . The Company also became eligible to receive up to $ 2.5 million in refundable Wisconsin state income tax credits from the Wisconsin Economic Development Corporation (WEDC) as incentives for investing in the local community and creating new job opportunities. As of September 30, 2023, the Company has collected $ 1.5 million of these credits. 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 it may develop using these licensed technologies. These agreements and other similar agreements often require the Company to make milestone and royalty payments. Milestone payments, for example, may be F-21 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/or certain sales level milestones. The Company did not reach any milestones during the years of 2023 and 2022. During 2021, the Company triggered the milestone related to the progression of the ARO-ENaC and ARO-HIF2 candidates and made milestone payments of $ 2.4 million. NOTE 8. LEASES On November 19, 2021, the Company entered into a 15 -year lease for approximately 144,000 square feet of office and research and development laboratory space in San Diego, California, for which the rent commencement date began on April 19, 2023. This new facility accommodates increased personnel for its expanding pipeline of current and future drug candidates. Pursuant to the lease, within twelve months of the expiration of the initial 15 -year term, the Company has the option to extend the lease for up to one additional ten-year term, with certain annual increases in base rent. The lease agreement grants the Company the right to receive an Additional Tenant Improvement Allowance (“ATIA”) funded by the lessor, with a maximum amount of $ 7.2 million, subject to a 7 % interest per annum over the base term. Further, on September 25, 2023, the Company executed the first amendment to the lease, which grants a second ATIA with a maximum amount of $ 23.6 million, bearing interest at a rate of 9 % per annum over the base term. The Company has received $ 27.8 million ATIA from the lessor as of September 30, 2023. As a result, the Company remeasured its lease liability and right-of-use assets to reflect these additional allowances and the related increase lease payments. The Company has further concluded that these ATIAs have no effects on the classification of the lease. Other Significant Leases Pasadena, California : The Company leases 49,000 square feet of office space located at 177 East Colorado Blvd. for its corporate headquarters from 177 Colorado Owner, LLC, which lease expires on April 30, 2027. The lease contains an option to renew for one term of five years. San Diego, California : The Company subleased space from Halozyme, Inc. for additional research and development space in San Diego, California. The term of this sublease commenced on April 1, 2020 and ended on January 14, 2023. On December 23, 2022, the Company entered into a new six-month lease agreement with 11404 & 11408 Sorrento Valley Owner (DE) LLC, effective January 15, 2023. The lease ended on July 15, 2023. Madison, Wisconsin : The Company leases space for office and laboratory facilities, which expires on September 30, 2031. The lease contains options to renew for two terms of five years . After accounting for additional rental square feet added pursuant to amendments to the lease agreement in 2019 and 2020, the Company currently leases a total of 115,000 square feet. The components of lease assets and liabilities along with their classification on the Company’s consolidated balance sheets were as follows: September 30, Lease Assets and Liabilities Classification 2023 2022 (in thousands) Operating lease assets Right-of-use assets $ 45,297 $ 58,291 Current operating lease liabilities Lease liabilities 10,563 2,776 Non-current operating lease liabilities Lease liabilities, net of current portion 104,608 78,800 The components of lease cost along with its classification on the Company’s consolidated statements of operations were as follows: F-22 Year Ended September 30, Lease Cost Classification 2023 2022 2021 (in thousands) Operating lease cost Research and development $ 10,350 $ 7,278 $ 3,649 General and administrative expense 1,730 1,757 1,498 Variable lease cost (1) Research and development 1,179 728 814 General and administrative expense — — 1 Total $ 13,259 $ 9,763 $ 5,962 (1) Variable lease cost is primarily related to operating expenses associated with the Company’s operating leases. There was $ 1.4 million, $ 0.3 million and $ 0 short-term lease cost during the years ended September 30, 2023, 2022, and 2021, respectively. The following table presents maturities of operating lease liabilities on an undiscounted basis as of September 30, 2023: Year Amounts (in thousands) 2024 $ 10,735 2025 15,000 2026 15,341 2027 14,514 2028 13,156 2029 and thereafter 124,951 Total $ 193,697 Less imputed interest ( 78,526 ) Total operating lease liabilities $ 115,171 Supplemental cash flow and other information related to leases was as follows: Year Ended September 30, 2023 2022 2021 (in thousands) Cash received for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 48,391 $ — $ — Right-of-use assets obtained in exchange for amended operating lease liabilities $ 17,071 $ — $ — Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 5,204 $ 4,500 $ 3,100 Weighted-average remaining lease term (in years) 13.5 7 8 Weighted-average discount rate 8.0 % 8.5 % 8.5 % F-23 NOTE 9. STOCK-BASED COMPENSATION The Company has three plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan (the “2004 Plan”) and the 2013 Incentive Plan (the “2013 Plan”), 0 and 3,408,707 shares, respectively, of the Company’s common stock are reserved for the grant of stock options and restricted stock awards to employees and directors of the Company as of September 30, 2023. On March 18, 2021, the Company’s Board of Directors approved the Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan (the “2021 Plan”), which authorized 8,000,000 shares (subject to certain adjustments) available for grants of stock options, stock appreciation rights, restricted and unrestricted stock, performance awards, cash awards and other awards convertible into or otherwise based on shares of the Company’s common stock. The maximum number of shares authorized under the 2021 Plan will be (i) reduced by any shares subject to awards made under the 2013 Plan after January 1, 2021, and (ii) increased by any shares subject to outstanding awards under the 2013 Plan as of January 1, 2021 that, after January 1, 2021, are canceled, expired, forfeited or otherwise not issued under such awards (other than as a result of being tendered or withheld to pay the exercise price or withholding taxes in connection with any such awards) or settled in cash. As of September 30, 2023, the total number of shares reserved for issuance was 6,204,720 shares, which includes 217,922 shares that were forfeited under the 2013 Plan, and 1,979,364 shares have been granted under the 2021 Plan. In addition, there were 707,432 shares reserved for options and 683,825 shares reserved for restricted stock units issued as inducement grants to new employees granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules. The following table presents a summary of awards outstanding: As of September 30, 2023 2004 Plan 2013 Plan 2021 Plan Inducement Awards Total Granted and outstanding awards: Options — 1,522,207 33,838 707,432 2,263,477 Restricted stock units — 1,886,500 1,671,315 683,825 4,241,640 Total — 3,408,707 1,705,153 1,391,257 6,505,117 Stock Option Awards The following table presents a summary of the stock option activity for the year ended September 30, 2023: Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding at September 30, 2022 2,721,384 $ 20.73 Granted 32,151 33.03 Cancelled or expired ( 50,708 ) 60.72 Exercised ( 439,350 ) 6.94 Outstanding at September 30, 2023 2,263,477 $ 22.68 4.3 $ 26,795,879 Exercisable at September 30, 2023 2,141,592 $ 21.45 4.2 $ 26,786,757 The aggregate intrinsic values represent the amount by which the market price of the underlying stock exceeds the exercise price of the option. The total intrinsic value of the options exercised during the years ended September 30, 2023, 2022, and 2021 was $ 12.2 million, $ 27.6 million and $ 66.9 million, respectively. Stock-based compensation expense related to stock options outstanding for the years ended September 30, 2023, 2022, and 2021 was $ 8.4 million, $ 10.8 million and $ 12.4 million, respectively. As of September 30, 2023, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $ 2.9 million will be recognized in the Company’s results of operations over a weighted average period of 0.4 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 F-24 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, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following table provides the assumptions used in the calculation of grant-date fair values of these stock options based on the Black-Scholes option pricing model: Year Ended September 30, 2023 2022 (5) 2021 Expected dividend yield (1) — — — Risk-free interest rate (2) 3.69 – 4.57 % N/A 0.40 – 1.1 % Expected volatility (3) 86.4 N/A 86.2 – 90.4 % Expected term (in years) (4) 6.25 N/A 6.25 Weighted-average grant date fair value per share 25.61 N/A 48.64 (1) The dividend yield is zero as the Company currently does not pay a dividend. (2) The risk-free interest rate is based on that of the U.S. Treasury yields with equivalent terms in effect at the time of the grant.. (3) Volatility is estimated based on volatility average of the Company’s common stock price. (4) The expected term represents the period of time that stock options granted are expected to be outstanding, by using historical exercise patterns and post-vesting termination behavior. (5) No options were granted during the year ended September 30, 2022. Restricted Stock Units Restricted stock units (“RSUs”), including market-based, time-based and performance-based awards, have been granted under the Company’s 2013 and 2021 Plans and as inducements grants granted outside of the Company’s equity-based compensation plans. 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 Outstanding as of September 30, 2022 4,069,931 $ 64.39 Granted 1,243,644 34.32 Vested ( 913,146 ) 52.99 Forfeited ( 158,789 ) 53.80 Outstanding as of September 30, 2023 4,241,640 $ 58.43 The fair value of RSUs was determined based on the closing price of the Company’s common stock on the grant date, with consideration given to the probability of achieving service and/or performance conditions for awards. On July 8, 2022, the Company revised the equity award made to its Chief Executive Officer on January 1, 2022 consisting of 800,000 shares, equal in value to $ 38.4 million, that was a 100% market-based award. The revised awards consist of 99,521 RSUs and 149,282 performance-based RSUs. No incremental expense resulted from the modification. The fair values of these awards were estimated on the date of grant using a closed-form valuation model (Monte-Carlo). For the years ended September 30, 2023, 2022 and 2021, the Company recorded stock-based compensation expense of $ 69.7 million, $ 113.6 million and $ 64.2 million, respectively, related to shares of RSUs. As of September 30, 2023, there was $ 94.4 million of total unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 1.6 years. F-25 NOTE 10. FAIR VALUE MEASUREMENTS The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data are not readily available, the Company’s own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the level of judgment associated with inputs used to measure their fair values and the level of market price observability, as follows: Level 1 Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Level 2 Pricing inputs are other than quoted prices in active markets, which are based on the following: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in non-active markets; or • Either directly or indirectly observable inputs as of the reporting date. Level 3 Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. At September 30, 2023 and 2022, the Company did not have any financial assets or financial liabilities based on Level 3 measurements The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques utilized by the Company: F-26 September 30, 2023 Level 1 Level 2 Level 3 Total (in thousands) Available-for-sale debt securities U.S. government bonds $ 31,553 $ — $ — $ 31,553 Municipal securities — 7,093 — 7,093 Commercial notes — 22,205 — 22,205 Corporate debt securities — 231,884 — 231,884 Total available-for-sale debt securities 31,553 261,182 — 292,735 Money market instruments 347 — — 347 Total financial assets $ 31,900 $ 261,182 $ — $ 293,082 September 30, 2022 Level 1 Level 2 Level 3 Total (in thousands) Held-to-maturity debt securities U.S. government bonds $ 1,973 $ — $ — $ 1,973 Municipal securities — — — — Commercial notes — 41,727 — 41,727 Corporate debt securities — 271,333 — 271,333 Certificate of deposits 50,000 — — 50,000 Total held-to-maturity debt securities 51,973 313,060 — 365,033 Money market instruments 39,262 — — 39,262 Total financial assets $ 91,235 $ 313,060 $ — $ 404,295 Debt securities were reclassified from held-to-maturity to available-for-sale recorded at fair value on a recurring basis. The fair value of debt securities are priced using model pricing based on the securities’ relationship to other benchmark quoted prices as provided by an independent third party, and under GAAP are considered a Level 2 input. There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy during the years ended September 30, 2023 and 2022. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses of the Company approximate fair value based on the short maturities of these instruments. At September 30, 2023, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities. NOTE 11. INCOME TAXES Income Tax Provision The components of the loss before income taxes are as follows: Year Ended September 30, 2023 2022 2021 (in thousands) Domestic $ ( 194,639 ) $ ( 170,570 ) $ ( 140,846 ) Foreign ( 7,852 ) ( 1,708 ) — Total $ ( 202,491 ) $ ( 172,278 ) $ ( 140,846 ) The provision for income taxes consisted of the following components: F-27 Year Ended September 30, 2023 2022 2021 (in thousands) Current: Federal $ 1,074 $ — $ — State 1,710 304 2 Foreign — 3,481 — Total current tax $ 2,784 $ 3,785 $ 2 Deferred: Federal $ — $ — $ — State — — — Foreign — — — Total deferred tax $ — $ — $ — Income tax provision $ 2,784 $ 3,785 $ 2 The following table presents a reconciliation of the tax expense based on the statutory rate to the Company’s actual tax expense in the consolidated statements of operations. A notional 21% tax rate was applied as follows: September 30, 2023 2022 2021 U.S. federal statutory income tax 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 0.4 % 8.6 % 7.0 % Tax credits 6.8 % — % — % Permanent and other items - 4.6 % - 1.7 % — % Non-deductible compensation - 4.6 % — % — % Foreign-derived intangible income deduction 1.2 % — % — % Stock compensation - 1.1 % - 1.7 % 1.3 % Valuation allowance - 20.5 % - 28.4 % - 29.3 % Effective income tax rate - 1.4 % - 2.2 % — % Deferred Income Taxes The following table presents the significant components of the Company’s net deferred tax assets and liabilities: F-28 September 30, 2023 2022 (in thousands) Deferred tax assets: Net operating loss carryforwards $ 60,495 $ 171,319 Capitalized research and development 75,208 324 Tax credits 66,407 — Deferred revenue 59,441 38,810 Lease liabilities 25,382 2,844 Stock compensation 10,296 41,479 Accrued compensation 3,082 2,961 Intangible assets 1,523 2,973 Other 2,636 2,162 Total gross deferred tax assets $ 304,470 $ 262,872 Valuation allowance $ ( 284,626 ) $ ( 242,394 ) Deferred tax liabilities: Fixed assets $ ( 9,878 ) $ ( 1,088 ) Right-of-use assets ( 9,966 ) — State taxes — ( 19,390 ) Total gross deferred tax liability $ ( 19,844 ) $ ( 20,478 ) Net deferred tax assets (liabilities) $ — $ — A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended September 30, 2023. Such objective evidence limits the ability to consider other subjective evidence such as its projections for future growth. On the basis of this evaluation at September 30, 2023 and 2022, a valuation allowance of $ 284.6 million and $ 242.4 million, respectively, has been recorded. As of September 30, 2023, the Company had accumulated federal and state net operating loss (“NOL”) carry forwards of $ 134.3 million and $ 491.5 million, respectively. Of the $ 134.3 million of federal NOL carryforwards, $ 34.0 million was generated before January 1, 2018 and is subject to the 20-year carryforward period (“pre-Tax Act losses”). The remaining $ 100.3 million (“post-Tax Act losses”) can be carried forward indefinitely but is subject to the 80% taxable income limitation. Of the $ 491.5 million of state NOL carryforwards $ 2.9 million can be carried forward indefinitely. The pre-Tax Act U.S. federal and state net operating loss carryforwards will expire at various dates through 2041. Pursuant to the Internal Revenue Code of 1986, as amended (the “Code”) Sections 382 and 383, annual use of an entity’s NOL and research and development credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% within a three-year period. The amount of the annual limitation is determined based on the value of the entity immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. If limited, the related tax asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. To date, the Company has not completed an analysis pursuant to Sections 382 and 383. Future changes in ownership may occur which could limit the Company’s ability to utilize attributes. Uncertainty in Income Taxes The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more-likely-than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more-likely-than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The following table summarizes the Company’s gross unrecognized tax benefits: F-29 Year Ended September 30, 2023 2022 2021 (in thousands) Beginning balance of unrecognized tax benefits $ 3,481 $ — $ — Gross increase for prior period tax positions 9,495 3,481 — Gross decrease for prior period tax positions ( 1,489 ) — — Gross increase for current period tax positions 3,049 — — Ending balance of unrecognized tax benefits $ 14,536 $ 3,481 $ — For the years ended September 30, 2023, 2022 and 2021, the Company has recorded income tax expense of $ 0 , $ 3.5 million and $ 0 respectively, related to uncertain tax positions. The Company’s policy is to recognize potential interest and penalties related to unrecognized tax benefits associated with uncertain tax positions, if any, in the income tax provision. As of September 30, 2023, the Company has accrued interest and penalties of $ 0.6 million and $ 0.9 million, respectively. If the unrecognized tax benefit at September 30, 2023 are ultimately recognized, excluding the impact of U.S. Tax benefits netted against deferred taxes that are subject to a valuation allowance, approximately $ 3.5 million would result in a reduction in the Company’s income tax expense and effective tax rate. The Company expects that $ 3.5 million of its unrecognized tax benefits to change over the next 12 months. The Company is subject to taxation in the U.S. and various states along with other foreign countries. Due to the presence of NOL carryforwards, all of the income tax years remain open for examination domestically. The Company has not been notified that it is under audit by the Internal Revenue Service or foreign taxing authorities; however, the Company has been notified of an income tax examination by the state of California. There are no other audits in any other jurisdictions. NOTE 12. EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution retirement plan which is under Section 401(k) of the Internal Revenue Code and is designed to adhere to ERISA Fiduciary standards. Substantially all of the Company’s employees are eligible to participate this plan. Under the terms of the plan, an eligible employee may elect to contribute a portion of their salary on a pre-tax basis, subject to federal statutory limitations. The plan allows for a discretionary match in an amount up to 100 % of each participant’s first 3 % of compensation contributed plus 50 % of each participant’s next 2 % of compensation contributed. For the years ended September 30, 2023, 2022, and 2021, the Company recorded expenses for the matching contributions under this plan of $ 2.2 million, $ 1.7 million and $ 1.3 million, respectively. The Company also provides certain employee benefit plans, including those which provide health and life insurance benefits to employees. NOTE 13. LIABILITY RELATED TO THE SALE OF FUTURE ROYALTIES On November 9, 2022, the Company and Royalty Pharma entered into the Royalty Pharma Agreement, pursuant to which Royalty Pharma agreed to pay up to $ 410.0 million in cash to the Company in consideration for the Company’s future royalty interest in olpasiran, a small interfering RNA (siRNA) originally developed by the Company and licensed to Amgen in 2016 under the Olpasiran Agreement. Pursuant to the Royalty Pharma Agreement, Royalty Pharma paid $ 250.0 million upfront and agreed to pay up to an additional $ 160.0 million in aggregate one-time milestone payments due if and when the following milestone events occur: (i) $ 50.0 million on completion of enrollment in the OCEAN Phase 3 clinical trial for olpasiran, (ii) $ 50.0 million upon receipt of FDA approval of olpasiran for an approved indication (reduction in the risk of myocardial infarction, urgent coronary revascularization, or coronary heart disease death in adults with established cardiovascular disease and elevated Lp(a)), and (iii) $ 60.0 million upon Royalty Pharma’s receipt of at least $ 70.0 million of royalty payments under the Royalty Pharma Agreement in any single calendar year. In consideration for the payment of the foregoing amounts under the Royalty Pharma Agreement, Royalty Pharma is entitled to receive all royalties otherwise payable by Amgen to the Company under the Olpasiran Agreement. The Company remains eligible to receive any milestone payments potentially payable by Amgen under the Olpasiran Agreement. F-30 The Company has evaluated the terms of the Royalty Pharma Agreement and concluded in accordance with the relevant accounting guidance that the Company accounted for the transaction as debt and the funding of $ 250.0 million from Royalty Pharma was recorded as a liability related to the sale of future royalties on its consolidated balance sheets. The Company is not obligated to repay this upfront funding received under the Royalty Pharma Agreement. This liability is amortized over the expected repayment term using an effective interest rate method. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. The interest rate may vary during the term of the agreement depending on a number of factors, including the amount and timing of forecasted net revenues which affects the repayment timing and ultimate amount of repayment. The Company will evaluate the effective interest rate periodically based on its current revenue forecasts utilizing the prospective method. For 2023, the Company recognized non-cash interest expense of $ 18.3 million, on the consolidated statements of operations and comprehensive loss. NOTE 14. EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share for the years ended September 30, 2023, 2022 and 2021. Year Ended September 30, 2023 2022 2021 (in thousands, except per share amounts) Numerator: Net loss attributable to Arrowhead Pharmaceuticals, Inc. $ ( 205,275 ) $ ( 176,063 ) $ ( 140,848 ) Denominator: Weighted-average basic shares outstanding 106,750 105,426 103,745 Effect of dilutive securities — — — Weighted-average diluted shares outstanding 106,750 105,426 103,745 Basic earnings per share $ ( 1.92 ) $ ( 1.67 ) $ ( 1.36 ) Diluted earnings per share $ ( 1.92 ) $ ( 1.67 ) $ ( 1.36 ) Potentially dilutive securities representing approximately 4,053,000 , 3,885,000 and 2,063,000 shares of common stock were excluded from the computation of diluted earnings per share for the years ended September 30, 2023, 2022 and 2021, respectively, because their effect would have been anti-dilutive. NOTE 15. SUBSEQUENT EVENTS On October 30, 2023, the Company entered into an Assignment and Consent Agreement with Janssen, whereby, the Company consented to the assignment of the Janssen License Agreement to GSK, which assignment shall be effective upon the receipt of certain anti-trust approvals. F-31