Quarterly Report


Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to             
Commission File Number: 001-35006  
 
SPPICOMPANYLOGOA07.JPG
SPECTRUM PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
93-0979187
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
11500 South Eastern Avenue, Suite 240
Henderson, Nevada
 
89052
(Address of principal executive offices)
 
(Zip Code)
(702) 835-6300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
As of October 31, 2016 , 80,557,934 shares of the registrant’s common stock were outstanding.



Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
Item
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial Statements (unaudited):
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 
Items 2 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

S PECTRUM PHARMACEUTICALS, INC. ®, FUSILEV®, FOLOTYN®, ZEVALIN®, MARQIBO®, BELEODAQ® , and EVOMELA® are registered trademarks of Spectrum Pharmaceuticals, Inc. and its affiliates. ROLONTIS , QAPZOLA , REDEFINING CANCER CARE™ and the Spectrum Pharmaceuticals' logos are trademarks owned by Spectrum Pharmaceuticals, Inc. Any other trademarks are the property of their respective owners.



2


Table of Contents

PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)

September 30,
2016

December 31,
2015
ASSETS



Current assets:



Cash and cash equivalents
$
171,605


$
139,741

Marketable securities
247


245

Accounts receivable, net of allowance for doubtful accounts of $15 and $120, respectively
42,466


30,384

Other receivables
7,091


12,572

Inventories
7,303


4,176

Prepaid expenses and other assets
2,702


3,507

Total current assets
231,414


190,625

Property and equipment, net of accumulated depreciation
538


918

Intangible assets, net of accumulated amortization and impairment charges
171,460


190,335

Goodwill
18,017


17,960

Other assets
28,015


19,211

Total assets
$
449,444


$
419,049

LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and other accrued liabilities
$
49,977


$
56,539

Accrued payroll and benefits
7,741


8,188

Deferred revenue
4,458


6,130

Drug development liability
156


259

Acquisition-related contingent obligations


5,227

Total current liabilities
62,332


76,343

Drug development liability, less current portion
14,004


14,427

Deferred revenue, less current portion
741


383

Acquisition-related contingent obligations, less current portion
1,915


1,439

Deferred tax liability
6,739


6,779

Other long-term liabilities
8,772


7,444

Convertible senior notes
104,144


99,377

Total liabilities
198,647


206,192

Commitments and contingencies



Stockholders’ equity:



Preferred stock, $0.001 par value; 5,000,000 shares authorized:



Series B junior participating preferred stock, $0.001 par value; 1,500,000 shares authorized; no shares issued and outstanding



Series E Convertible Voting Preferred Stock, $0.001 par value and $10,000 stated value; 2,000 shares authorized; 0 and 20 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively (the prior year balance relates to the 20 shares of preferred stock which were converted into 40,000 shares of common stock in the current year)


123

Common stock, $0.001 par value; 175,000,000 shares authorized; 80,566,699 and 68,228,935 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
80


68

Additional paid-in capital
638,006


552,108

Accumulated other comprehensive loss
(2,090
)

(5,319
)
Accumulated deficit
(385,199
)

(334,123
)
Total stockholders’ equity
250,797


212,857

Total liabilities and stockholders’ equity
$
449,444


$
419,049

See accompanying notes to these unaudited condensed consolidated financial statements.

3



SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
 
2016

2015

2016

2015
Revenues:







Product sales, net
$
30,272


$
28,457


$
96,401


$
102,014

License fees and service revenue
3,121


170


14,807


10,212

Total revenues
$
33,393


$
28,627


$
111,208


$
112,226

Operating costs and expenses:







Cost of product sales (excludes amortization and impairment charges of intangible assets)
7,503


8,447


18,715


21,508

Cost of service revenue
2,221




5,716



Selling, general and administrative
19,465


19,411


69,047


65,297

Research and development
13,293


9,924


43,037


35,333

Amortization and impairment charges of intangible assets
6,907


6,919


19,052


27,857

Total operating costs and expenses
49,389


44,701


155,567


149,995

Loss from operations
(15,996
)

(16,074
)

(44,359
)

(37,769
)
Other (expense) income:







Interest expense, net
(2,373
)

(2,274
)

(7,087
)

(6,760
)
Change in fair value of contingent consideration related to acquisitions
78


81


(1,249
)

(565
)
Other income (expense), net
372


(535
)

990


(1,501
)
Total other expenses
(1,923
)

(2,728
)

(7,346
)

(8,826
)
Loss before income taxes
(17,919
)

(18,802
)

(51,705
)

(46,595
)
Benefit (provision) for income taxes
464


78


635


(37
)
Net loss
$
(17,455
)

$
(18,724
)

$
(51,070
)

$
(46,632
)
Net loss per share:







Basic and diluted
$
(0.22
)

$
(0.28
)

$
(0.73
)

$
(0.71
)
Weighted average shares outstanding:







Basic and diluted
79,303,380


65,855,727


70,437,885


65,457,060

See accompanying notes to these unaudited condensed consolidated financial statements.


4



SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(17,455
)
 
$
(18,724
)
 
$
(51,070
)
 
$
(46,632
)
Other comprehensive income (loss), net of income tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities
465

 
(3,934
)
 
2,975

 
(949
)
Foreign currency translation adjustments
96

 
387

 
254

 
(1,913
)
Other comprehensive income (loss)
561

 
(3,547
)
 
3,229

 
(2,862
)
Total comprehensive loss
$
(16,894
)
 
$
(22,271
)
 
$
(47,841
)
 
$
(49,494
)
See accompanying notes to these unaudited condensed consolidated financial statements.


5



SPECTRUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2016

2015
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(51,070
)
 
$
(46,632
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
19,493

 
21,235

Stock-based compensation
9,754

 
8,490

Accretion of debt discount, recorded to interest expense on 2018 Convertible Notes (Note 14)
4,246

 
3,895

Amortization of deferred financing costs, recorded to interest expense on 2018 Convertible Notes ( Note 14 )
521

 
493

Bad debt (recovery) expense
(15
)
 
11

Impairment of intangible assets ( Note 3(f) )

 
7,160

Unrealized foreign currency exchange loss (gain)
(155
)
 
435

Research and development expense recognized for the value of stock issued in connection with milestone achievement ( Note 16(b)(xii) )
2,419

 

Change in fair value of contingent consideration related to the EVOMELA and Talon acquisitions ( Note 9 )
1,249

 
565

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(12,040
)
 
22,537

Other receivables
5,571

 
(8,008
)
Inventories
(6,768
)
 
2,127

Prepaid expenses
804

 
(133
)
Deferred tax assets

 
(147
)
Other assets
(2,095
)
 
(1,398
)
Accounts payable and other accrued obligations
(6,595
)
 
(5,638
)
Accrued payroll and benefits
(451
)
 
(1,286
)
Drug development liability
(526
)
 
(1,385
)
Acquisition related contingent obligations
(1,300
)
 

Deferred revenue
(1,417
)
 
359

Deferred tax liability
(40
)
 
89

Other long-term liabilities
1,321

 
874

Net cash (used in) provided by operating activities
(37,094
)

3,643

Cash Flows From Investing Activities:
 
 
 
Proceeds from sale of available-for-sale securities

 
3,061

Redemption of mutual funds
(1
)
 

Purchases of property and equipment
(61
)
 
(212
)
Net cash (used in) provided by investing activities
(62
)
 
2,849

Cash Flows From Financing Activities:
 
 
 
Proceeds from exercise of stock options
190

 
1,482

Proceeds from sale of stock under employee stock purchase plan
383

 
335

Purchase and retirement of restricted stock to satisfy employees' tax liability at vesting
(829
)
 
(629
)
Payment of contingent consideration related to EVOMELA acquisition ( Note 9(b) )
(4,700
)
 

Proceeds from common shares sold under an at-the-market-issuance sales agreement ( Note 18 )
73,869

 

Dividends paid upon conversion of Series E Convertible Voting Preferred Stock ( Note 18 )
(6
)
 

Net cash provided by financing activities
68,907

 
1,188

Effect of exchange rates on cash and equivalents
113

 
(1,095
)
Net increase in cash and cash equivalents
31,864

 
6,585

Cash and cash equivalents—beginning of period
139,741

 
129,942

Cash and cash equivalents—end of period
$
171,605

 
$
136,527

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
$
11

 
$
332

Cash paid for interest
$
1,650

 
$
1,650


See accompanying notes to these unaudited condensed consolidated financial statements.

6



Spectrum Pharmaceuticals, Inc.
 
Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND OPERATING SEGMENT
(a) Description of Business
Spectrum Pharmaceuticals, Inc. (“Spectrum”, the “Company”, “we”, “our”, or “us”) is a biotechnology company, with a primary strategy comprised of acquiring, developing, and commercializing a broad and diverse pipeline of late-stage clinical and commercial products. We have an in-house clinical development organization with regulatory and data management capabilities, and a commercial infrastructure and field sales force for our marketed products. Currently, we market six approved oncology/hematology products that target different types of non-Hodgkin's lymphoma ("NHL"), advanced metastatic colorectal cancer, acute lymphoblastic leukemia ("ALL"), and multiple myeloma ("MM").
We also have three drugs in late-stage development:
ROLONTIS (formerly referred to as SPI-2012) for chemotherapy-induced neutropenia in patients with breast cancer.
QAPZOLA (formerly referred to as APAZIQUONE) for immediate intravesical instillation in post-transurethral resection of bladder tumors in patients with non-muscle invasive bladder cancer.
POZIOTINIB, a novel pan-HER inhibitor used in the treatment of patients with breast cancer.
(b) Basis of Presentation
Interim Financial Statements
The interim financial data as of September 30, 2016 and 2015 is unaudited, and is not necessarily indicative of our operating results for a full year. In the opinion of our management, the interim data includes normal and recurring adjustments necessary for a fair presentation of our financial results for the three and nine months ended September 30, 2016 and 2015 . Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to U.S. Securities and Exchange Commission (“SEC”) rules and regulations relating to interim financial statements. The December 31, 2015 balances reported herein are derived from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 . The accompanying Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 , filed with the SEC on March 14, 2016.
Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and with the rules and regulations of the SEC. These financial statements include the financial position, results of operations, and cash flows of Spectrum and its subsidiaries, all of which are wholly-owned (except for Spectrum Pharma Canada ("SPC"), as discussed below). All inter-company accounts and transactions among these legal entities have been eliminated in consolidation.
Variable Interest Entity
We own fifty -percent of SPC, a legal entity organized in Quebec, Canada in January 2008. Certain of our drug clinical studies are conducted through this “variable interest entity” (as defined under applicable GAAP) and we fund all of SPC’s operating costs. Since we carry the full risks and rewards of SPC, we meet the applicable GAAP criteria as being its “primary beneficiary.” Accordingly, SPC’s balance sheets and statements of operations are included in our Condensed Consolidated Financial Statements as if it were a wholly-owned subsidiary for all periods presented.
(c) Operating Segment

7


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


We operate in one reportable operating segment that is focused exclusively on developing and commercializing oncology and hematology drug products. For the three and nine months ended September 30, 2016 and 2015 , all of our revenue and related expenses were solely attributable to these activities. Substantially all of our assets (excluding our cash held in certain foreign bank accounts and our ZEVALIN distribution rights for the Ex-U.S. territory) are held in the U.S.
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires our management to make informed estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. However, actual values may materially differ, since estimates are inherently uncertain. On an on-going basis, our management evaluates its estimates and assumptions, including those related to (i) gross-to-net revenue adjustments; (ii) the timing of revenue recognition; (iii) the collectability of customer accounts; (iv) whether the cost of inventories can be recovered; (v) the fair value of goodwill and intangible assets; (vi) the realization of tax assets and estimates of tax liabilities; (vii) the likelihood of payment and value of contingent liabilities; (viii) the fair value of investments; (ix) the valuation of stock options and the periodic expense recognition of stock-based compensation; and (x) the potential outcome of ongoing or threatened litigation.
The estimates and assumptions that most significantly impact the presented amounts within these accompanying Condensed Consolidated Financial Statements are further described below:
(i) Revenue Recognition
(a) Product Sales : We sell our products to wholesalers/distributors (i.e., our customers), except for our U.S. sales of ZEVALIN in which case the end-user (i.e. clinic or hospital) is our customer. Our wholesalers/distributors in turn sell our products directly to clinics, hospitals, and private oncology-based practices. Revenue from our product sales is recognized when title and risk of loss have transferred to our customer, and the following additional criteria are met:
(1)
appropriate evidence of a binding arrangement exists with our customer;
(2)
price is substantially fixed or determinable;
(3)
collection from our customer is reasonably assured;
(4)
our customer’s obligation to pay us is not contingent on resale of the product;
(5)
we do not have significant continued performance obligations to our customer; and
(6)
we have a reasonable basis to estimate returns.
Our gross revenue is reduced by our gross-to-net (“GTN”) estimates each period, resulting in our reported “product sales, net” in the accompanying Condensed Consolidated Statements of Operations. We defer revenue recognition in full if these estimates are not reasonably determinable at the time of sale. These estimates are based upon information received from external sources (such as written and oral information obtained from our customers with respect to their period-end inventory levels, and their sales to end-users during the period), in combination with management’s informed judgments. Due to the inherent uncertainty of estimates, the actual amount we incur may be materially different than our GTN estimates, and require prospective revenue adjustments in periods after the initial sale was recorded.
Our GTN estimates are comprised of the following categories:
Product Returns Allowances : Our FUSILEV, MARQIBO, and BELEODAQ customers are permitted to return purchased product beginning at its expiration date, and within six months thereafter. Our EVOMELA customers are permitted to return purchased product beginning at six months prior to its expiration date, and within 12 months thereafter (as well as for overstock inventory, as determined by end-users). Returned product is generally not resold. Returns for expiry of ZEVALIN and FOLOTYN are not contractually, or customarily, allowed. We estimate expected returns based on our historical return rates.
Government Chargebacks : Our products are subject to pricing limits under certain federal government programs (e.g., Medicare and the 340B Drug Pricing Program). Qualifying entities (i.e., end-users) purchase product from our customers at their qualifying discounted price. The chargeback amount we incur represents the difference between our contractual sales price

8


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


to our customer, and the end-user’s applicable discounted purchase price under the government program. There may be significant lag time between our reported net product sales and our receipt of corresponding government chargeback claims from our customers.
Prompt Pay Discounts : Discounts for prompt payment are estimated at the time of sale, based on our eligible customers’ prompt payment history and the contractual discount percentage.
Commercial Rebates : Commercial rebates are based on (i) our estimates of end-user purchases through a group purchasing organization ("GPO"), (ii) the corresponding contractual rebate percentage tier we expect each GPO to achieve, and (iii) our estimates of the impact of any prospective rebate program changes made by us.
Medicaid Rebates : Our products are subject to state government-managed Medicaid programs, whereby rebates are issued to participating state governments. These rebates arise when a patient treated with our product is covered under Medicaid, resulting in a discounted price for our product under the applicable Medicaid program. Our Medicaid rebate accrual calculations require us to project the magnitude of our sales, by state, that will be subject to these rebates. There is a significant time lag in us receiving rebate notices from each state (generally several months or longer after our sale is recognized). Our estimates are based on our historical claim levels by state, as supplemented by management’s judgment.
Distribution, Data, and GPO Administrative Fees : Distribution, data, and GPO administrative fees are paid to authorized wholesalers/distributors of our products (except for U.S. sales of ZEVALIN) for various commercial services, including: contract administration, inventory management, delivery of end-user sales data, and product returns processing. These fees are based on a contractually-determined percentage of our applicable sales.
(b) License Fees : Our out-license arrangements may include one or more of the following: (a) upfront license fees, (b) royalties from our licensees’ sales, and (c) milestone payments from our licensees’ sales or regulatory achievements. We recognize revenue from these categories based on the contractual terms that establish the legal rights and obligations between us and our licensees.
(i)
We first assess the number of “units of accounting” in the arrangement in accordance with multiple element arrangement guidance. We consider if the separate “deliverable” has standalone value to our licensee, and if standalone value does not exist for a deliverable, it is combined with other deliverables until the "bundle" has standalone value. The allocation of arrangement consideration and the recognition of revenue then is determined for those combined deliverables as a single unit of accounting

(ii)
Next, we measure and allocate arrangement consideration among the separate units of accounting. This measurement and allocation is based upon the fixed and discreet license fee payments and fixed royalties (as a percentage of our licensees’ net sales) that are part of the contractual terms within our arrangements. This fixed or determinable consideration is allocated to the units of accounting using the "relative selling price method".

(iii)
We evaluate certain customer payments as follows:

(a)
For upfront license fees, we consider whether the revenue is earned and realizable at the time of contract execution (i.e., when the license rights transfer to the customer). We give specific consideration to whether we have any on-going contractual service obligations to the licensee, including any requirements for us to provide on-going support services, and/or for us to supply drug products for the licensee’s future sales. As a result, we may either recognize all upfront license fees as revenue in the period of contract execution, or recognize these fees over the actual (or implied) contractual term of the out-license.

(b)
For royalties, when we have no on-going performance obligation, we recognize revenue in the period that our licensee has sales for which we are contractually entitled to a percentage-based royalty payment.

(c)
For our licensees’ sales or regulatory milestone achievements, revenue associated with substantive at-risk milestones is recognized when we have no on-going performance obligation

9


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


and based upon the achievement of the milestones set forth in the respective agreements, as this is the point at which the additional consideration becomes fixed or determinable.
(c) Service Revenue : We receive fees under certain arrangements for (a) sales and marketing services, (b) supply chain services (c) research and development services, and (d) clinical trial management services. Payment for these services may be triggered by (i) an established fixed-fee schedule, (ii) the completion of product delivery in our capacity as a procurement agent, (iii) the successful completion of a phase of development, (iv) favorable results from a clinical trial, and/or (v) regulatory approval events.
We consider whether revenue associated with these service arrangements is “realizable and earned” each reporting period, based on our completed services or deliverables during the period, and the contractual terms of the arrangement (which typically includes fee schedules). For any/all milestone achievements in the reporting period that contractually result in fixed payments due to us, we apply the “milestone method” of revenue recognition. Accordingly, this revenue recognition occurs as each “substantive” milestone (as discussed below) is achieved by us, since (1) all contingencies associated with each milestone is resolved upon its achievement, (2) the milestone achievement relates solely to our past performance, and (3) no remaining milestone performance obligations exist in relation to our receipt of payment.

In recognizing revenue under the milestone method, we first assess the number of “units of accounting” in the arrangement. We consider if the separate “deliverable” has standalone value to our licensee, and if standalone value does not exist for a deliverable, it is combined with other deliverables until the "bundle" has standalone value. The allocation of arrangement consideration and the recognition of revenue is determined for those combined deliverables as a single unit of accounting. This includes allocation of consideration associated with milestones achieved by our licensees.

Next, we measure and allocate arrangement consideration among the separate units of accounting. This fixed or determinable consideration is allocated to the units of accounting using the "relative selling price method". Variable fees subsequently earned (other than substantive milestone payments) are allocated to the units of accounting on the same basis.

We determine whether the milestone is substantive by considering (i) the extent of our effort to achieve the milestone and/or the enhancement of the value of the delivered item(s) as a result of milestone achievement, (ii) whether the milestone achievement relates solely to our past performance, and (iii) if the milestone payment is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

For service contracts without milestones, we recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) fees are fixed or determinable, and (iv) collectability is reasonably assured.

(d) New Revenue Recognition Standard : The new revenue recognition standard, ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), is effective for us beginning January 1, 2018. This new standard requires that our revenue is recognized in a manner that reasonably reflects the delivery of our goods or services to customers in return for expected consideration. To achieve this core principle, the guidance provides the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
We intend to apply the "cumulative effect transition method" of ASU 2014-09 for its implementation. We continue to evaluate the impact of this new standard on our current revenue recognition models for product sales, license fees, and service revenue (as described above), though we currently believe the most significant impact of this new standard relates to the timing of our license fee revenue.
(ii) Cash and Equivalents
Our cash and equivalents consist of bank deposits and highly liquid investments with maturities of three months or less from the purchase date.
(iii) Marketable Securities

10


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


Our marketable securities consist of our holdings in mutual funds and bank certificates of deposit. Since we classify these securities as “available-for-sale” under applicable GAAP, any unrealized gains or losses from their change in value is reflected in “unrealized gain (loss) on available-for-sale securities” on the accompanying Condensed Consolidated Statements of Comprehensive Loss. Realized gains and losses on available-for-sale securities are included in “other income (expense), net” on the accompanying Condensed Consolidated Statements of Operations.
(iv) Accounts Receivable
Our accounts receivables are derived from our product sales and license fees (our service revenue is recorded in "other receivables"), and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in our existing accounts receivable. Account balances are charged off against the allowance after appropriate collection efforts are exhausted.
(v) Inventories
We value our inventory at the lower of (i) the actual cost of its purchase or manufacture, or (ii) its current market value. Inventory cost is determined on the first-in, first-out method. We regularly review our inventory quantities in process of manufacture and on hand. When appropriate, we record a provision for obsolete and excess inventory to derive its new cost basis, which takes into account our sales forecast by product and corresponding expiry dates.
Direct and indirect manufacturing costs related to the production of inventory prior to U.S. Food and Drug Administration ("FDA") approval are expensed through “research and development,” rather than being capitalized to inventory cost.
(vi) Property and Equipment
Our property and equipment is stated at historical cost, and is depreciated on a straight-line basis over an estimated useful life that corresponds with its designated asset category. We evaluate the recoverability of “long-lived assets” (which includes property and equipment) whenever events or changes in circumstances in our business indicate that the asset’s carrying amount may not be recoverable through on-going operations.
(vii) Goodwill and Intangible Assets
Our goodwill represents the excess of our business acquisition cost over the estimated fair value of the net assets acquired in the corresponding transaction. Goodwill has an indefinite accounting life and is therefore not amortized. Instead, goodwill is evaluated for impairment on an annual basis (as of each October 1 st ), unless we identify impairment indicators that would require earlier testing.
We evaluate the recoverability of indefinite-lived intangible assets at least annually, or whenever events or changes in our business indicate that an intangible asset’s (whether indefinite or definite-lived) carrying amount may not be recoverable. Such circumstances could include, but are not limited to the following:
(a)
a significant decrease in the market value of an asset;
(b)
a significant adverse change in the extent or manner in which an asset is used; or
(c)
an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset.
Intangible assets with finite useful lives are amortized over their estimated useful lives on a straight-line basis. We review these assets for potential impairment if/when facts or circumstances suggest that the carrying value of these assets may not be recoverable.
(viii) Stock-Based Compensation
Stock-based compensation expense for equity awards granted to our employees and members of our board of directors is recognized on a straight-line basis over each award's vesting period. Recognized compensation expense is net of an estimated

11


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


forfeiture rate, representing the percentage of awards that are expected to be forfeited (by termination of employment or service) prior to vesting. We use the Black-Scholes option pricing model to determine the fair value of stock options (as of the date of grant) which carry service conditions for vesting. When applicable, we use the Monte Carlo valuation model to value equity awards (as of the date of grant) which carry combined market conditions and service conditions for vesting.
The calculation of the fair value of stock options on the date of grant, and the recognition of stock-based compensation expense over the appropriate time period, requires uncertain assumptions, including (a) the pre-vesting forfeiture rate of the stock option, (b) the term of the stock option, (c) the stock price volatility over the term of the stock option, and (d) the risk-free interest rate over the term of the stock option. 
We estimate forfeiture rates based on our employees’ overall forfeiture history, which we believe will be representative of future results. We estimate the expected term of stock options granted based on our employees’ historical exercise patterns, which we believe will be representative of their future behavior. We estimate the volatility of our common stock on the date of grant based on historical volatility of our common stock for a look-back period that corresponds with the expected term. We estimate the risk-free interest rate based upon the U.S. Treasury yields in effect at award grant, for a period equaling the stock options’ expected term.  
(ix) Foreign Currency Translation
We translate the assets and liabilities of our foreign subsidiaries that are stated in their functional currencies (i.e., local operating currencies), to U.S. dollars at the rates of exchange in effect at the reported balance sheet date. Revenues and expenses are translated using the monthly average exchange rates during the reported period. Unrealized gains and losses from the translation of our subsidiaries’ financial statements (that are initially denominated in the corresponding functional currency) are included as a separate component of “accumulated other comprehensive loss” in the Condensed Consolidated Balance Sheets.
We record foreign currency transactions, when initially denominated in a currency other than the respective functional currency of our subsidiary, at the prevailing exchange rate on the date of the transaction. Resulting unrealized foreign exchange gains and losses from transactions with third parties are included in “accumulated other comprehensive loss” in the Condensed Consolidated Balance Sheets.
All unrealized foreign exchange gains and losses associated with our intercompany loans are included in "accumulated other comprehensive loss" in the Condensed Consolidated Balance Sheets, as these loans with our foreign subsidiaries are not expected to be settled in the "foreseeable future." For the period January 1, 2015 through March 31, 2015, unrealized foreign exchange gains and losses associated with our intercompany loans were included in "accumulated other comprehensive loss" in the Condensed Consolidated Balance Sheets and in "other income (expense), net" in the Condensed Consolidated Statements of Operations.
(x) Basic and Diluted Net (Loss) Income per Share
We calculate basic and diluted net (loss) income per share using the weighted average number of common shares outstanding during the periods presented. In periods of a net loss, basic and diluted loss per share are the same. For the diluted earnings per share calculation, we adjust the weighted average number of common shares outstanding to include only dilutive stock options, warrants, and other common stock equivalents outstanding during the period.
(xi) Income Taxes
Deferred tax assets and liabilities are recorded based on the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the financial statements, as well as operating losses and tax credit carry forwards using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
We have recorded a valuation allowance to reduce our deferred tax assets, because we believe that, based upon a weighting of positive and negative factors, it is more likely than not that these deferred tax assets will not be realized. If/when we determine that our deferred tax assets are realizable, an adjustment to the corresponding valuation allowance would increase our net income in the period that such determination was made.

12


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


In the event that we are assessed interest and/or penalties from taxing authorities that have not been previously accrued, such amounts would be included in “benefit (provision) for income taxes” within the Condensed Consolidated Statements of Operations in the period the notice was received.
(xii) Research and Development Costs
Our research and development costs are expensed as incurred, or as certain milestone payments become due, generally triggered by clinical or regulatory events.
(xiii) Fair Value Measurements
We determine measurement-date fair value based on the proceeds that would be received through the sale of the asset, or that we would pay to settle or transfer the liability, in an orderly transaction between market participants. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used in descending order to measure fair value. These tiers include the following:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are publicly accessible at the measurement date.
Level 2: Observable prices that are based on inputs not quoted on active markets, but that are corroborated by market data. These inputs may include quoted prices for similar assets or liabilities or quoted market prices in markets that are not active to the general public.
Level 3: Unobservable inputs are used when little or no market data is available.
3. BALANCE SHEET ACCOUNT DETAIL
The composition of selected financial statement captions that comprise the accompanying Condensed Consolidated Balance Sheets are summarized below:
(a) Cash and Cash Equivalents and Marketable Securities
As of September 30, 2016 and December 31, 2015 , our holdings included within “cash and cash equivalents” and “marketable securities” were at major financial institutions.
Our investment policy requires that investments in marketable securities be in only highly-rated instruments, which are primarily U.S. treasury bills or U.S. treasury-backed securities, and limited investments in securities of any single issuer. We maintain cash balances in excess of federally insured limits with reputable financial institutions. To a limited degree, the Federal Deposit Insurance Corporation ("FDIC") and other third parties insure these investments. However, these investments are not insured against the possibility of a complete loss of earnings or principal and are inherently subject to the credit risk related to the continued credit worthiness of the underlying issuer and general credit market risks. We manage such risks on our portfolio by investing in highly liquid, highly rated instruments, and limit investing in long-term maturity instruments.
 
The carrying amount of our equity securities, money market funds, bank certificates of deposits, and mutual funds approximates their fair value (utilizing Level 1 or Level 2 inputs – see Note 2(xiii) ) because of our ability to immediately convert these instruments into cash with minimal expected change in value.
The following is a summary of our “cash and cash equivalents” and “marketable securities”:

13


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


 
 
 
 
 
 
 
 
 
 
Marketable Securities
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Cash and Cash
Equivalents
 
Current
 
Long
Term
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
$
28,134

 
$

 
$

 
$
28,134

 
$
28,134

 
$

 
$

Money market funds
138,472

 

 

 
138,472

 
138,472

 

 

Bank certificates of deposits
5,246

 

 

 
5,246

 
4,999

 
247

 

Total cash and cash equivalents and marketable securities
$
171,852

 
$

 
$

 
$
171,852

 
$
171,605

 
$
247

 
$

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
$
59,625

 
$

 
$

 
$
59,625

 
$
59,625

 
$

 
$

Money market funds
80,116

 

 

 
80,116

 
80,116

 

 

Bank certificates of deposits
245

 

 

 
245

 

 
245

 

Total cash and cash equivalents and marketable securities
$
139,986

 
$

 
$

 
$
139,986

 
$
139,741

 
$
245

 
$

As of September 30, 2016 , none of these securities had been in a continuous unrealized loss position longer than one year.
(b) Property and Equipment, Net of Accumulated Depreciation
“Property and equipment, net of accumulated depreciation” consist of the following:  
 
September 30, 2016
 
December 31, 2015
Computer hardware and software
$
3,823

 
$
3,785

Laboratory equipment
622

 
608

Office furniture
354

 
355

Leasehold improvements
2,880

 
2,872

Property and equipment, at cost
7,679

 
7,620

(Less): Accumulated depreciation
(7,141
)
 
(6,702
)
Property and equipment, net of accumulated depreciation
$
538

 
$
918

Depreciation expense (included within “total operating costs and expenses” in the accompanying Condensed Consolidated Statements of Operations) for the nine months ended September 30, 2016 and 2015 , was $0.4 million and $0.5 million , respectively.

     In February 2016, the FASB issued ASU 2016-02 , which amends the FASB Accounting Standards Codification and creates Topic 842, “Leases.” The new topic supersedes Topic 840, “Leases,” and requires lease assets and lease liabilities (including for operating leases) to be presented on the balance sheet at its "gross amount" and requires additional disclosures regarding lease arrangements. The guidance is effective for us beginning January 1, 2019, and mandates a "modified retrospective" transition method. We are currently assessing the impact this guidance will have on our consolidated financial statements. We presently do not have any capital lease arrangements, though we have several operating lease agreements that primarily relate to our principal executive office in Henderson, Nevada, and our research and development facility in Irvine, California, in addition to several other administrative office leases.

(c) Inventories
“Inventories” consist of the following:  

14


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


 
September 30, 2016
 
December 31, 2015
Raw materials
$
2,632

 
$
1,606

Work-in-process*
10,091

 
4,228

Finished goods
1,380

 
1,498

(Less:) Non-current portion of inventories included within "other assets" **
(6,800
)
 
(3,156
)
Inventories
$
7,303

 
$
4,176


* In January 2016, we received $3.4 million of ZEVALIN antibody materials for its future manufacture (representing strategic long-term supply).

** The "non-current" portion of inventories is presented within "other assets" in the accompanying Condensed Consolidated Balance Sheet at September 30, 2016 and December 31, 2015, respectively. This value of $6.8 million at September 30, 2016 represents product that we expect to sell beyond September 30, 2017.
(d) Prepaid expenses and other assets
“Prepaid expenses and other assets” consist of the following:
 
September 30, 2016
 
December 31, 2015
Prepaid operating expenses
$
2,702

 
$
3,507

Current portion of debt issuance costs*

 

Prepaid expenses and other assets
$
2,702

 
$
3,507

* Beginning January 1, 2016, our debt issuance costs (current and non-current portions) were retrospectively reclassified from “prepaid expenses and other assets” and "other assets" to a reduction of the carrying amount of “convertible senior notes” (i.e., contra-liability - see Note 14 ) within our accompanying Consolidated Balance Sheets, in accordance w ith the FASB-issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). These amounts were $1.7 million and $2.2 million (including current and non-current portions) as of September 30, 2016 and December 31, 2015, respectively.
(e) Other receivables
“Other receivables” consist of the following:
 
September 30, 2016
 
December 31, 2015
Income tax receivable
$
1,264

 
$
1,301

Insurance receivable
350

 
7,100

Mundipharma promissory note

 
2,215

CASI note - short term*
1,500

 

Eagle receivable for services and support costs ( Note 13 )
1,896

 

Research and development expenses - reimbursements due
1,726

 
1,699

Other miscellaneous receivables
355

 
257

Other receivables
$
7,091

 
$
12,572

* This full balance was prospectively reclassified beginning March 31, 2016 to "other receivables" (presented within current assets on the accompanying Condensed Consolidated Balance Sheets) from "other assets" (presented within non-current assets) due to this note's maturity date of March 17, 2017 (i.e., within 12 months of September 30, 2016 ) - see Note 10 .
(f) Intangible Assets and Goodwill
“Intangible assets, net of accumulated amortization and impairment charges” consist of the following:  

15


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


 
 
 
September 30, 2016
 
Historical
Cost
 
Accumulated
Amortization
 
Foreign
Currency
Translation
 
Impairment
 
Net Amount
 
Full
Amortization
Period
(months)
 
Remaining
Amortization
Period
(months)
MARQIBO IPR&D (NHL and other novel indications)
$
17,600

 
$

 
$

 
$

 
$
17,600

 
n/a
 
n/a
EVOMELA distribution rights  (1)
7,700

 
(296
)
 

 

 
7,404

 
156
 
150
BELEODAQ distribution rights
25,000

 
(4,219
)
 

 

 
20,781

 
160
 
133
MARQIBO distribution rights
26,900

 
(11,783
)
 

 

 
15,117

 
81
 
42
FOLOTYN distribution rights (2)
118,400

 
(37,767
)
 

 

 
80,633

 
152
 
74
ZEVALIN distribution rights – U.S.
41,900

 
(33,214
)
 

 

 
8,686

 
123
 
30
ZEVALIN distribution rights – Ex-U.S.
23,490

 
(14,159
)
 
(3,818
)
 

 
5,513

 
96
 
42
FUSILEV distribution rights (3)
16,778

 
(9,618
)
 

 
(7,160
)
 

 
56
 
0
FOLOTYN out-license (4)
27,900

 
(11,151
)
 

 
(1,023
)
 
15,726

 
110
 
70
Total intangible assets
$
305,668

 
$
(122,207
)
 
$
(3,818
)
 
$
(8,183
)
 
$
171,460

 
 
 
 
 
(1)
The FDA approval of EVOMELA in March 2016 triggered a $6 million payment due to CyDex Pharmaceuticals, Inc. (a wholly-owned subsidiary of Ligand Pharmaceuticals Incorporated ("Ligand")). This event also resulted in a reclassification of our $7.7 million "EVOMELA IPR&D" to "EVOMELA distribution rights" due to our ability to begin its commercialization with this FDA approval. Amortization commenced on April 1, 2016, in accordance with our capitalization policy for intangible assets.

(2)
Beginning June 2016, we adjusted the amortization period of our FOLOTYN distribution rights to November 2022 from March 2025, representing the period through which we expect to have patent protection from generic competition (see Note 16(g) ).

(3)
On February 20, 2015, the U.S. District Court for the District of Nevada found the patent covering FUSILEV to be invalid, which was upheld on appeal. On April 24, 2015, Sandoz began to commercialize a generic version of FUSILEV. This represented a “triggering event” under applicable GAAP in evaluating the value of our FUSILEV distribution rights as of March 31, 2015, resulting in a $7.2 million impairment charge (non-cash) in the first quarter of 2015. We accelerated amortization expense recognition in 2015 for the then remaining net book value of FUSILEV distribution rights.

(4)
On May 29, 2013, we amended our FOLOTYN collaboration agreement with Mundipharma International Corporation Limited ("Mundipharma"). As a result of the amendment, Europe and Turkey were excluded from Mundipharma’s commercialization territory, and their royalty rates and milestone payments to us were modified. This constituted a change under which we originally valued the FOLOTYN out-license as part of business combination accounting, resulting in an impairment charge (non-cash) of $1.0 million in the second quarter of 2013.

 
 
 
December 31, 2015

Historical
Cost
 
Accumulated
Amortization
 
Foreign
Currency
Translation
 
Impairment
 
Net Amount
MARQIBO IPR&D (NHL and other novel indications)
$
17,600

 
$

 
$

 
$

 
$
17,600

EVOMELA IPR&D
7,700

 

 

 

 
7,700

BELEODAQ distribution rights
25,000

 
(2,812
)
 

 

 
22,188

MARQIBO distribution rights
26,900

 
(8,544
)
 

 

 
18,356

FOLOTYN distribution rights
118,400

 
(29,474
)
 

 

 
88,926

ZEVALIN distribution rights – U.S.
41,900

 
(30,608
)
 

 

 
11,292

ZEVALIN distribution rights – Ex-U.S.
23,490

 
(12,632
)
 
(4,353
)
 

 
6,505

FUSILEV distribution rights
16,778

 
(9,618
)
 

 
(7,160
)
 

FOLOTYN out-license
27,900

 
(9,109
)
 

 
(1,023
)
 
17,768

Total intangible assets
$
305,668

 
$
(102,797
)
 
$
(4,353
)
 
$
(8,183
)
 
$
190,335



16


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


Intangible asset amortization expense recognized during the nine months ended September 30, 2016 was $19.1 million , as compared to $27.9 million of amortization and impairment expense recognized in the prior year period (of which $7.2 million relates to the impairment of the FUSILEV distribution rights, and the remaining $20.7 million relates to scheduled amortization expense).

Estimated intangible asset amortization expense for the remainder of 2016 and the five succeeding fiscal years and thereafter is as follows:

Years Ending December 31,
 
Remainder of 2016
$
6,909

2017
27,635

2018
27,635

2019
25,029

2020
19,740

2021
18,266

2022 and thereafter
28,646

 
$
153,860

“Goodwill” is comprised of the following:
 
September 30, 2016
 
December 31, 2015
Acquisition of Talon (MARQIBO rights)
$
10,526

 
$
10,526

Acquisition of ZEVALIN Ex-U.S. distribution rights
2,525

 
2,525

Acquisition of Allos (FOLOTYN rights)
5,346

 
5,346

Foreign currency exchange translation effects
(380
)
 
(437
)
Goodwill
$
18,017

 
$
17,960

(g) Other assets
“Other assets” are comprised of the following:  
 
September 30, 2016
 
December 31, 2015
Equity securities and secured promissory note - CASI (see Note 10)*
$
9,146

 
$
6,689

Supplies and deposits
181

 
185

2018 Convertible Notes issuance costs (excluding current portion)**

 

Executive officer life insurance – cash surrender value
11,845

 
9,181

Inventories - non-current portion
6,800

 
3,156

Other miscellaneous assets
43

 

Other assets
$
28,015

 
$
19,211


* These equity securities were excluded from “marketable securities” (see Note 3(a) ) due to our intent to hold these securities for at least one year beyond September 30, 2016 , as discussed in Note 10 . The “unrealized gain on available-for-sale securities" within the Condensed Consolidated Statements of Comprehensive Loss, totaled $3.0 million , net of income tax, for the nine months ended September 30, 2016 .

** Beginning January 1, 2016, our debt issuance costs (current and non-current portions) were retrospectively reclassified from “prepaid expenses and other assets” and "other assets" to a reduction of the carrying amount of “convertible senior notes” (i.e., contra-liability - see Note 14 ) within our accompanying Consolidated Balance Sheets, in accordance w ith ASU 2015-03. These amounts were $1.7 million and $2.2 million (including current and non-current portions) as of September 30, 2016 and December 31, 2015 , respectively.
(h) Accounts payable and other accrued liabilities

17


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


“Accounts payable and other accrued liabilities” are comprised of the following :
 
September 30, 2016
 
December 31, 2015
Trade accounts payable and other accrued liabilities
$
27,180

 
$
26,684

Accrued rebates
10,130

 
18,166

Accrued product royalty
5,286

 
4,908

Allowance for returns
2,237

 
1,394

Accrued data and distribution fees
2,996

 
1,830

Accrued GPO administrative fees
342

 
1,058

Accrued inventory management fee
323

 
498

Allowance for chargebacks
1,483

 
2,001

Accounts payable and other accrued liabilities
$
49,977

 
$
56,539

Amounts presented within “accounts payable and other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets specifically for GTN estimates (see Note 2(i) ) are as follows:

Rebates and
Chargebacks
 
Data and
Distribution,
GPO Fees, and
Inventory
Management
Fees
 
Returns
Balance as of December 31, 2014
$
45,822

 
$
8,284

 
$
1,135

Add: provisions
75,498

 
15,928

 
1,486

(Less): credits or actual allowances
(101,153
)
 
(20,826
)
 
(1,227
)
Balance as of December 31, 2015
20,167

 
3,386

 
1,394

Add: provisions
67,390

 
10,235

 
1,558

(Less): credits or actual allowances
(75,944
)
 
(9,960
)
 
(715
)
Balance as of September 30, 2016
$
11,613

 
$
3,661

 
$
2,237

(i) Deferred revenue
Deferred revenue (current and non-current) is comprised of the following:

September 30, 2016
 
December 31, 2015
Mundipharma deferred revenue (see Note 11 )
$
1,700

 
$

EVOMELA deferred revenue*
3,094

 

FUSILEV deferred revenue**

 
6,083

Dr. Reddy's out-license (see Note 16(b)(iii) )
405

 
430

Deferred revenue
$
5,199

 
$
6,513

*We commercialized EVOMELA beginning in April 2016, and have deferred revenue recognition (see Note 2(i)(a) ) for any product shipped to our distributors, but not ordered and received by end-users as of September 30, 2016 .

**In the third quarter of 2015, we deferred revenue recognition related to certain FUSILEV product shipments that did not meet our revenue recognition criteria (see Note 2(i)(a )), aggregating $9.9 million . Specifically, this deferral resulted from our inability to concurrently estimate future rebate values (with requisite precision) offered to our customers in order to compete with generic products. During the fourth quarter of 2015, we recognized $3.8 million for these third quarter shipments, and $6.1 million remained deferred as of December 31, 2015 . In the first quarter of 2016, this $6.1 million of deferred revenue was recognized in full.


18


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


(j) Other long-term liabilities
Other long-term liabilities are comprised of the following:
 
September 30, 2016
 
December 31, 2015
Accrued executive deferred compensation
$
7,797

 
$
6,458

Deferred rent (non-current portion)
193

 
248

Clinical study holdback costs, non-current
44

 

Other tax liabilities
738

 
738

Other long-term liabilities
$
8,772

 
$
7,444

 
4. GROSS-TO-NET PRODUCT SALES
The below table presents a GTN product sales reconciliation for the accompanying Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Gross product sales
$
61,513

 
$
44,713

 
$
175,963

 
$
160,111

Commercial rebates and government chargebacks
(26,167
)
 
(12,515
)
 
(67,389
)
 
(44,364
)
Data and distribution fees, GPO fees, and inventory management fees
(4,234
)
 
(3,503
)
 
(10,235
)
 
(12,709
)
Prompt pay discounts
(300
)
 
(15
)
 
(380
)
 
(16
)
Product returns allowance
(540
)
 
(223
)
 
(1,558
)
 
(1,008
)
Net product sales
$
30,272

 
$
28,457

 
$
96,401

 
$
102,014


5. NET PRODUCT SALES BY GEOGRAPHIC REGION AND PRODUCT LINE, AND COMPOSITION OF LICENSE FEES AND SERVICE REVENUE
The below table presents our net product sales by geography for the three and nine months ended September 30, 2016 and 2015 :
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
United States
$
29,576

 
97.7
%
 
$
26,262

 
92.3
%
 
$
93,392

 
96.9
%
 
$
96,546

 
94.6
%
International:

 

 

 

 

 

Europe
696

 
2.3
%
 
709

 
2.5
%
 
3,009

 
3.1
%
 
1,806

 
1.8
%
Asia Pacific*

 
%
 
1,486

 
5.2
%
 

 
%
 
3,662

 
3.6
%
Total international
696

 
2.3
%
 
2,195

 
7.7
%
 
3,009

 
3.1
%
 
5,468

 
5.4
%
Net product sales
$
30,272

 
100.0
%
 
$
28,457

 
100.0
%
 
$
96,401

 
100.0
%
 
$
102,014

 
100.0
%
 
* See Note 11 for discussion of our November 2015 out-license for Asia Pacific territory to Mundipharma.

The below table presents our net product sales by product line for the three and nine months ended September 30, 2016 and 2015 :

19



 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
FUSILEV
$
4,893

 
16.2
%
 
$
11,101

 
39.0
%
 
$
30,568

 
31.7
%
 
$
45,597

 
44.7
%
FOLOTYN
11,315

 
37.4
%
 
8,722

 
30.6
%
 
35,577

 
36.9
%
 
30,261

 
29.7
%
ZEVALIN
2,627

 
8.7
%
 
4,762

 
16.7
%
 
8,224

 
8.5
%
 
13,784

 
13.5
%
MARQIBO
1,925

 
6.4
%
 
1,316

 
4.6
%
 
4,921

 
5.1
%
 
5,290

 
5.2
%
BELEODAQ
3,635

 
12.0
%
 
2,556

 
9.0
%
 
10,326

 
10.7
%
 
7,082

 
6.9
%
EVOMELA
5,877

 
19.4
%
 

 
%
 
6,785

 
7.0
%
 

 
%
Net product sales
$
30,272

 
100.0
%
 
$
28,457

 
100.0
%
 
$
96,401

 
100.0
%
 
$
102,014

 
100.0
%
 
The below table presents our license fee and service revenue by source for the three and nine months ended September 30, 2016 and 2015 :

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Out-license to Servier in Canada territory ( Note 12 )
$

 
%
 
$

 
%
 
$
6,000

 
40.5
%
 
$

 
%
Co-promotion with Eagle ( Note 13 )
2,406

 
77.1
%
 

 
%
 
6,737

 
45.5
%
 

 
%
Out-license to Mundipharma in China and other ex-U.S. territories (Note 11 and 15)
703

 
22.5
%
 
158

 
92.9
%
 
2,013

 
13.6
%
 
493

 
4.8
%
Out-license to CASI in China territory ( Note 10 )

 
%
 

 
%
 

 
%
 
9,682

 
94.8
%
Other license fees and service revenues
12

 
0.4
%
 
12

 
7.1
%
 
57

 
0.4
%
 
37

 
0.4
%
License fees and service revenues
$
3,121

 
100.0
%
 
$
170

 
100.0
%
 
$
14,807

 
100.0
%
 
$
10,212

 
100.0
%

6. STOCK-BASED COMPENSATION
We classify our stock-based compensation expense (inclusive of our incentive stock plan, employee stock purchase plan, and 401(k) contribution matching program) in the accompanying Condensed Consolidated Statements of Operations, based on the department to which the recipient belongs. Stock-based compensation expense included within “Total operating costs and expenses” for the three and nine months ended September 30, 2016 and 2015 was as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Cost of product sales
$
30

 
$
21

 
$
84

 
$
43

Research and development
470

 
474

 
1,461

 
1,326

Selling, general and administrative
2,650

 
2,005

 
8,209

 
7,121

Total stock-based compensation
$
3,150

 
$
2,500

 
$
9,754

 
$
8,490

 
7. NET LOSS PER SHARE
Net loss per share was computed by dividing net loss by the weighted average number of common shares outstanding for the three and nine months ended September 30, 2016 and 2015 :

20



 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(17,455
)
 
$
(18,724
)
 
$
(51,070
)
 
$
(46,632
)
Weighted average shares – basic and diluted
79,303,380

 
65,855,727

 
70,437,885

 
65,457,060

Net loss per share – basic and diluted
$
(0.22
)
 
$
(0.28
)
 
$
(0.73
)
 
$
(0.71
)
The below outstanding securities were excluded from the above calculation of net loss per share because their impact would have been anti-dilutive due to net loss per share in the three and nine months ended September 30, 2016 and 2015 , as summarized below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
2018 Convertible Notes
11,401,284

 
11,401,284

 
11,401,284

 
11,401,284

Common stock options
1,603,028

 
1,591,709

 
1,498,034

 
1,507,700

Restricted stock awards
2,609,533

 
1,457,232

 
2,609,533

 
1,457,232

Common stock warrants

 
59,853

 
1,674

 
45,121

Preferred stock

 
40,000

 

 
40,000

Total
15,613,845

 
14,550,078

 
15,510,525

 
14,451,337

 

8. FAIR VALUE MEASUREMENTS
The table below summarizes certain asset and liability fair values that are included within our accompanying Condensed Consolidated Balance Sheets, and their designations among three fair value measurement categories:
 
September 30, 2016
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:

 

 

 

Bank certificates of deposits
$

 
$
5,246

 
$

 
$
5,246

Money market currency funds

 
138,472

 

 
138,472

Equity securities
9,146

 

 

 
9,146

Mutual funds

 
45

 

 
45

Deferred compensation investments, including life insurance cash surrender value

 
11,845

 

 
11,845


$
9,146

 
$
155,608

 
$

 
$
164,754

Liabilities:

 

 

 

Deferred executive compensation liability
$

 
$
7,797

 
$

 
$
7,797

Drug development liability ( Note 15 )

 

 
14,160

 
14,160

Talon CVR ( Note 9(a) )

 

 
1,853

 
1,853

Corixa Liability

 

 
62

 
62

 
$

 
$
7,797

 
$
16,075

 
$
23,872

 

21


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


 
December 31, 2015
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:

 

 

 

Bank certificates of deposits
$

 
$
245

 
$

 
$
245

Money market currency funds

 
80,116

 

 
80,116

Equity securities
5,189

 

 

 
5,189

Deferred compensation investments, including life insurance cash surrender value

 
9,181

 

 
9,181


$
5,189

 
$
89,542

 
$

 
$
94,731

Liabilities:

 

 

 

Deferred executive compensation liability
$

 
$
6,458

 
$

 
$
6,458

Drug development liability

 

 
14,686

 
14,686

Ligand Contingent Consideration

 

 
5,227

 
5,227

Talon CVR

 

 
1,377

 
1,377

Corixa Liability

 

 
62

 
62


$

 
$
6,458

 
$
21,352

 
$
27,810


We did not have any transfers between Levels 1 and 2 for all periods presented. The following presents a roll forward of our liabilities for which we utilize Level 3 inputs in determining period-end value. These liabilities are included on our Condensed Consolidated Balance Sheets within “acquisition-related contingent obligations” and “drug development liability”. The basis of the various Level 3 valuation inputs are discussed in the Notes to these accompanying Condensed Consolidated Financial Statements.
Our carrying amounts of financial instruments such as cash equivalents, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities, excluding acquisition-related contingent obligations, approximate their related fair values due to their short-term nature.
 
Fair Value Measurements of
Unobservable Inputs (Level 3)
Balance at December 31, 2014
$
23,127

Deferred drug development costs
(1,099
)
Ligand Contingent Consideration fair value adjustment
326

Talon CVR fair value adjustment
(1,002
)
Balance at December 31, 2015
21,352

Settlement of Ligand Contingent Consideration liability (see   Note 9(b))
(6,000
)
Deferred drug development costs (see Note 15 )
(526
)
Ligand Contingent Consideration fair value adjustment prior to settlement (see  Note 9(b) )
773

Talon CVR fair value adjustment (see Note 9(a) )
476

Balance at September 30, 2016*
$
16,075

* This amount is comprised of the current and non-current portions of “drug development liability” and of “acquisition-related contingent obligations” on our accompanying Condensed Consolidated Balance Sheets.

9. BUSINESS COMBINATIONS AND CONTINGENT CONSIDERATION
(a) Acquisition of Talon Therapeutics, Inc. and Related Contingent Consideration
Overview of Talon Acquisition
On July 17, 2013 , we purchased all of the outstanding shares of common stock of Talon Therapeutics, Inc. (“Talon”). Through the acquisition of Talon, we gained worldwide rights to MARQIBO. The Talon purchase consideration comprised of (i) an aggregate upfront cash amount of $11.3 million , (ii) issuance of 3.0 million shares of our common stock, then equivalent

22


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


to $26.3 million (based on a closing price of $8.77 per share on July 17, 2013), and (iii) the issuance of contingent value rights (“CVR”) initially valued at $6.5 million .
The CVR was valued using a valuation model that probability-weights expected outcomes (ranging from 50% to 100% ) and discounts those amounts to their present value, using an appropriate discount rate (these represent unobservable inputs and are therefore classified as Level 3 inputs – see Note 2 (xiii) ). The CVR has a maximum payout of $195 million if all sales and regulatory approval milestones are achieved, as summarized below:
 
$5 million upon the achievement of net sales of MARQIBO in excess of $30 million in any calendar year
$10 million upon the achievement of net sales of MARQIBO in excess of $60 million in any calendar year
$25 million upon the achievement of net sales of MARQIBO in excess of $100 million in any calendar year
$50 million upon the achievement of net sales of MARQIBO in excess of $200 million in any calendar year
$100 million upon the achievement of net sales of MARQIBO in excess of $400 million in any calendar year
$5 million upon receipt of marketing authorization from the FDA regarding Menadione Topical Lotion

Talon CVR Fair Value as of September 30, 2016 and December 31, 2015
The CVR fair value will continue to be evaluated on a quarterly basis. Current and future changes in its fair value results from the likelihood and timing of milestone achievement and/or the corresponding discount rate applied thereon. Adjustments to CVR fair value are recognized within “change in fair value of contingent consideration related to acquisitions” in the accompanying Condensed Consolidated Statements of Operations.  
 
Fair Value
of Talon
CVR
December 31, 2015
$
1,377

Fair value adjustment for the nine months ended September 30, 2016
476

September 30, 2016
$
1,853

(b) Acquisition of Rights to EVOMELA and Related Contingent Consideration
Overview of Acquisition of Rights to EVOMELA
In March 2013, we completed the acquisition of exclusive global development and commercialization rights to Captisol-enabled®, propylene glycol-free MELPHALAN (which we branded as “EVOMELA”) for use as a conditioning treatment prior to autologous stem cell transplant for patients with MM. We acquired these rights from CyDex Pharmaceuticals, Inc. a wholly-owned subsidiary of Ligand ("CyDex") for an initial license fee of $3 million , and assumed responsibility for EVOMELA's then-ongoing clinical and regulatory development program. Concurrent with the execution of this in-license agreement, we entered into an exclusive supply agreement with CyDex that requires that all of our purchases of the Captisol product (which is required to formulate EVOMELA) must be from CyDex, while CyDex must supply us with all of our future commercial needs of this raw material.
We accounted for this transaction as a business combination, which required that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the transaction date.
We are required to pay Ligand additional amounts up to an aggregate $60 million upon the achievement of annual net sales thresholds (exclusive of the $6 million milestone payment triggered in March 2016, as discussed below), however, we continue to not expect to achieve these sales thresholds based on our estimated market size for this product and our projected market share. We also must pay royalties of 20% on our net sales of EVOMELA in all territories. Our EVOMELA royalty obligation and sales-based milestones are jointly treated under GAAP as part of an "executory contract" that is connected with an at-market supply agreement for Captisol (requiring the continuing involvement of CyDex). As a result, this royalty obligation and sales-based milestones are treated as separate transactions apart from consideration for the EVOMELA rights. Our royalty expenses are reported through “cost of goods sold” on our Consolidated Statement of Operations in the period of our recognized revenue for the product sale.

23


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


Consideration Transferred
The acquisition-date fair value of the consideration transferred consisted of the following:
 
 
Cash consideration
$
3,000

Ligand Contingent Consideration - FDA approval milestone
4,700

Total purchase consideration
$
7,700

Fair Value Estimate of Asset Acquired and Liability Assumed
The total purchase consideration is allocated to the acquisition of the net tangible and intangible assets based on their estimated fair values as of the closing date. The allocation of the total purchase price to the net assets acquired is as follows:
EVOMELA IPR&D
$
7,700

We estimated the fair value of the in-process research and development using the income approach. The income approach uses valuation techniques to convert future amounts to a single present amount (discounted). Our measurement is based on the value indicated by current market expectations about those future amounts. The fair value estimate took into account our estimates of future incremental earnings that may be achieved upon regulatory approval, promotion, and distribution associated with the rights, and included estimated cash flows of approximately 10 years and a discount rate of approximately 25% .
 
The fair value of the contingent consideration liability assumed was determined using the probability of success and the discounted cash flow method of the income approach (representing unobservable inputs and are therefore represent Level 3 values - see Note 2(xiii) ). In March 2016, the FDA approved EVOMELA, triggering a $6 million milestone payment to Ligand (“Ligand Contingent Consideration”) that was paid in April 2016. "EVOMELA IPR&D" of $7.7 million was reclassified to "EVOMELA distribution rights" within "Intangible assets, net of accumulated amortization and impairment charges" in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2016 (see Note 3(f) ). Amortization related to this intangible asset commenced on April 1, 2016.
Ligand Contingent Consideration Fair Value as of September 30, 2016 and December 31, 2015
The fair value of the Ligand Contingent Consideration immediately prior to its payment was the full $6 million payment due upon milestone achievement. Accordingly, in the first quarter of 2016, we recorded a $0.8 million adjustment to the “change in fair value of contingent consideration related to acquisitions” in the accompanying Condensed Consolidated Statements of Operations.
 
Fair Value of
Ligand
Contingent
Consideration
December 31, 2015
$
5,227

Fair value adjustment for the three months ended March 31, 2016
773

Payment to Ligand in April 2016 for FDA approval milestone achievement
$
(6,000
)
September 30, 2016
$

 
(c) Allos Acquisition
We acquired Allos Therapeutics, Inc. (“Allos”) on September 5, 2012, which was accounted for as a business combination. Our total cash consideration for this acquisition was $205.2 million , through which we acquired FOLOTYN distribution rights. We have no contingent consideration obligations as part of this transaction.

10. OUT-LICENSE OF MARQIBO, ZEVALIN, AND EVOMELA IN CHINA TERRITORY TO CASI
Overview of CASI Out-License

24


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


On September 17, 2014, we executed three product out-license agreements with a perpetual term (collectively, the “CASI Out-License”) with CASI Pharmaceuticals, Inc. (“CASI”), a publicly-traded biopharmaceutical company (NASDAQ: CASI) with a primary focus on the China market. Under the CASI Out-License, we granted CASI the exclusive rights to distribute two of our commercialized oncology drugs, ZEVALIN and MARQIBO, and our Phase 3 drug candidate, EVOMELA (“CASI Out-Licensed Products”) in greater China (which includes Taiwan, Hong Kong and Macau). In return, we received CASI equity for the rights related to ZEVALIN and EVOMELA and a secured promissory note for the rights related to MARQIBO. Additionally, under certain conditions which generally expire on September 17, 2019, we have a right to receive additional CASI common stock in order to maintain our post-investment ownership percentage if CASI issues additional securities. In February 2016 and July 2016, we acquired an additional 1.7 million and 1.1 million common shares of CASI at par value, respectively, resulting in our total holding of 8.2 million common shares as of September 30, 2016 .
CASI will be responsible for the development and commercialization of these three drugs, including the submission of import drug registration applications to regulatory authorities and conducting any confirmatory clinical studies in greater China. We will provide CASI with future commercial supply of the CASI Out-Licensed Products under typical market terms.
Proceeds Received in the Third Quarter of 2014
The proceeds we received, and its fair value on the CASI Out-License execution date, consisted of the following:
CASI common stock (5.4 million shares)
$
8,649

(a)
CASI secured promissory note due March 17, 2017, net of fair value discount ($1.5 million face value and 0.5% annual coupon)
1,310

(b)
Total consideration received, net of fair value discount
$
9,959


(a)
Value determined based on the September 17, 2014 closing price of 5.4 million shares of CASI common stock on the NASDAQ Capital Market of $1.60 per share. Our current intention is to hold these securities on a long-term basis. Accordingly, we have presented its value of $9.1 million as of September 30, 2016 within "other assets" (rather than "marketable securities") on our accompanying Condensed Consolidated Balance Sheets. The change in fair value of these securities is reported within “unrealized gain on available-for-sale securities" on the Condensed Consolidated Statements of Comprehensive Loss.

(b)
Value estimated using the terms of the $1.5 million promissory note, the application of a synthetic debt rating based on CASI’s publicly-available financial information, and the prevailing interest yields on similar public debt securities as of September 17, 2014. The face value of the promissory note as of September 30, 2016 is included within "other receivables" on the accompanying Condensed Consolidated Balance Sheets.
In addition, CASI will be responsible for paying any royalties or milestones that we are obligated to pay to our third-party licensors resulting from the achievement of certain milestones and/or sales of CASI Out-Licensed Products, but only to the extent of the greater China portion of such royalties or milestones.

11. OUT-LICENSE OF ZEVALIN IN CERTAIN EX-U.S. TERRITORIES TO MUNDIPHARMA

On November 16, 2015, we entered into an out-license agreement with Mundipharma International Corporation Limited for their commercialization of ZEVALIN in Asia (excluding India and Greater China), Australia, New Zealand, Africa, the Middle East, and Latin America (including the Caribbean). In return, we received $18 million (comprised of $15 million received in December 2015 and $3 million received in January 2016). Of these proceeds, $15 million was recognized within "license fees and service revenue" in the fourth quarter of 2015, and $1.3 million of the $3 million payment was recognized in the same caption for the nine months ended September 30, 2016 . As of September 30, 2016 , $1.7 million remains deferred and is presented within "deferred revenue" (current and non-current) in the accompanying Condensed Consolidated Balance Sheets. We are also eligible to receive an additional $2 million upon Mundipharma's achievement of a specified sales milestone, that if/when achieved, will also be reported within "license fees and service revenue".

As Mundipharma has sales of ZEVALIN kits in their territories, the remaining unrecognized portion of this $3 million payment will be reported by us within "license fees and service revenue" on an established per-unit basis. Mundipharma is required to reimburse us for our payment of royalties due to Bayer Pharma AG ("Bayer") from their ZEVALIN sales - see Note 16(b)(ii) .
 

25


Notes to Condensed Consolidated Financial Statements
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)


In connection with this out-license, on November 16, 2015, we concurrently sold to Mundipharma K.K., all common stock of Spectrum Pharmaceuticals GK (the legal entity through which we previously sold ZEVALIN in Japan) for $2.2 million (in the form of an unsecured note, which was paid in full in June 2016), representing its net asset value (excluding inventory) as of November 16, 2015.

12. OUT-LICENSE OF ZEVALIN, FOLOTYN, BELEODAQ, AND MARQIBO IN CANADA TERRITORY TO SERVIER
On January 8, 2016, we entered into a strategic partnership with Servier Canada, Inc. ("Servier") for the out-licenses of ZEVALIN, FOLOTYN, BELEODAQ, and MARQIBO. We received $6 million in upfront payments in the first quarter of 2016 which was recognized within "license fees and service revenue" in the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2016 . We will also receive development milestone payments if/when achieved, and a high single-digit royalty on their sales of these products.

13. CO-PROMOTION ARRANGEMENT WITH EAGLE PHARMACEUTICALS
On November 4, 2015, we executed an agreement with Eagle Pharmaceuticals, Inc. ("Eagle") whereby designated members of our sales force will concurrently market up to six of Eagle's pharmaceutical products along with our products, in return for fixed monthly payments over the initial 18 month contract term through June 30, 2017, aggregating $12.8 million (the "Eagle Agreement"). We are also eligible to receive milestone payments of up to $5 million for sales made in 2016 that exceed certain thresholds, and up to $4 million for sales made in the first half 2017 that exceed certain thresholds. In addition, for performance above such sales levels in 2016, and in the first half of 2017, we are eligible to receive variable-based payments in the high single-digits on incremental sales of Eagle's products above these established threshold levels.
The fixed payments received by us, as well as reimbursable costs for certain marketing activities that we coordinate with third parties on Eagle's behalf, are recognized within "license fees and service revenue" on our accompanying Consolidated Statement of Operations. This amount was $2.4 million and $6.7 million for the three and nine months ended September 30, 2016 , respectively. Any variable payments due to us will be recognized in the period earned and reported within the same revenue caption.
An allocation of our sales personnel costs that are dedicated to Eagle sales activities are reported within "cost of service revenue" on our accompanying Consolidated Statement of Operations, as are reimbursable costs for Eagle marketing activities. These were an aggregate $2.2 million and $5.7 million for the three and nine months ended September 30, 2016 , respectively.
Eagle may extend the initial term of this agreement by six months to December 31, 2017 at its sole election. Any extensions after December 31, 2017 require mutual consent and will be for six months per extension. The Eagle Agreement may be terminated by either party for uncured material breaches and certain other events following a change of control or insolvency of either party, and solely by Eagle for convenience with 60 days written notice, subject to an established termination fee, as calculated within the Eagle Agreement.

14. CONVERTIBLE SENIOR NOTES

Overview