10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

 

¨ 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

 

LOGO

 

 

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  x    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  x    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   x
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  x

As of July 31, 2014, 65,731,956 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 SIX MONTHS ENDED JUNE 30, 2014

TABLE OF CONTENTS

 

Item

       Page  
  PART I. FINANCIAL INFORMATION   

Item 1.

 

Condensed Consolidated Financial Statements (unaudited):

  
 

Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

     1   
 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013

     2   
 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2014 and 2013

     3   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

     4   
 

Notes to Condensed Consolidated Financial Statements

     5   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4.

 

Controls and Procedures

     41   
  PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     42   

Item 1A.

 

Risk Factors

     43   

Item 6.

 

Exhibits

     44   
 

Signatures

     45   

Item 2 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.


Table of Contents

PART I: FINANCIAL INFORMATION

SPECTRUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value amounts)

(Unaudited)

 

     June 30,
2014
    December 31,
2013
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 132,405      $ 156,306   

Marketable securities

     3,306        3,471   

Accounts receivable, net of allowance for doubtful accounts of $177 and $206, respectively

     56,742        49,483   

Other receivables

     11,802        7,539   

Inventories

     10,881        13,519   

Prepaid expenses and other current assets

     3,410        3,213   

Deferred tax assets

     1,587        1,659   
  

 

 

   

 

 

 

Total current assets

     220,133        235,190   

Property and equipment, net of accumulated depreciation

     1,407        1,535   

Intangible assets, net of accumulated amortization

     219,735        231,352   

Goodwill

     18,476        18,501   

Other assets

     15,197        12,577   
  

 

 

   

 

 

 

Total assets

   $ 474,948      $ 499,155   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable and other accrued liabilities

   $ 69,178      $ 79,837   

Accrued payroll and benefits

     5,149        6,872   

Deferred revenue

     33        156   

Drug development liability

     3,119        3,119   
  

 

 

   

 

 

 

Total current liabilities

     77,479        89,984   

Drug development liability, less current portion

     14,069        14,623   

Acquisition-related contingent obligations

     10,058        8,329   

Deferred tax liability

     8,167        7,168   

Other long-term liabilities

     5,709        5,965   

Convertible senior notes

     93,812        91,480   
  

 

 

   

 

 

 

Total liabilities

     209,294        217,549   

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; 20 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively (convertible into 40,000 shares of common stock, with aggregate liquidation value of $240)

     123        123   

Common stock, $0.001 par value; 175,000,000 shares authorized; 65,730,897 and 64,104,173 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     66        64   

Additional paid-in capital

     532,554        518,144   

Accumulated other comprehensive income

     1,734        894   

Accumulated deficit

     (268,823     (237,619
  

 

 

   

 

 

 

Total stockholders’ equity

     265,654        281,606   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 474,948      $ 499,155   
  

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

1


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Revenues:

        

Product sales, net

   $ 46,855      $ 32,213      $ 86,951      $ 61,559   

License fees and service revenue

     —          1,019        28        10,340   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     46,855        33,232        86,979        71,899   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Cost of product sales (excludes amortization and impairment of intangible assets)

     6,156        7,268        12,434        14,050   

Selling, general and administrative

     25,399        22,584        48,802        44,598   

Research and development

     11,335        10,460        40,832        22,343   

Amortization and impairment of intangible assets

     5,361        5,449        10,721        9,894   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     48,251        45,761        112,789        90,885   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (1,396     (12,529     (25,810     (18,986
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

        

Interest expense, net

     (1,976     (397     (4,043     (818

Change in fair value of contingent consideration related to acquisitions

     (1,005     —         (1,729     —     

Other income (expense), net

     (487     234        (845     (663
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     (3,468     (163     (6,617     (1,481
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,864     (12,692     (32,427     (20,467

Benefit for income taxes

     1,301        2,971        1,223        5,310   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,563   $ (9,721   $ (31,204   $ (15,157
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

        

Basic and diluted

   $ (0.06   $ (0.16   $ (0.49   $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic and diluted

     64,609,197        58,977,295        64,119,441        58,995,735   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

2


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net loss

   $ (3,563   $ (9,721   $ (31,204   $ (15,157

Other comprehensive income, net of income tax:

        

Unrealized gain on available-for-sale securities

     741        99        1,055        967   

Income tax on unrealized gain on available-for-sale securities

     (279     57        (398     171   

Foreign currency translation adjustments

     95        (37     183        (361
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     557        119        840        777   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (3,006   $ (9,602   $ (30,364   $ (14,380
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

3


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six months ended
June 30,
 
     2014     2013  

Cash Flows From Operating Activities:

    

Net loss

   $ (31,204   $ (15,157

Adjustments to reconcile net loss to net cash used in operating activities:

    

Amortization of deferred service revenue

     —         (10,300

Depreciation and amortization

     12,179        10,772   

Stock-based compensation

     5,525        5,671   

Accretion of debt discount to interest expense on 2018 Convertible Notes (Note 11)

     2,332        —    

Amortization of deferred financing costs to interest expense on 2018 Convertible Notes (Note 11)

     308        —    

Bad debt (recovery) expense

     (28     44   

Impairment of intangible assets

     —          1,023   

Unrealized foreign currency loss

     606        654   

Research and development expense for the value of stock issued to TopoTarget in connection with milestone achievement (Note 13)

     7,790        —    

Change in fair value of contingent consideration related to acquisitions (Note 9)

     1,729        —    

Change in fair value of drug development liability (Note 12)

     —         (2,869

Changes in operating assets and liabilities:

    

Accounts receivable

     (7,231     39,746   

Other receivables

     (4,263     —    

Inventories

     2,638        (834

Prepaid expenses and other current assets

     (197     (5,691

Deferred tax assets

     72        (6,039

Other assets

     (1,873     —    

Accounts payable and other accrued obligations

     (10,659     (11,495

Accrued payroll and benefits

     (1,723     (472

Drug development liability (Note 12)

     (554     (2,352

Deferred revenue

     (123     —    

Deferred tax liability

     602        —    

Other long-term liabilities

     (256     743   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (24,330     3,444   
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Acquisition of C-E MELPHALAN license (Note 9)

     —         (3,000

Redemption of certificate of deposit

     165        —    

Purchases of property and equipment

     (605     (127
  

 

 

   

 

 

 

Net cash used in investing activities

     (440     (3,127
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Proceeds from exercise of stock options

     1,339        1,137   

Proceeds from sale of stock under employee stock purchase plan

     348        197   

Payments to acquire treasury stock

     —         (1,652

Purchase and retirement of restricted stock to satisfy employee tax liability at vesting

     (590 )     (410

Proceeds from Mundipharma related to FOLOTYN collaboration (Note 12)

     —         7,000   

Proceeds from revolving line of credit

     —         100,000   

Repayment of revolving line of credit

     —         (125,000
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,097        (18,728
  

 

 

   

 

 

 

Effect of exchange rates on cash

     (228     (184

Net (decrease) increase in cash and cash equivalents

     (23,901     (18,595

Cash and cash equivalents—beginning of period

     156,306        139,698   
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 132,405      $ 121,103   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

C-E MELPHALAN license included in intangible assets and other long-term obligations

   $ —       $ 4,700   
  

 

 

   

 

 

 

Retirement of treasury shares

   $ —       $ 1,652   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 329      $ 197   
  

 

 

   

 

 

 

Cash paid for interest

   $ 1,588      $ 421   
  

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

4


Table of Contents

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. and its wholly-owned subsidiaries (“Spectrum”, the “Company”, “we”, “our”, or “us”), is a biotechnology company with fully integrated commercial and drug development operations, with a primary focus in oncology and hematology. Our strategy is comprised of acquiring, developing, and marketing a diverse pipeline of late-stage clinical and commercial products.

We currently market five drugs for the following indications:

 

    FUSILEV® injection for patients in the U.S. with advanced metastatic colorectal cancer and to counteract certain effects of methotrexate therapy;

 

    ZEVALIN® injection for patients in the U.S. and various international markets with follicular non-Hodgkin’s lymphoma;

 

    FOLOTYN® injection for patients in the U.S. with relapsed or refractory peripheral T-cell lymphoma (“PTCL”);

 

    MARQIBO® injection for patients in the U.S. with Philadelphia chromosome–negative acute lymphoblastic leukemia; and

 

    BELEODAQ™ injection for patients in the U.S. with relapsed or refractory PTCL. We did not launch this product until July 2014, and accordingly, no corresponding revenue is reported for any period presented in the accompanying Condensed Consolidated Financial Statements.

We also have ongoing indication expansion studies with several of our marketed products, and a diversified pipeline of product candidates in advanced-stage Phase 2 and Phase 3 studies. Our integrated in-house scientific team, includes formulation development and medical research, as well as expertise in regulatory and clinical affairs, biostatistics, and data management. In the U.S., we have full commercial operations for the sales and marketing of our drug products, and leverage the expertise of our worldwide partners to assist us with international sales and product development.

(b) Basis of Presentation

Interim Financial Statements

The interim financial data as of June 30, 2014 and 2013 is unaudited and is not necessarily indicative of the 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 six months ended June 30, 2014 and 2013. 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 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, 2013, filed with the SEC on March 12, 2014.

Principles of Consolidation

The accompanying Condensed Consolidated 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 SPC, as discussed below). All inter-company accounts and transactions among the consolidated entities have been eliminated in consolidation.

Variable Interest Entity

We own fifty-percent of Spectrum Pharma Canada (“SPC”), organized in Quebec, Canada in January 2008. SPC is a “variable interest entity” as defined under applicable GAAP. Certain of our drug clinical studies are conducted through this entity, and we are obligated to fund all of its costs and have the sole rights to any revenue derived from its operations. Since we carry the full risks and rewards of this entity, 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.

 

5


Table of Contents

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)

 

(c) Operating Segment

We operate in one reportable operating segment that is focused exclusively on developing and commercializing oncology and hematology drug products. For the three and six months ended June 30, 2014 and 2013, all of our revenue and related expenses were solely attributable to these activities. Substantially all of our long-lived assets are located 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 and liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, our management evaluates its estimates, including those related to (i) gross-to-net revenue adjustments; (ii) the collectability of customer accounts; (iii) whether the cost of inventories can be recovered; (iv) the fair value of goodwill and intangible assets; (v) the realization of tax assets and estimates of tax liabilities; (vi) the likelihood of payment and value of contingent liabilities; (vii) the fair value of investments; (viii) assumptions used in reporting stock-based compensation; and (ix) the potential outcome of ongoing or threatened litigation.

Such estimates are based on our management’s professional judgment which takes into account our Company’s experience and all available facts. Nonetheless, actual results may materially differ from management’s estimates. In our judgment, the accounting policies, estimates, and assumptions described below have the greatest potential to significantly impact the accompanying Condensed Consolidated Financial Statements:

(i) Revenue Recognition

(a) Product Sales: We sell our products to wholesalers and distributors. Our wholesalers and distributors in turn sell the products directly to end-users, such as clinics, hospitals, and private oncology-based practices. Revenue from 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 and 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 obligations for future performance to directly bring about the resale of our product; and

 

  (6) we have a reasonable basis to estimate returns.

Our gross revenue is reduced by our gross-to-net (“GTN”) estimates, resulting in our reported “Product sales, net” in the accompanying Condensed Consolidated Statements of Operations. We defer revenue recognition in full if/when these estimates are not reasonably determinable at the time of sale. Information from external sources is used to estimate GTN adjustments. Such information includes written and oral information obtained from our wholesalers with respect to their inventory levels and sell-through to end-users during the period. The inventory information received from wholesalers is a product of their recordkeeping process. Our GTN estimates reduce revenue in the same period that the related sale is recorded and include the following major categories:

Product Returns Allowances: Our FUSILEV and MARQIBO customers (and BELEODAQ customers, beginning in the third quarter of 2014) are typically permitted to return products within six months of its expiration date, subject to certain restocking fees and preauthorization requirements. Returns for ZEVALIN and FOLOTYN expirations are not contractually or customarily allowed. We estimate potential returns, based on several factors, including historical rates of return, customer and end-user ordering patterns, inventory held by distributors, and sell through data of distributor sales to end users. In general, returned product is not resold.

 

6


Table of Contents

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)

 

Government Chargebacks: Our products are subject to certain pricing limits under federal government programs. Qualifying entities purchase products through our distributors at the discounted price. Our distributors charge the difference between the list price and discounted price back to us, for which there may be significant lag time. Due to estimates inherent in determining the amount and volume of government chargebacks we will incur, the actual amount of government chargeback claims may be materially different from our estimates.

Discounts: Discounts for prompt payment are estimated based on the customer’s payment history and our current expectations for timing of customer payment.

Rebates: Rebates are estimated based on the customer’s actual purchase level during the quarterly or annual rebate purchase period, and the corresponding contractual rebate tier we expect the customer to achieve.

Medicaid Rebates: Our products are subject to state government-managed Medicaid programs whereby discounts and rebates are provided to participating state governments. Our calculations related to these rebate accruals require estimates, including estimates of customer mix, to determine which of our sales will be subject to rebates and the amount of such rebates. Our estimates are based on historical claims and forecasting techniques, as supplemented by management’s judgment for many factors, including changes in sales trends and product pricing. Due to estimates and assumptions inherent in determining the amount of our product sales that will be subject to Medicaid rebates, and the time lag in us receiving these rebate notices (generally several months after the sale is made), the actual amount of these claims may be materially different from our estimates. As a result, Medicaid rebate adjustments affecting revenue may be prospectively recorded and reported over several periods after we reported the initial sale.

Distribution, Data, and GPO Administrative Fees: Distribution, data, and GPO administrative fees are paid to authorized wholesalers and specialty distributors of our products (except U.S. sales of ZEVALIN). These fees are based on a percentage of such estimated net sales and are for various services, including: contract administration, inventory management, product sales reporting by customer, and product returns processing.

(b) License Fees: We recognize revenue for our licensing of intellectual property to third parties, based on the terms of each contractual agreement. In general, this results in periodic revenue recognition as the licensee has sales for which we are entitled to a royalty, or in certain instances we may receive a lump-sum payment from licensees, in which case, revenue is fully recognized in that period.

(c) Service Revenue: We receive fees under certain arrangements for our research and development services. These services are generally performed in connection with a collaboration agreement with another pharmaceutical company. Payment may be triggered by the successful completion of a phase of development, results from a clinical trial, and/or regulatory approval events. We recognize revenue when the corresponding milestone is achieved, or the revenue is otherwise earned through our on-going activities.

ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), was issued in May 2014 for our mandatory adoption beginning January 1, 2017 (no early adoption is permitted under this new revenue recognition standard). ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply 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 continue to evaluate the impact of ASU 2014-09 to our current revenue recognition models for product sales, license fees, and service revenue, as described above.

(ii) Cash and Equivalents

Our cash and equivalents consist of bank deposits and highly liquid investments with original maturities of three months or less from the original purchase date.

 

7


Table of Contents

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)

 

(iii) Marketable Securities

Our marketable securities consist of our holdings in mutual funds and bank certificates of deposit. These are classified as available-for-sale, with any unrealized change in value reflected in “unrealized gain (loss) on securities” on the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss). Realized gains and losses on available-for-sale securities are included in “other expense” on the accompanying Condensed Consolidated Statements of Operations.

(iv) Accounts Receivable

Our accounts receivable are derived from our product sales, license fees, and service revenue, and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in existing accounts receivable. Account balances are charged off against the allowance after appropriate collection efforts are exhausted.

(v) Inventories

We value inventory at the lower of the actual cost to purchase or manufacture it, or its market value (i.e., its net realizable value). Cost is determined on the first-in, first-out method (FIFO). We regularly review inventory quantities in process and on hand, and when appropriate, record a provision for obsolete and excess inventory to reduce it to its net realizable value.

Direct and indirect manufacturing costs related to the production of inventory in anticipation of FDA approval are expensed through “research and development,” rather than capitalized. Upon FDA approval, these direct and indirect manufacturing costs are subsequently capitalized to inventory as incurred.

(vi) Property and Equipment

Our property and equipment is stated at cost and depreciated on a straight-line basis over its estimated useful lives. In the case of leasehold improvements, depreciation is over the shorter of the estimated useful life or remaining term of the lease. 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 transactions. Goodwill has an indefinite useful life and is not amortized, but is instead tested for impairment on an annual basis, unless there are interim impairment indicators requiring earlier testing. We perform our annual evaluation as of October 1 each year.

We evaluate the recoverability of indefinite and definite lived intangible assets at least annually, or whenever events or changes in our business indicate that an intangible asset’s 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.

(viii) Stock-Based Compensation

We recognize stock-based compensation expense for employees and directors over the equity award vesting period, on a straight-line basis, and is net of an estimated forfeiture rate which is periodically updated.

We use the Black-Scholes option pricing model to determine the fair value of stock option grants with service conditions for vesting, and the Monte Carlo valuation model to value equity awards with combined market conditions and service conditions for vesting. These models require the use of highly subjective assumptions, including the volatility of our stock price and the probability of the achievement of market capitalization thresholds.

 

8


Table of Contents

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)

 

(ix) Foreign Currency Translation and Transactions

We translate the assets and liabilities of our foreign subsidiaries stated in local functional currencies to U.S. dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates of exchange in effect during the period. Gains and losses from the translation of financial statements denominated in the foreign 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 denominated in something other than the respective functional currency of our applicable legal entity, at the exchange rate prevailing at the date of the transaction. Resulting unrealized and realized gains and losses are included in “other income (expense), net” within the Condensed Consolidated Statements of Operations. Foreign currency transaction gains and losses have not been significant for any period presented.

(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.

In the event that we are assessed interest and/or penalties from taxing authorities, such amounts would be included in “income tax benefit (expense)” within the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the notice was received.

(xii) Research and Development Costs

Our research and development costs are expensed as incurred.

(xiii) Fair Value Measurements

We determine measurement-date fair value based on the proceeds that would be received through the sale an asset, or that we would pay to settle or transfer a 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 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.

 

9


Table of Contents

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)

 

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. The fair value hierarchy gives the lowest priority to Level 3 inputs.

“Cash and cash equivalents” within our accompanying Condensed Consolidated Balance Sheets include certificates of deposit and money market funds that are valued utilizing Level 2 inputs. “Marketable securities” consist of mutual funds that are also valued utilizing Level 2 inputs.

“Other assets” within our accompanying Condensed Consolidated Balance Sheets include equity securities that are valued using Level 1 inputs.

The fair value of our “drug development liability” within our accompanying Condensed Consolidated Balance Sheets was estimated using the discounted income approach model. The unobservable inputs (i.e., Level 3 inputs) in this valuation model that have the most significant effect on these liabilities include (i) estimates of research and development personnel costs needed to perform the research and development services, (ii) estimates of expected cash outflows to third parties for services and supplies over the expected period that the services will be performed, and (iii) an appropriate discount rate for these expenditures. These inputs are reviewed for reasonableness by management on at least on a quarterly basis.

“Acquisition-related contingent obligations” within our accompanying Condensed Consolidated Balance Sheets represent future amounts we may be required to pay in conjunction with various business combinations. See Note 9(a) for a discussion of contingent value rights granted as part of our acquisition of Talon, and Note 9(b) for the fair value of the liability associated with FDA approval of C-E MELPHALAN. These liabilities are valued using Level 3 inputs and include probabilities and assumptions related to the timing and likelihood of achievement of regulatory and sales milestones.

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 June 30, 2014 and December 31, 2013, 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, with limitations on investing 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 money market funds, bank certificate of deposits (“Bank CDs”), and mutual funds approximates their fair value (utilizing Level 2 inputs – see Note 2(xiii)) because of our ability to immediately convert these instruments into cash with minimal expected change in value.

 

10


Table of Contents

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)

 

The following is a summary of our “cash and cash equivalents” and “marketable securities”:

 

    
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
fair
Value
     Cash and cash
equivalents
     Marketable Securities  
                  Current      Long
Term
 

June 30, 2014

                 

Bank deposits

   $ 59,443       $ —        $ —        $ 59,443       $ 59,443       $ —        $ —    

Money market funds

     72,962         —          —          72,962         72,962         —          —    

Bank CDs

     245         —          —          245         —          245         —    

Mutual funds

     3,061         —          —          3,061         —          3,061         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and equivalents and marketable securities

   $ 135,711       $ —        $ —        $ 135,711       $ 132,405       $ 3,306       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                 

Bank deposits

   $ 55,911       $ —        $ —        $ 55,911       $ 55,911       $ —        $ —    

Money market funds

     100,395         —          —          100,395         100,395         —          —    

Bank CDs

     410         —          —          410         —          410         —    

Mutual funds

     3,061         —          —          3,061         —          3,061         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and equivalents and marketable securities

   $ 159,777       $ —        $ —        $ 159,777       $ 156,306       $ 3,471       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2014, none of these securities had been in a continuous unrealized loss position longer than one year.

(b) Property and Equipment

“Property and equipment, net of accumulated depreciation” consist of the following:

 

     June 30,
2014
    December 31,
2013
 

Computer hardware and software

   $ 3,258      $ 5,154   

Laboratory equipment

     648        1,063   

Office furniture

     372        1,575   

Leasehold improvements

     2,858        2,813   
  

 

 

   

 

 

 

Property and equipment, at cost

     7,136        10,605   

(Less): Accumulated depreciation

     (5,729     (9,070
  

 

 

   

 

 

 

Property and equipment, net of accumulated depreciation

   $ 1,407      $ 1,535   
  

 

 

   

 

 

 

Depreciation expense (included within “operating costs and expenses” in the accompanying Condensed Consolidated Statement of Operations) for the six months ended June 30, 2014 and 2013, was $0.7 million in each period. During the three months ended June 30, 2014, we corrected our property and equipment to remove assets which were determined to no longer be in use (property and equipment at cost of $4.2 million, less accumulated depreciation of $4.0 million).

(c) Inventories

“Inventories” consist of the following:

 

     June 30,
2014
     December 31,
2013
 

Raw materials

   $ 2,092       $ 1,794   

Work-in-process

     2,095         3,312   

Finished goods

     6,694         8,413   
  

 

 

    

 

 

 
   $ 10,881       $ 13,519   
  

 

 

    

 

 

 

 

11


Table of Contents

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)

 

(d) Prepaid expenses and other current assets

“Prepaid expenses and other current assets” consist of the following:

 

     June 30,
2014
     December 31,
2013
 

Prepaid operating expenses

   $ 3,166       $ 3,213   

Research and development supplies

     244         —      
  

 

 

    

 

 

 
   $ 3,410       $ 3,213   
  

 

 

    

 

 

 

(e) Other receivables

“Other receivables” consist of the (i) amounts we expect to be refunded from taxing authorities for our income taxes paid, relating to fiscal year 2012 and the (ii) amounts we expect to be reimbursed from certain of our product development partners for incurred drug development expenses.

 

     June 30,
2014
     December 31,
2013
 

Income tax receivable

   $ 9,098       $ 7,539   

Product development expenses—reimbursement receivables

     2,704         —      
  

 

 

    

 

 

 
   $ 11,802       $ 7,539   
  

 

 

    

 

 

 

(f) Intangible Assets and Goodwill

“Intangible assets, net of accumulated amortization” consist of the following:

 

            June 30, 2014  
     Historical
Cost
     Accumulated
Amortization
    Foreign
Currency
Translation
     Impairment     Net Amount      Full
Amortization
Period (years)
     Remaining
Amortization
Period (years)
 

MARQIBO IPR&D (NHL indication)

   $ 17,600       $ —       $ —        $ —       $ 17,600         n/a         n/a   

C-E MELPHALAN IPR&D

     7,700         —         —          —         7,700         n/a         n/a   

MARQIBO distribution rights

     26,900         (2,366     —          —         24,534         11         9.7   

FOLOTYN distribution rights

     118,400         (15,308     —          —         103,092         13         10.9   

ZEVALIN distribution rights – U.S.

     41,900         (25,315     —          —         16,585         10         4.5   

ZEVALIN distribution rights – Ex-U.S.

     23,490         (6,804     453         —         17,139         8         5.6   

FUSILEV distribution rights

     16,778         (5,546     —          —         11,232         11         7.7   

FOLOTYN out-license*

     27,900         (5,024     —          (1,023     21,853         10         8.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

       

Total intangible assets

   $ 280,668       $ (60,363   $ 453       $ (1,023   $ 219,735         
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

       

 

*

On May 29, 2013, we amended our collaboration agreement with Mundipharma in order to modify the scope of their licensed territories and the respective development obligations. As a result of the amendment, Europe and Turkey were excluded from Mundipharma’s commercialization territory, and royalty and milestone rates were modified.

 

12


Table of Contents

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)

 

  The modification of our associated royalty and milestone rights constituted a change in the contractual provisions under which we measured our original acquired intangible asset (i.e., FOLOTYN rights). We determined that an impairment of the FOLOTYN out-license rights to Mundipharma of $1.0 million resulted from this amendment.

 

            December 31, 2013  
     Historical
Cost
     Accumulated
Amortization
    Foreign
Currency
Translation
     Impairment     Net Amount  

MARQIBO IPR&D (NHL indication)

   $ 17,600       $ —       $ —        $ —       $ 17,600   

C-E MELPHALAN IPR&D

     7,700         —         —          —         7,700   

MARQIBO distribution rights (ALL indication)

     26,900         (1,107     —          —         25,793   

FOLOTYN distribution rights

     118,400         (10,587     —          —         107,813   

ZEVALIN distribution rights – U.S.

     41,900         (23,455     —          —         18,445   

ZEVALIN distribution rights – Ex-U.S.

     23,490         (5,343     682         —         18,829   

FUSILEV distribution rights

     16,778         (4,821     —          —         11,957   

FOLOTYN out-license

     27,900         (3,662     —          (1,023     23,215   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 280,668       $ (48,975   $ 682       $ (1,023   $ 231,352   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Intangible asset amortization expense recognized in the six months ended June 30, 2014 and 2013 was $11.4 million and $9.9 million, respectively. Estimated intangible asset amortization expense (excluding incremental amortization from the reclassification of IPR&D to developed technology) for the remainder of 2014 and the five succeeding fiscal years and thereafter is as follows:

 

Years Ending December 31

      

Remainder of 2014

   $ 11,438   

2015

     22,877   

2016

     22,877   

2017

     22,877   

2018

     22,722   

2019

     19,157   

2020 and thereafter

     72,487   
  

 

 

 
   $ 194,435   
  

 

 

 

“Goodwill” is comprised of the following (by source):

 

     June 30,
2014
     December 31,
2013
 

Acquisition of Talon

   $ 10,526       $ 10,526   

Acquisition of ZEVALIN Ex-U.S. distribution rights

     2,525         2,525   

Acquisition of Allos

     5,346         5,346   

Foreign currency exchange translation effects

     79         104   
  

 

 

    

 

 

 
   $ 18,476       $ 18,501   
  

 

 

    

 

 

 

 

13


Table of Contents

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)

 

(g) Other assets

“Other assets” are comprised of the following:

 

     June 30,
2014
     December 31,
2013
 

Investments in equity securities

   $ 4,648       $ 3,593   

Supplies and other assets

     691         —    

Deposits

     193         190   

2018 Convertible Notes issuance costs

     3,124         3,432   

Executive officer life insurance – cash surrender value

     6,541         5,362   
  

 

 

    

 

 

 
   $ 15,197       $ 12,577   
  

 

 

    

 

 

 

 

14


Table of Contents

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)

 

(h) Accounts payable and other accrued liabilities

“Accounts payable and other accrued liabilities” are comprised of the following:

 

     June 30,
2014
     December 31,
2013
 

Trade payables

   $ 7,620       $ 12,796   

Accrued research and development expenses

     3,915         6,433   

Accrued selling, general and administrative expenses

     7,591         8,870   

Accrued rebates

     34,842         28,893   

Accrued product royalty

     3,599         9,498   

Allowance for returns

     1,500         2,900   

Accrued data and distribution fees

     2,934         2,430   

Accrued GPO administrative fees

     2,684         2,327   

Inventory management fee

     845         616   

Allowance for chargebacks

     3,648         5,074   
  

 

 

    

 

 

 
   $ 69,178       $ 79,837   
  

 

 

    

 

 

 

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:

 

Description

   Rebates and
Chargebacks
    Data and
Distribution,
GPO Fees, and
Inventory
Management
Fees
    Prompt
Pay
Discount
    Returns  

Balance as of December 31, 2012

   $ 26,176      $ 14,149      $ 1,451      $ 5,056   

Add: provisions (recovery)

     63,609        19,067        183        (2,034

(Less): credits or actual allowances

     (55,818     (27,843     (1,317     (122
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2013

     33,967        5,373        317        2,900   

Add: provisions (recovery)

     34,721        9,416        5        (1,265

(Less): credits or actual allowances

     (30,198     (8,326     (281     (135
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2014

   $ 38,490      $ 6,463      $ 41      $ 1,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

(i) Other long-term liabilities

Other long-term liabilities are comprised of the following:

 

     June 30,
2014
     December 31,
2013
 

Accrued executive deferred compensation

   $ 4,527       $ 3,949   

Deferred rent (non-current portion)

     451         366   

Business acquisition liability

     —           298   

Other tax liabilities

     731         1,352   
  

 

 

    

 

 

 
   $ 5,709       $ 5,965   
  

 

 

    

 

 

 

 

15


Table of Contents

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)

 

4. GROSS-TO-NET PRODUCT SALES

The below table presents a GTN product sales reconciliation for the accompanying Condensed Consolidated Statement of Operations:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Gross product sales

   $ 68,329      $ 57,522      $ 129,828      $ 100,494   

Rebates and chargebacks

     (17,772     (20,365     (34,721     (31,083

Data, distribution and GPO administrative fees

     (4,920     (5,704     (9,416     (10,046

Prompt pay discount

     (2     (13     (5     (105

Product returns allowance

     1,220        773        1,265        2,299   
  

 

 

   

 

 

   

 

 

   

 

 

 

Product sales, net

   $ 46,855      $ 32,213      $ 86,951      $ 61,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

5. PRODUCT SALES, NET BY GEOGRAPHIC REGION AND PRODUCT LINE

The below table presents “product sales, net” by geography for the three and six months ended June 30, 2014 and 2013:

 

     Three months ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

United States

   $ 44,541         95.1   $ 30,157         93.6   $ 81,998         94.3     57,091         92.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

International:

                    

Europe

     796         1.7     602         1.9     1,836         2.1     1,631         2.6

Asia Pacific

     1,518         3.2     1,454         4.5     3,117         3.6     2,837         4.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total international

     2,314         4.9     2,056         6.4     4,953         5.7     4,468         7.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Product sales, net

   $ 46,855         100.0   $ 32,213         100.0   $ 86,951         100.0     61,559         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The below table presents “product sales, net” by product line for the three and six months ended June 30, 2014 and 2013:

 

     Three months ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

FUSILEV

   $ 26,554         56.7   $ 12,864         39.9   $ 48,747         56.1   $ 24,706         40.1

FOLOTYN

     12,597         26.9     12,557         39.0     22,655         26.1     22,481         36.5

ZEVALIN

     6,336         13.5     6,792         21.1     12,636         14.5     14,372         23.3

MARQIBO

     1,368         2.9     —          —       2,913        3.4     —          —  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Product sales, net

   $ 46,855         100.0   $ 32,213         100.0   $ 86,951         100.0   $ 61,559         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) 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 “operating costs and expenses” for the three and six months ended June 30, 2014 and 2013 was as follows:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2014      2013      2014      2013  

Research and development

   $ 511       $ 485       $ 955       $ 1,159   

Selling, general and administrative

     2,163         2,439         4,570         4,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation

   $ 2,674       $ 2,924       $ 5,525       $ 5,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

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)

 

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 six months ended June 30, 2014 and 2013:

 

     Three months ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

Net loss

   $ (3,563   $ (9,721   $ (31,204   $ (15,157

Weighted average shares – basic and diluted

     64,609,197        58,977,295        64,119,441        58,995,735   

Net loss per share – basic and diluted

   $ (0.06   $ (0.16   $ (0.49   $ (0.26

The below-listed outstanding securities were excluded from our calculation of net loss per share, (using the treasury stock and if-converted method, as applicable), because their impact would have been anti-dilutive due to net loss per share in the three and six months ended June 30, 2014 and 2013:

 

     Three months ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  

2018 Convertible Notes

     11,401,284         —          11,401,284         —    

Common stock options

     2,076,157         2,412,230         2,300,525         3,211,911   

Restricted stock awards

     1,021,825         1,102,654         1,021,825         1,102,654   

Common stock warrants

     111,601         115,249         129,512         173,031   

Preferred stock

     40,000         40,000         40,000         40,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

         14,650,867         3,670,133         14,893,146         4,527,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

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)

 

8. FAIR VALUE MEASUREMENTS

The below table 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 (as described within Note 2(xiii)):

 

     June 30, 2014
Fair Value Measurements
 
     Level 1      Level 2      Level 3      Total  

Assets:

           

Bank CDs

   $ —         $ 245       $ —         $ 245   

Money market currency funds

     —           72,962         —           72,962   

Mutual funds

     —           3,061         —           3,061   

Deferred compensation investments, including life insurance cash surrender value

     —           6,541         —           6,541   

Equity securities

     4,648         —          —           4,648   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,648       $ 82,809       $ —        $ 87,457   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Deferred executive compensation liability

     —           4,527         —           4,527   

Drug development liability

     —           —           17,188         17,188   

Ligand Contingent Consideration

     —           —           4,300         4,300   

Talon CVR

     —           —           5,696         5,696   

Corixa Liability

     —           —           62         62   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 4,527       $ 27,246       $ 31,773   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013
Fair Value Measurements
 
     Level 1      Level 2      Level 3      Total  

Assets:

           

Bank CDs

   $ —        $ 410       $ —        $ 410   

Money market currency funds

     —          100,395         —          100,395   

Mutual funds

     —          3,061         —          3,061   

Deferred compensation investments, including life insurance cash surrender value

     —          5,362         —           5,362   

Equity securities

     3,593         —          —          3,593   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,593       $ 109,228       $ —        $ 112,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Deferred executive compensation liability

     —          3,949         —          3,949   

Deferred development costs

     —          —          17,742         17,742   

Ligand Contingent Consideration

     —          —          4,000         4,000   

Talon CVR

     —          —          4,329         4,329   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 3,949       $ 26,071       $ 30,020   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

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)

 

The following summarizes the fair value measurement activity for our liabilities that utilize Level 3 inputs:

 

     Fair Value Measurements of
Unobservable Inputs (Level 3)
 

Balance at December 31, 2012

   $ 14,520   
  

 

 

 

Transfers in (out) of Level 3

     —    

Deferred development costs

     5,509   

Deferred payment contingency

     (2,287

Ligand Contingent Consideration

     4,000   

Talon CVR

     4,329   
  

 

 

 

Balance at December 31, 2013

     26,071   
  

 

 

 

Transfers in (out) of Level 3

      

Deferred development costs (see Note 12)

     (554

Ligand Contingent Consideration (see Note 9(b))

     300   

Talon CVR (see Note 9(a))

     1,367   

Corixa Liability (see Note 13(b)(i))

     62   
  

 

 

 

Balance at June 30, 2014**

   $ 27,246   
  

 

 

 

 

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

9. BUSINESS COMBINATIONS AND CONTINGENT CONSIDERATION

(a) Acquisition of Talon Therapeutics, Inc.

Talon Acquisition Overview

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, an FDA-approved drug that we believe complements our other hematology and oncology products.

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 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 a discount rate of 25% (these represent unobservable inputs and are therefore classified as Level 3 inputs – see Note 2 (xiii)). The CVR has a maximum payout of $195.0 million if all sales and regulatory approval milestones are achieved, as summarized below:

 

    $5.0 million upon the achievement of net sales of MARQIBO in excess of $30.0 million in any calendar year

 

    $10.0 million upon the achievement of net sales of MARQIBO in excess of $60.0 million in any calendar year

 

    $25.0 million upon the achievement of net sales of MARQIBO in excess of $100.0 million in any calendar year

 

    $50.0 million upon the achievement of net sales of MARQIBO in excess of $200.0 million in any calendar year

 

    $100.0 million upon the achievement of net sales of MARQIBO in excess of $400.0 million in any calendar year

 

    $5.0 million upon receipt of marketing authorization from the FDA regarding Menadione Topical Lotion

 

19


Table of Contents

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)

 

Talon CVR Fair Value as of June 30, 2014 and December 31, 2013

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 acquisition” in the accompanying Condensed Consolidated Statements of Operations.

 

     Fair Value
of Talon
CVR
 

December 31, 2013

   $ 4,329   

Fair value adjustment for the six months ended June 30, 2014

     1,367   
  

 

 

 

June 30, 2014

   $ 5,696   
  

 

 

 

(b) Acquisition of Rights to Captisol-Enabled® Melphalan

Overview of Acquisition of Rights to Captisol-Enabled® Melphalan

On March 8, 2013, we completed the acquisition of exclusive global development and commercialization rights to Captisol-enabled ®, propylene glycol-free MELPHALAN (“C-E MELPHALAN”) for use as a conditioning treatment prior to autologous stem cell transplant for patients with multiple myeloma from CyDex Pharmaceuticals, Inc. a wholly-owned subsidiary of Ligand Pharmaceuticals Incorporated (“Ligand”) for an initial license fee of $3.0 million (paid on April 1, 2013). Aggregate transaction costs were nominal for this acquisition.

We accounted for this transaction as a business combination (rather than as an asset acquisition), using the acquisition method of accounting. This requires that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values, which involves our estimates of future cash flows and the application of appropriate discount rates as of the transaction date.

We are required to pay Ligand additional amounts up to an aggregate $66.0 million, upon the achievement of certain regulatory milestones and net sales thresholds (“Ligand Contingent Consideration”), and we also assumed full responsibility for its ongoing clinical and regulatory development program. We also must pay royalties in the range of 15% to 25% on our future net sales of licensed products in all territories.

Consideration Transferred

The acquisition-date fair value of the consideration transferred consisted of the following items:

 

Cash consideration

   $  3,000   

Ligand Contingent Consideration

     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:

 

IPR&D—Captisol-enabled®, propylene glycol-free MELPHALAN rights

   $  7,700   
  

 

 

 

IPR&D is an intangible asset that is classified as indefinite-lived until the completion or abandonment of the associated R&D effort, and is subject to impairment testing. C-E MELPHALAN IPR&D will be amortized over an estimated useful life to be determined at the date the project is complete.

We estimated the fair value of this IPR&D 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%.

 

20


Table of Contents

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)

 

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, which assumes that FDA approval of C-E MELPHALAN will occur on or about December 31, 2015. Upon receipt of FDA approval, we will be obligated to make a milestone payment to Ligand.

Ligand Contingent Consideration Fair Value as of June 30, 2014 and December 31, 2013

The Ligand Contingent Consideration fair value will continue to be evaluated on a quarterly basis. This liability is included within “acquisition-related contingent obligations” in the accompanying Condensed Consolidated Balance Sheets. 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 Ligand Contingent Consideration fair value are recognized within “change in fair value of contingent consideration related to acquisition” in the accompanying Condensed Consolidated Statements of Operations.

 

     Fair Value of
Ligand
Contingent
Consideration
 

December 31, 2013

   $ 4,000   

Fair value adjustment for the six months ended June 30, 2014

     300   
  

 

 

 

June 30, 2014

   $ 4,300   
  

 

 

 

10. REVOLVING LINE OF CREDIT

We entered into a credit agreement on September 5, 2012 with Bank of America, N.A, as the administrative agent and Wells Fargo Bank, N.A, as an initial lender (the “Credit Agreement”). The Credit Agreement provided us with a committed $50.0 million revolving line of credit facility (the “Credit Facility”). The Credit Facility was repaid in full, then immediately terminated, on December 20, 2013 in connection with the sale and issuance of our 2018 Convertible Notes (see Note 11).

The Credit Facility bore interest, at our election, at a rate equal to the London Interbank Offer Rate (LIBOR), plus an applicable margin (2.75% to 4.25%, dependent on a defined liquidity ratio). An unused line fee was payable quarterly in an amount ranging from 0.38% to 0.63%.

11. CONVERTIBLE SENIOR NOTES

On December 17, 2013, we entered into an agreement for the sale of $120.0 million aggregate principal amount of 2.75% Convertible Senior Notes due December 2018 (the “2018 Convertible Notes”). The 2018 Convertible Notes are convertible into shares of our common stock at a conversion rate of 95 shares per $1,000 principal amount of the 2018 Convertible Notes, totaling 11.4 million common shares if fully converted. The in-the-money conversion price is equivalent to $10.53 per common share. The conversion rate and conversion price is subject to adjustment under certain limited circumstances. The 2018 Convertible Notes bear interest at a rate of 2.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2014. The 2018 Convertible Notes will mature and become payable on December 15, 2018, subject to earlier conversion into common stock at the holders’ option.

The sale of the 2018 Convertible Notes closed on December 23, 2013 and our net proceeds were $115.4 million, after deducting banker and professional fees of $4.6 million. We used a portion of these net proceeds to simultaneously enter into “bought call” and “sold warrant” transactions with Royal Bank of Canada (collectively, the “Note Hedge”). We recorded the Note Hedge on a net cost basis of $13.1 million, as a reduction to “additional paid-in capital” in our accompanying Condensed Consolidated Balance Sheets. Under applicable GAAP, the Note Hedge transaction is not expected to be marked-to-market through earnings or comprehensive income in future reported periods.

 

21


Table of Contents

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)

 

We entered into Note Hedge transactions to reduce the potential dilution to our stockholders and/or offset any cash payments that we are required to make in excess of the principal amount, upon conversion of the 2018 Convertible Notes (in the event that the market price of our common stock is greater than the conversion price). The strike price of the “bought call” is equal to the conversion price and conversion rate of the 2018 Convertible Notes, matching the 11.4 million common shares the 2018 Convertible Notes may be converted into. The strike price of our “sold warrant” is $14.03 per share of our common stock, and is also for 11.4 million common shares.

As of June 30, 2014, the 2018 Convertible Notes could be converted into common stock. Prior to June 15, 2018, holders may convert all or a portion of their 2018 Convertible Notes only under the following circumstances: (1) during any fiscal quarter (and only during such fiscal quarter), if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period immediately following any five consecutive trading day period in which, for each trading day of that measurement period, the trading price per $1,000 principal amount of 2018 Convertible Notes for such trading day was less than 98% of the product of (i) the last reported sale price of our common stock on such trading day and (ii) the applicable conversion rate on such trading day; (3) upon the occurrence of certain corporate transactions; and (4) at any time prior to our stockholders’ approval to settle the 2018 Convertible Notes in our common shares and/or cash. On and after June 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2018 Convertible Notes at any time.

We initially may only settle conversions of the 2018 Convertible Notes by delivering shares of our common stock. However, if we obtain stockholder approval, we may, at our election, settle conversions of the 2018 Convertible Notes by paying or delivering, as the case may be, cash, shares of common stock, or a combination of cash and shares of common stock.

The carrying value of the 2018 Convertible Notes as of June 30, 2014 is summarized as follows:

 

Principal amount

   $  120,000   

(Less): Unamortized debt discount (amortized through December 2018)

     (26,188
  

 

 

 

June 30, 2014

   $ 93,812   
  

 

 

 

The following table sets forth the components of the “interest expense” recognized in the accompanying Condensed Consolidated Statements of Operations for the 2018 Convertible Notes for the six months ended June 30, 2014:

 

Contractual coupon interest expense

   $  1,659   

Amortization of debt issuance costs

     308   

Accretion of debt discount

     2,332   
  

 

 

 

Total

   $ 4,299   
  

 

 

 

Effective interest rate

     8.59
  

 

 

 

12. MUNDIPHARMA AGREEMENT

As the result of our acquisition of Allos Therapeutics, Inc. on September 5, 2012 (through which we obtained distribution rights for FOLOTYN), we assumed its obligations under an active strategic collaboration agreement with a third-party, Mundipharma (the “Mundipharma Collaboration Agreement”). Under the Mundipharma Collaboration Agreement, we retained full commercialization rights for FOLOTYN in the U.S. and Canada, with Mundipharma having exclusive rights to commercialize FOLOTYN in all other countries in the world (the “Mundipharma Territories”).

On May 29, 2013, the Mundipharma Collaboration Agreement was amended and restated (the “Amended Munipharma Collaboration Agreement”), in order to modify: (i) the scope of the licensed territory, (ii) milestone payments, (iii) royalty rates, and (iv) development obligations. In connection with the Amended Munipharma Collaboration Agreement, we received a one-time $7.0 million payment from Mundipharma for certain research and development activities performed by us.

 

22


Table of Contents

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)

 

As a result of the Amended Mundipharma Collaboration Agreement, (a) Europe and Turkey were excluded from Mundipharma’s commercialization territory, (b) we may receive regulatory milestone payments of up to $16.0 million, and commercial progress and sales-dependent milestone payments of up to $107.0 million, (c) we will receive tiered double-digit royalties based on net sales of FOLOTYN within Mundipharma’s licensed territories, and (d) we and Mundipharma will bear our own FOLOTYN development costs.

We recorded the initial September 2012 fair value of the related drug development liability of $12.3 million, using the discounted cash flow method of the income approach. The fair value of this liability was determined to be $17.2 million as of June 30, 2014 (inclusive of the $7.0 million payment received from Mundipharma). This value is included in the current and long-term portions of “drug development liability” within the accompanying Condensed Consolidated Balance Sheets, and it includes our assumptions about personnel needed to perform these research and development activities, third party costs for projected clinical trial enrollment, and patient treatment-related follow up through approximately 2031.

We will assess this liability at each subsequent reporting date and record its adjustment through “research and development” expense in our Condensed Consolidated Statements of Operations.

 

     Drug
Development
Liability,
Current –
FOLOTYN
     Drug
Development
Liability,
Long Term –
FOLOTYN
    Total Drug
Development
Liability –
FOLOTYN
 

Balance at December 31, 2013

   $ 3,119       $ 14,623      $ 17,742   

Transfer from long term to current

     —           —          —     

(Less): Expenses incurred

     —           (554     (554
  

 

 

    

 

 

   

 

 

 

Balance at June 30, 2014

   $ 3,119       $ 14,069      $ 17,188   
  

 

 

    

 

 

   

 

 

 

13. COMMITMENTS AND CONTINGENCIES

(a) Facility Leases

We lease our principal executive office in Henderson, Nevada under a non-cancelable operating lease expiring April 30, 2019. We also lease our research and development facility in Irvine, California under a non-cancelable operating lease expiring May 31, 2019, in addition to several other administrative office leases. Each lease agreement contains scheduled rent increases which are accounted for on a straight-line basis.

(b) Licensing Agreements, Co-Development Agreements, and Milestone Payments

Our drug candidates are being developed pursuant to license agreements that provide us with territory-specific rights to its manufacture, sublicense, and sale. We are generally responsible for all development costs, patent filings and maintenance costs, sales and marketing costs, and liability insurance costs. We are also obligated to make certain milestone payments to third parties upon the achievement of regulatory and sales milestones that are specified in these license agreements. We estimate and present a corresponding liability on our Condensed Consolidated Balance Sheets when amounts are probable and reasonably estimable. In addition, we are obligated to pay royalties based on our current and future net sales of in-licensed products.

Our most significant of these agreements are listed and summarized below:

(i) ZEVALIN U.S.: Licensing and development in the U.S.

In December 2008, we acquired rights to commercialize and develop ZEVALIN in the U.S. as the result of a transaction with a third-party, Cell Therapeutics, Inc. (“CTI”) through our wholly-owned subsidiary, RIT Oncology LLC (“RIT”), where we assumed certain agreements with various third parties related to ZEVALIN intellectual property related to its manufacture, use, and sale in the U.S.

In accordance with the terms of assumed contracts, we are required to meet specified payment obligations, including a milestone payment to Corixa Corporation of $5.0 million based on ZEVALIN sales in the U.S. (the “Corixa Liability”). This milestone has not yet been met, and $0.1 million for this potential milestone achievement is included within “acquisition-related contingent obligations” in our accompanying June 30, 2014 Condensed Consolidated Balance Sheet. Our U.S. net sales-based royalties are in the low to mid-single digits to Genentech, Inc. and mid-single digits to Corixa.

 

23


Table of Contents

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)

 

(ii) ZEVALIN Ex-U.S.: License and Asset Purchase Agreement with Bayer Pharma

On April 1, 2012, through our wholly-owned subsidiary, Spectrum Pharmaceuticals Cayman, L.P., we completed the acquisition of licensing rights to market ZEVALIN outside of the U.S. from Bayer Pharma AG (“Bayer”).

ZEVALIN is currently approved in more than 40 countries outside the U.S. for the treatment of B-cell non-Hodgkin lymphoma, including countries in Europe, Latin America and Asia. In consideration for the rights granted under the agreement, concurrent with the closing, we paid Bayer a one-time fee of €19.0 million, and we will pay Bayer royalties based on a mid-teen digits percentage of net sales of the licensed products in all territories worldwide, except the U.S. Unless earlier terminated, the term of the agreement continues until the expiration of the last-to-expire patent covering the sale of a licensed product in the relevant country, or 15 years from the date of first commercial sale of the licensed product in such country, whichever is longer.

(iii) FUSILEV: Amended and Restated License Agreement with Merck & Cie AG

In May 2006, we amended and restated a license agreement with Merck & Cie AG (“Merck”), which we assumed in connection with our March 2006 acquisition of the assets of Targent. Pursuant to the license agreement with Merck, we obtained the exclusive license to use regulatory filings related to FUSILEV and a non-exclusive license under certain patents and know-how to develop, manufacture, use, and sell FUSILEV in the field of oncology in North America in return for royalties in the mid-single digits percentage of net sales. Merck is eligible to receive a $0.2 million payment from us upon the achievement of a FDA approval of an oral form of FUSILEV. This milestone has not yet been met, and no such value is included within “total liabilities” in our accompanying Condensed Consolidated Balance Sheets for its potential achievement.

(iv) FOLOTYN: License Agreement with Sloan-Kettering Institute, SRI International and Southern Research Institute

In December 2002, Allos entered into the FOLOTYN License Agreement with Sloan-Kettering Institute for Cancer Research, SRI International, and Southern Research Institute. As a result of Allos becoming our wholly owned subsidiary on September 5, 2012, we are bound by the FOLOTYN License Agreement under which we obtained exclusive worldwide rights to a portfolio of patents and patent applications related to FOLOTYN and its uses. Under the terms of the FOLOTYN License Agreement, we are required to fund all development programs and will have sole responsibility for all commercialization activities. In addition, we pay the licensors royalties based on worldwide graduated annual levels of net sales of FOLOTYN, or sublicense revenues arising from sublicensing the product, if and when such sales or sublicenses occur. Royalties are 8% of annual worldwide net sales up to $150 million; 9% of annual worldwide net sales of $150 million through $300 million; and 11% of annual worldwide net sales in excess of $300 million.

(v) C-E MELPHALAN: License Agreement with Cydex Pharmaceuticals, Inc.

On March 8, 2013, we completed the acquisition of exclusive global development and commercialization rights to C-E MELPHALAN from Ligand (see Note 9(b)). We reported on April 23, 2014 that C-E MELPHALAN had met its primary endpoint in a pivotal trial for use as a conditioning treatment prior to autologous stem cell transplant for patients with multiple myeloma, and as a result, we intend to file a NDA with the FDA in the second half of 2014.

We assumed full responsibility for its ongoing clinical and regulatory development program. We are required to pay Ligand additional amounts of up to $66 million, upon achievement of certain regulatory milestones and net sales thresholds, which we have valued at $4.3 million and $4.0 million within “acquisition-related contingent obligations” in our accompanying Condensed Consolidated Statements of Operations as of June 30, 2014 and December 31, 2013, respectively. We will also pay royalties in the range of 15% to 25% on our net sales of licensed products in all territories.

(vi) MARQIBO: Agreement with Talon Therapeutics, Inc.

On July 17, 2013, we completed the acquisition of Talon, through which we obtained exclusive global development and commercialization rights to MARQIBO (see Note 9(a)). As part of this acquisition, we issued the former Talon stockholders contingent value rights (“CVR”) that we have valued and presented on our accompanying Condensed

 

24


Table of Contents

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)

 

Consolidated Balance Sheets as a $5.7 million and $4.3 million liability within “acquisition-related contingent obligations” as of June 30, 2014 and December 31, 2013, respectively. The CVR has a maximum payout of $195 million if all sales and regulatory approval milestones are achieved.

(vii) APAZIQUONE: In-License Agreement with Allergan, Inc.

In October 2008, we entered into an exclusive development and commercialization collaboration agreement with Allergan for APAZIQUONE. Pursuant to the terms of the agreement, Allergan paid us an up-front non-refundable fee of $41.5 million at closing (which we have amortized through revenue within “license fees and service revenue” in full as of December 31, 2013).

On January 29, 2013, we entered into a second amendment to the license, development, supply and distribution agreement with Allergan to amend the agreement and reacquire the rights originally licensed to Allergan in the U.S., Europe, and other territories in exchange for a tiered single-digit royalty on certain products containing APAZIQUONE, and relieved Allergan of its development and commercialization obligations.

As a result of this amendment to the agreement, Allergan has no remaining obligations to us. We will be obligated to pay Allergan a tiered single-digit royalty not to exceed mid-single digits based upon our net sales of certain products containing APAZIQUONE in specified territories. Additionally, we will be obligated to pay any royalties or other payments due to certain licensors of underlying intellectual property, as well as to provide indemnification of Allergan for claims arising from the manufacture, development, or commercialization of pharmaceutical products containing APAZIQUONE by us.

(viii) APAZIQUONE: Collaboration Agreement with Nippon Kayaku Co. LTD.

In November 2009, we entered into a collaboration agreement with Nippon Kayaku Co., LTD. (“Nippon Kayaku”) for the development and commercialization of APAZIQUONE in Asia, except North and South Korea (the “Nippon Kayaku Territory”). In addition, Nippon Kayaku received exclusive rights to APAZIQUONE for the treatment of non-muscle invasive bladder cancer in Asia (other than North and South Korea), including Japan and China. Nippon Kayaku will conduct APAZIQUONE clinical trials in the Nippon Kayaku Territory pursuant to a development plan. Further, Nippon Kayaku will be responsible for all expenses relating to the development and commercialization of APAZIQUONE in the Nippon Kayaku Territory.

Pursuant to the terms of this agreement, Nippon Kayaku paid us an upfront fee of $15.0 million (which we have amortized through revenue within “license fees and service revenue” in full as of December 31, 2013). Nippon Kayaku is also obligated to make additional payments to us based on the achievement of certain development, regulatory and commercialization milestones. Under the terms of the agreement, we are entitled to payment of $10 million and $126 million upon achievement of certain regulatory and commercialization milestones, respectively. Also, Nippon Kayaku has agreed to pay us royalties based on a percentage of net sales of the subject products in the defined territory in the mid-teen digits.

Our license agreement with Nippon Kayaku provides for payments to us upon the achievement of development milestones, such as the completion of clinical trials or regulatory submissions, approvals by health authorities, and commercial launches of drug candidates. Given the challenges inherent in developing and obtaining approval for drug products and in achieving commercial launches, there was substantial uncertainty whether any such milestones would be achieved at the time of execution of such license agreement. Such revenue will only be recognized if/when such milestones are achieved.

(ix) BELEODAQ: Licensing and Collaboration Agreement with TopoTarget

In February 2010, we entered into a licensing and collaboration agreement with TopoTarget A/S (“TopoTarget”), as amended in October 2013, for the development and commercialization of BELEODAQ. The agreement provides that we have the exclusive right to manufacture, develop, and commercialize BELEODAQ in North America and India, with an option for China. Pursuant to the terms of this agreement, we paid TopoTarget an upfront fee of $30.0 million in 2010.

 

25


Table of Contents

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)

 

Under continuing terms, all development, including studies, will be conducted under a joint development plan, which we will fund 70% of such costs, and TopoTarget will fund 30%. We have final decision-making authority for all developmental activities in North America and India (and China upon exercise of its option). TopoTarget has final decision-making authority for all developmental activities in all other jurisdictions.

In February 2014, upon FDA acceptance of our new drug application (NDA), we issued TopoTarget 1.0 million shares of our common stock, and made a $10.0 million milestone payment to them. The aggregate payout value of this first milestone was $17.8 million and is recognized within “research and development” of the accompanying Condensed Consolidated Statement of Operations for the six months ended June 30, 2014.

In July 2014, we received approval from the FDA for BELEODAQ’s use for injection for the treatment of PTCL, and as a result, we are obligated to TopoTarget for a second milestone payment of $25.0 million by November 2014. As of June 30, 2014, no provision for this milestone (given its timing after our June 30, 2014 balance sheet date), or any other remaining regulatory or sales-based milestone aggregating $278.0 million is included within “total liabilities” in our accompanying Condensed Consolidated Balance Sheets for potential achievement.

We will pay TopoTarget future royalties in the mid-teen digits based on net sales of BELEODAQ in the defined territory. The agreement will continue until the expiration of the last royalty payment period in the last country in the defined territory with certain provisions surviving, unless earlier terminated in accordance with its terms.

(x) SPI-2012: Co-Development and Commercialization Agreement with Hanmi Pharmaceutical Company

In January 2012, we entered into a co-development and commercialization agreement with Hanmi Pharmaceutical Company, (“Hanmi”), for SPI-2012, formerly known as “LAPS-GCSF”, a drug for the treatment of chemotherapy induced neutropenia based on Hanmi’s proprietary LAPSCOVERY™ Technology, at which time we paid Hanmi $1.0 million. Under the terms of the agreement, as amended in March 2014, we will share the expenses of this study, and we continue to have primary responsibility for the SPI-2012 development plan. If SPI-2012 is ultimately commercialized by us, we will have worldwide rights, except for Korea, China, and Japan upon our payment of agreed-upon fees to Hanmi. We will also be responsible for milestone payments related to SPI-2012 regulatory approvals and sales thresholds.

(c) Service Agreements

In connection with the research and development of our drug products, we have entered into contracts with numerous third party service providers, such as radio-pharmacies, distributors, clinical trial centers, clinical research organizations, data monitoring centers, and with drug formulation, development and testing laboratories. The financial terms of these agreements are varied and generally obligate us to pay in stages, depending on achievement of certain events specified in the agreements, such as contract execution, reservation of service or production capacity, actual performance of service, or the successful accrual and dosing of patients.

At each period end, we accrue for all services received, with such accruals based on factors such as estimates of work performed, patient enrollment, completion of patient studies and other events. Should we decide to discontinue and/or slow-down the work on any project, the associated costs for those projects would be limited to the extent of the work completed. Generally, we are able to terminate these contracts due to the discontinuance of the related project(s) and thus avoid paying for the services that have not yet been rendered.

(d) Supply Agreements

We have entered into certain supply agreements, or have issued purchase orders, which require us to make minimum purchases from vendors for the manufacture of our products. These commitments do not exceed our planned commercial requirements (except for certain amounts accrued for within the accompanying Condensed Consolidated Financial Statements), and the contracted prices do not exceed their fair market value.

 

26


Table of Contents

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)

 

(e) Employment Agreement

We have entered into an employment agreement with our Chief Executive Officer under which cash compensation and benefits would become payable in the event of termination by us for any reason other than cause, his resignation for good reason, or upon a change in control of our Company.

(f) Deferred Compensation Plan

The Spectrum Pharmaceuticals, Inc. Deferred Compensation Plan (the “DC Plan”) is administered by the Compensation Committee of our Board of Directors and is intended to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.

The DC Plan is maintained to provide deferred compensation benefits for a select group of our employees (the “DC Participants”). Under the DC Plan, we provide the DC Participants with the opportunity to make annual elections to defer up to a specified amount or percentage of their eligible cash compensation, and we have the option to make discretionary contributions. At June 30, 2014 and December 31, 2013, DC Plan deferrals and contributions totaling $4.5 million and $3.9 million, respectively, are included within “other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets.

(g) Litigation

We are involved from time-to-time with various legal matters arising in the ordinary course of business. These claims and legal proceedings are of a nature we believe are normal and incidental to a pharmaceutical business, and may include product liability, intellectual property, employment matters, and other general claims.

We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. Although the ultimate resolution of these various matters cannot be determined at this time, we do not believe that such matters, individually or in the aggregate, will have a material adverse effect on our consolidated results of operations, cash flows, or financial condition.

We are presently responding to Abbreviated New Drug Applications (“ANDAs”) filed by companies seeking to launch generic forms of FUSILEV and FOLOTYN, respectively, and to certain shareholder suits that purportedly stem from our March 12, 2013 press release, in which we announced anticipated changes in customer ordering patterns of FUSILEV. These complaints allege that, as a result of the March 12, 2013 press release, our stock price declined.

FUSILEV ANDA Litigation

On January 20, 2012, March 2, 2012, and June 18, 2014, respectively, we filed suit against Sandoz Inc. and Innopharma Inc., and Ben Venue Laboratories, Inc., respectively, following Paragraph IV certifications in connection with their filing separate ANDAs, to manufacture a generic version of FUSILEV. We filed the lawsuits in the U.S. District Court for the Districts of Nevada and Delaware seeking to enjoin the approval of their ANDAs plus recovery of our litigation fees and costs incurred in such matters. On December 9, 2013, three Mylan entities collaborating with Innopharma were joined to Innopharma case. While we believe our patent rights are strong, the ultimate outcome of these cases is uncertain.

FOLOTYN ANDA Litigation

On June 19, 2014, we filed a lawsuit against five parties resulting from Paragraph IV certifications in connection with four separate ANDAs to manufacture a generic version of FOLOTYN: (1) Teva Pharmaceuticals USA, Inc., (2) Sandoz Inc., (3) Fresenius Kabi USA, LLC, and (4) Dr. Reddy’s Laboratories, Ltd., and Dr. Reddy’s Laboratories, Inc. We filed the lawsuit in the U.S. District Court for the District of Delaware seeking to enjoin the approval of their ANDAs plus recovery of our litigation fees and costs. While we believe our patent rights are strong, the ultimate outcome of such action is uncertain.

 

27


Table of Contents

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)

 

Shareholder Litigation

John Perry v. Spectrum Pharmaceuticals, Inc. et al. (Filed March 14, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00433-LDG-CWH. This putative consolidated class action raises substantially identical claims and allegations against defendants Spectrum Pharmaceuticals, Inc., Dr. Rajesh C. Shrotriya, Brett L. Scott, and Joseph Kenneth Keller. The alleged class period is August 8, 2012 to March 12, 2013. The lawsuits allege a violation of Section 10(b) of the Securities Exchange Act of 1934 against all defendants and control person liability, as a violation of Section 20(b) of the Securities Exchange Act of 1934, against the individual defendants. The claims purportedly stem from the Company’s March 12, 2013 press release, in which it announced that it anticipated a change in ordering patterns of FUSILEV. The complaints allege that, as a result of the March 12, 2013 press release, the Company’s stock price declined. The complaints further allege that during the putative class period certain defendants made misleadingly optimistic statements about FUSILEV sales, which inflated the trading price of Company stock. The lawsuits seek relief in the form of monetary damages, costs and fees, and any other equitable or injunctive relief that the court deems appropriate. On March 21, 2014, the Court entered an order appointing Arkansas Teacher Retirement System as lead plaintiff. On May 20, 2014, Arkansas Teacher Retirement System filed a consolidated amended class action complaint. On July 18, 2014, we filed a motion to dismiss the consolidated amended class action complaint.

Timothy Fik v. Rajesh C. Shrotriya, et al. (Filed April 11, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00624-JCM-CWH); Christopher J. Watkins v. Rajesh C. Shrotriya, et al. (Filed April 22, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00684-JCM-VCF); and Stefan Muenchhagen v. Rajesh C. Shrotriya, et al. (Filed May 28, 2013 in United States District Court, District of Nevada; Case Number 2:2013-cv-00942-APG-PAL). These derivative complaints are brought by the respective purported shareholders on behalf of nominal plaintiff Spectrum against certain current and former directors and officers. The complaints generally allege breaches of fiduciary based on conduct relating to the events alleged in the consolidated Perry action. The complaints seek compensatory damages, corporate governance reforms, restitution and disgorgement of defendants’ alleged profits, and costs and fees. On May 15, 2013, the court entered a consolidation order staying the actions pending resolution of the federal securities class action.

Hardik Kakadia v. Rajesh C. Shrotriya, et al. (Filed April 23, 2013 in the Eighth Judicial District Court of the State of Nevada in and for Clark County; Case Number A-13-680643-B); and Joel Besner v. Rajesh C. Shrotriya, et al. (Filed May 31, 2013 in the Eighth Judicial District Court of the State of Nevada in and for Clark County; Case Number A-13-682668-C) (collectively the “State Derivative Actions”). These consolidated State Derivative Actions are brought by the respective purported shareholders on behalf of nominal plaintiff Spectrum Pharmaceuticals, Inc. and are substantially similar to the consolidated federal derivative actions.

(h) SEC Subpoena

On April 1, 2013, we received a subpoena from the SEC for documents pursuant to a formal order of investigation. The subpoena followed our March 12, 2013 announcement that we anticipated a change in customer ordering patterns of FUSILEV. We continue to cooperate with this SEC investigation, though we cannot predict its outcome, or the timing of resolution.

14. INCOME TAXES

We apply an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods, as required under GAAP. We recorded a benefit for income taxes of $1.2 million and $5.3 million for the six months ended June 30, 2014 and 2013, respectively. Our ETR differs from the U.S. federal statutory tax rate of 35% primarily as a result of nondeductible expenses, state income taxes, foreign income taxes, and the impact of a valuation allowance on our deferred tax assets. In addition, in the six months ended June 30, 2014, we expensed approximately $1.2 million related to the correction of our prior year estimate of carryback of federal net operating losses and of credits ineligible for offset against federal income taxes.

Our provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards.

 

28


Table of Contents

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)

 

Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction by jurisdiction basis, and includes a review of all available positive and negative evidence.

We recognize excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, we follow the with-and-without approach, excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to us. We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.

15. SUBSEQUENT EVENT

FDA Approval of BELEODAQ

On July 3, 2014, the FDA granted us accelerated approval of BELEODAQ™ for injection for the treatment of patients with relapsed or refractory PTCL. As a result of this milestone achievement, we are obligated to pay TopoTarget $25.0 million by November 2014 (see Note 13(b)(ix)). Since this event occurred after our balance sheet date of June 30, 2014, no provision or corresponding intangible asset has been recorded to our accompanying Condensed Consolidated Financial Statements.

 

29


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements regarding our future product development activities and costs, the revenue potential (licensing, royalty and sales) of our products and product candidates, the success, safety and efficacy of our drug products, revenues, development timelines, product acquisitions, liquidity and capital resources and trends, and other statements containing forward-looking words, such as, “believes,” “may,” “could,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” “continues,” or the negative thereof or variation thereon or similar terminology (although not all forward-looking statements contain these words). Such forward-looking statements are based on the reasonable beliefs of our management as well as assumptions made by and information currently available to our management. Readers should not put undue reliance on these forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified; therefore, our actual results may differ materially from those described in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in our periodic reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q, and the following factors:

 

    our ability to successfully develop, obtain regulatory approval for and market our products;

 

    our ability to continue to grow sales revenue of our marketed products;

 

    risks associated with doing business internationally;

 

    our ability to generate and maintain sufficient cash resources to fund our business;

 

    our ability to enter into strategic alliances with partners for manufacturing, development and commercialization;

 

    efforts of our development partners;

 

    the ability of our manufacturing partners to meet our timelines;

 

    the ability to timely deliver product supplies to our customers;

 

    our ability to identify new product candidates and to successfully integrate those product candidates into our operations;

 

    the timing and/or results of pending or future clinical trials, and our reliance on contract research organizations;

 

    our ability to protect our intellectual property rights;

 

    competition in the marketplace for our drugs;

 

    delay in approval of our products or new indications for our products by the U.S. Food and Drug Administration, or the FDA;

 

    actions by the FDA and other regulatory agencies, including international agencies;

 

    securing positive reimbursement for our products;

 

    the impact of any product liability, or other litigation to which we are, or may become a party;

 

    the impact of legislative or regulatory reform of the healthcare industry and the impact of recently enacted healthcare reform legislation;

 

    the availability and price of acceptable raw materials and components from third-party suppliers, and their ability to meet our demands;

 

30


Table of Contents
    our ability, and that of our suppliers, development partners, and manufacturing partners, to comply with laws, regulations and standards, and the application and interpretation of those laws, regulations and standards, that govern or affect the pharmaceutical and biotechnology industries, the non-compliance with which may delay or prevent the development, manufacturing, regulatory approvals and sale of our products;

 

    defending against claims relating to improper handling, storage or disposal of hazardous chemical, radioactive or biological materials which could be time consuming and expensive;

 

    our ability to maintain the services of our key executives and technical and sales and marketing personnel;

 

    the difficulty in predicting the timing or outcome of product development efforts and regulatory approvals; and

 

    demand and market acceptance for our approved products.

All subsequent written and oral forward-looking statements attributable to us or by persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We expressly disclaim any intent or obligation to update information contained in any forward-looking statement after the date thereof to conform such information to actual results or to changes in our opinions or expectations.

Company Overview

We are a biotechnology company with fully integrated commercial and drug development operations with a primary focus in oncology and hematology. Our strategy is comprised of acquiring, developing, and commercializing a broad and diverse pipeline of late-stage clinical and commercial products.

We currently market five drugs:

 

    FUSILEV® injection for patients in the U.S. with advanced metastatic colorectal cancer and to counteract certain side effects of methotrexate therapy;

 

    ZEVALIN® injection for patients in the U.S. and various international markets with follicular non-Hodgkin’s lymphoma;

 

    FOLOTYN® injection for patients in the U.S. with relapsed or refractory PTCL;

 

    MARQIBO® injection for patients in the U.S. with relapsed Philadelphia chromosome–negative acute lymphoblastic leukemia; and

 

    BELEODAQ™ injection for patients in the U.S. with relapsed or refractory PTCL. We did not launch this product until July 2014, and accordingly, no corresponding revenue is reported for any period presented in the accompanying Condensed Consolidated Financial Statements.

We also have ongoing indication expansion studies with several of our marketed products, and a diversified pipeline of product candidates in advanced-stage Phase 2 and Phase 3 studies. Our integrated in-house scientific team, includes formulation development and medical research, as well as expertise in regulatory and clinical affairs, biostatistics, and data management. In the U.S., we have full commercial operations for the sales and marketing of our drug products, and leverage the expertise of our worldwide partners to assist us with international sales and product development.

Business Strategy

Our business strategy is comprised of the following three initiatives:

 

    Maximizing the revenue potential of our five currently-marketed drugs for the treatment of cancer.

Our near-term outlook largely depends on sales and marketing successes for our five marketed drugs. It is this base business, along with potential additional indications for these drugs, that provides the working capital needed to operate our daily business and provides the necessary capital for opportunistic acquisitions.

 

31


Table of Contents
    Developing and commercializing the drugs for the treatment of cancer within our pipeline.

Our strategy for our development portfolio is to focus on late-stage development drugs. We strive to complete clinical studies to demonstrate the safety and efficacy of these drugs in order to obtain regulatory approval in a timely manner. Upon obtaining approval, our sales and marketing function educates physicians on the safety of the drug and its effectiveness in treating patients for the approved indication, with the goal of achieving maximum commercial success.

 

    Expanding our pipeline of development-stage and commercial-stage drugs through business development activities.

It is our goal to identify new strategic opportunities that are synergistic with our currently-marketed drugs. We will continue to (i) explore strategic collaborations as they relate to drugs that are either in clinical trials or are currently on the market, and (ii) identify and secure drugs that have significant growth potential – through enhanced marketing and sales efforts and/or through pursuit of additional clinical development. We may also identify and pursue partnerships for out-licensing certain of our drugs in development.

See Item 1. of our Annual Report on Form 10-K for the year ended December 31, 2013, “Business” section for a discussion of:

 

    Cancer Background & Market Size

 

    Product Portfolio

 

    Manufacturing

 

    Sales and Marketing

 

    Customers

 

    Competition

 

    Research and Development

Recent Highlights in Our Business, Product Development Initiatives, and Regulatory Approvals

During the first half of 2014, we accomplished various critical objectives for our business, which included:

 

    Commercial: Product sales for the quarter surpassed $40 million for the fourth consecutive quarter.

 

    Medical: In July 2014, we received FDA approval of BELEODAQ for patients in the U.S. with relapsed or refractory PTCL. PTCL comprises of a group of rare and aggressive non-Hodgkin’s Lymphomas (NHL) that develop from mature T-cells and accounts for approximately 10%-15% of all NHL cases in the U.S. These patients generally have poor prognosis with a low response rate (25%-27%) to available treatment options, and commonly experience repeated treatment failures until drug resistance or death. Accordingly, we believe this drug addresses an important unmet medical need for improved treatment options of PTCL patients.

In April 2014 we reported positive data from the pivotal study of C-E MELPHALAN, with an expected NDA filing by September 2014.

Our Phase 2 study for SPI-2012 is currently enrolling and we should be in position to make a Phase 3 decision by the end of the year.

CHARACTERISTICS OF OUR REVENUE AND EXPENSES

See Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013, Characteristics of Our Revenue and Expenses for a discussion of the nature of our revenue and operating expense line items within our accompanying Condensed Consolidated Statements of Operations.

 

32


Table of Contents

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013, Critical Accounting Policies and Estimates for a discussion of significant estimates and assumptions as part of the preparation of our accompanying condensed consolidated financial statements. These critical accounting policies and estimates arise in conjunction with the following accounts:

 

    Revenue recognition

 

    Inventories – lower of cost or market

 

    Fair value of acquired assets and assumed liabilities

 

    Goodwill and intangible assets – impairment evaluations

 

    Income taxes

 

    Stock-based compensation

 

    Litigation accruals

 

33


Table of Contents

RESULTS OF OPERATIONS

Operations Overview – Three and six months ended June 30, 2014 and 2013

 

     Three months ended June 30,     Six months ended June 30,  
     2014     2013     2014     2013  

Total revenues

   $ 46,855        100.0   $ 33,232        100.0   $ 86,979        100.0   $ 71,899        100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

              

Cost of product sales (excludes amortization and impairment of intangible assets)

     6,156        13.1     7,268        21.9     12,434        14.3     14,050        19.5

Selling, general and administrative

     25,399        54.2     22,584        68.0     48,802        56.1     44,598        62.0

Research and development

     11,335        24.2     10,460        31.5     40,832        46.9     22,343        31.1

Amortization and impairment of intangible assets

     5,361        11.4     5,449        16.4     10,721        12.3     9,894        13.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     48,251        >100     45,761        >100.0     112,789        >100     90,885        >100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (1,396     (3.0 )%      (12,529     (37.7 )%      (25,810     (29.7 )%      (18,986     (26.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of contingent consideration related to acquisitions

     (1,005     (2.1 )%      —          —         (1,729     (2.0 )%      —          —     

Other expense, net

     (2,463     (5.3 )%      (163     (0.5 )%      (4,888     (5.6 )%      (1,481     (2.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,864     (10.4 )%      (12,692     (38.2 )%      (32,427     (37.3 )%      (20,467     (28.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefit for income taxes

     1,301        2.8     2,971        8.9     1,223        1.4     5,310        7.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,563     (7.6 )%    $ (9,721     (29.3 )%    $ (31,204     (35.9 )%    $ (15,157     (21.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

THREE MONTHS ENDED JUNE 30, 2014 VERSUS 2013

Total Revenues

 

     Three months ended June 30,      $ Change     % Change  
     2014      2013       
     ($ in millions)               

Product sales, net:

          

FUSILEV

   $ 26.6       $ 12.9       $ 13.7        >100.0

FOLOTYN

     12.6         12.5         0.1        0.8

ZEVALIN

     6.3         6.8         (0.5     (7.4 )% 

MARQIBO

     1.4         —           1.4        >100.0
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 46.9       $ 32.2       $ 14.7        45.7

License fees and service revenue

     —           1.0         (1.0     >(100.0 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 46.9       $ 33.2       $ 13.7        41.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Product sales, net. Gross product sales are reduced by estimated provisions for product returns, sales discounts and rebates, distribution and data fees, and estimates for chargebacks established as of each period to arrive at presented “product sales, net”.

FUSILEV revenue increase is primarily due to (i) an increase in our average net price per unit as a result of certain non-recurring GTN adjustments in the current period, and (ii) an increase in unit sales to our wholesalers to satisfy end-user demand.

 

34


Table of Contents

FOLOTYN revenue remained consistent with the prior year period, with unit sales and average net sales price per unit largely unchanged. In the second quarter of 2014, we modified our FOLOTYN distribution model. This resulted in a $1.0 million additional purchase of this product by our wholesalers in order to fulfill anticipated end-user demand, and is not expected to recur at this level in the second half of 2014.

ZEVALIN revenue decrease is due to depressed unit demand for U.S. sales, partially offset by a U.S. and Ex-U.S. increase in our average net sales price per unit between these periods. Beginning in the second quarter of 2013, we terminated our ZEVALIN services agreement with Bayer, and transitioned to a sales distribution model in Europe. This transition has had a favorable impact on unit sales in Europe, though we realize a much lower average price per unit for these sales, as compared both to our U.S. sales and former Bayer sales.

MARQIBO revenue derived in 2014 is a result of our acquisition of Talon in July 2013, as discussed in Note 9(a).

License fees and service revenue. In the second quarter of 2013, we recognized $1.0 million from the amortization of deferred revenue that corresponded with our contracted research and development services. This revenue is associated with an aggregate of $16.0 million upfront payment we received from Nippon Kayaku in 2010, as discussed in Note 13(b)(viii). As of December 31, 2013, these upfront payments have been recognized through “license fees and service revenue” in full, and as a result, did not recur in the second quarter of 2014.

Operating Costs and Expenses & Total Other Expenses

 

     Three months ended June 30,     $ Change     % Change  
     2014     2013      
     ($ in millions)              

Operating costs and expenses:

        

Cost of product sales (excludes amortization and impairment of intangible assets)

   $ 6.2      $ 7.3      $ (1.1     (15.1 )% 

Selling, general and administrative

     25.4        22.6        2.8        12.4

Research and development

     11.3        10.5        0.8        7.6

Amortization and impairment of intangible assets

     5.4        5.4        —          —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

   $ 48.3      $ 45.8      $ 2.5        5.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

   $ (3.5   $ (0.2   $ (3.3     >(100.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Product Sales. Despite our large increase in product sales, net, in the second quarter of 2014 as compared to 2013, our cost of product sales decreased 15%. This is primarily due to (i) a higher realized net price, (ii) our product sales mix in the current period, and (iii) certain royalty adjustments for in-license contract amendments.

Selling, General and Administrative. Selling, general and administrative expenses increased primarily due to:

 

  (i) $0.9 million increase in expense for intellectual property matters and various legal services;

 

  (ii) $0.7 million increase in travel-related expenses to support our sales growth;

 

  (iii) $0.6 million increase in marketing expenses to support our sales growth;

 

  (iv) $0.9 million increase in personnel and infrastructure expenses as we continue to build our sales team and enhance supporting administrative functions.

This increase is partially offset by the non-recurrence of $0.7 million of Talon acquisition expenses, incurred in the second quarter of 2013.

 

35


Table of Contents

Research and Development. Research and development expense increase is primarily due to a reduction of our liability and corresponding expenses as a result of the amendment to our agreement with Mundipharma (see Note 12), which did not recur in 2014.

Amortization and Impairment of Intangible Assets. The amortization and impairment of intangible assets remained consistent with the prior year period.

Total Other Expenses. Total other expenses increased by $3.3 million and was primarily due to (i) $1.6 million increase in interest expense attributable to our convertible senior notes issued in December 2013; (ii) $1.0 million increase to our “acquisition-related contingent obligations” liability to the former shareholders of Talon and Ligand, which resulted in an equal charge to our “change in fair value of contingent consideration related to acquisitions”; and (iii) an unrealized $0.7 million loss in the current period for intercompany obligations denominated in foreign currency.

 

     Three months ended June 30,      $ Change     % Change  
     2014      2013       
     ($ in millions)               

Benefit for income taxes

   $ 1.3       $ 3.0       $ (1.7     (56.7 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Benefit for Income Taxes. Our current period benefit for income taxes primarily represents the amount that we expect to be refunded from taxing authorities (for income taxes we paid for fiscal year 2012) upon the filing our 2014 U.S. income tax return–based on our operating results in the first half of 2014 and our projected full-year operating results.

SIX MONTHS ENDED JUNE 30, 2014 VERSUS 2013

Total Revenues

 

     Six months ended June 30,      $ Change     % Change  
     2014      2013       
     ($ in millions)               

Product sales, net:

          

FUSILEV

   $ 48.7       $ 24.7       $ 24.0        97.2

FOLOTYN

     22.7         22.5         0.2        0.9

ZEVALIN

     12.7         14.4         (1.7     (11.8 )% 

MARQIBO

     2.9         —          2.9        >100.0
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 87.0       $ 61.6       $ 25.4        41.2

License fees and service revenue

     —          10.3         (10.3     >(100.0 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 87.0       $ 71.9       $ 15.1        21.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Product sales, net. Gross product sales are reduced by estimated provisions for product returns, sales discounts and rebates, distribution and data fees, and estimates for chargebacks established as of each period to arrive at presented “product sales, net.”

FUSILEV revenue increase is primarily due to (i) an increase in our average net price per unit as a result of certain non-recurring GTN adjustments in the current period, and (ii) an increase in unit sales to our wholesalers to satisfy end-user demand.

FOLOTYN revenue remained consistent with the prior year period. Unit sales and average net sales price per unit were largely unchanged. In the first half of 2014, we modified our FOLOTYN distribution model. This resulted in a $1.0 million additional purchase of this product by our wholesalers in order to fulfill anticipated end-user demand, and is not expected to recur at this level in the second half of 2014.

 

36


Table of Contents

ZEVALIN revenue decrease is due to depressed unit demand for U.S. sales, partially offset by an U.S. and Ex-U.S. increase in our average net sales price per unit between these periods. Beginning in the second quarter of 2013, we terminated our ZEVALIN services agreement with Bayer, and transitioned to a sales distribution model in Europe. This transition has had a favorable impact on unit sales in Europe, though we realize a much lower average price per unit for these sales, as compared both to our U.S. sales and former Bayer sales.

MARQIBO revenue derived in 2014 is a result of our acquisition of Talon in July 2013, as discussed in Note 9(a).

License fees and service revenue. In the first six months of 2013, we recognized $10.3 million from the amortization of deferred revenue that corresponded with our contracted research and development services. This revenue is associated with a $41.5 million upfront payment we received from Allergan in 2008, and an aggregate of $16.0 million upfront payment we received from Nippon Kayaku in 2010. As of December 31, 2013, these upfront payments have been recognized through “license fees and service revenue” in full, and as a result, did not recur in the first quarter of 2014. In the current period, we recognized $28,000 from our out-license royalties, all derived from FOLOTYN sales in Mundipharma’s (our co-development partner –see Note 12) territories.

Operating Costs and Expenses & Total Other Expense

 

     Six months ended June 30,     $ Change     % Change  
     2014     2013      
     ($ in millions)              

Operating costs and expenses:

        

Cost of product sales (excludes amortization and impairment of intangible assets)

   $ 12.4      $ 14.0      $ (1.6     (11.4 )% 

Selling, general and administrative

     48.8        44.6        4.2        9.4

Research and development

     40.8        22.3        18.5        83.0

Amortization and impairment of intangible assets

     10.7        9.9        0.8        8.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

   $ 112.8      $ 90.8      $ 22.0        24.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

   $ (6.6   $ (1.5   $ (5.1     >(100.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Product Sales. Despite our large increase in product sales, net, in the first six months of 2014 as compared to 2013, our cost of product sales decreased 11%. This result was primarily driven by (i) a higher realized net price, (ii) an unusually large excess inventory charge for FUSILEV in the first half of 2013 that did not recur in the current period, and (iii) certain royalty adjustments for in-license contract amendments.

Selling, General and Administrative. Selling, general and administrative expenses increased primarily due to

 

  (i) $0.8 million increase in personnel-related expenses as we continue to build our sales and marketing team;

 

  (ii) $1.2 million increase in marketing expenses to support our sales growth;

 

  (iii) $0.6 million increase in expense for intellectual property matters and various legal services;

 

  (iv) $0.8 million increase in travel related expenses to support our sales growth; and

 

  (v) $0.7 million related to enhancements to our administrative capabilities and functions.

The increase in these expenses is partially offset by the non-recurrence of $0.7 million of Talon acquisition expenses, incurred in the first half of 2013.

Research and Development. Research and development expense increase is primarily due to an aggregate $17.8 million from cash payment and stock issuance to TopoTarget, upon the February 2014 contractual milestone achievement represented by the acceptance by the FDA of our new drug application (NDA) for the PTCL indication of BELEODAQ.

 

37


Table of Contents

Amortization and Impairment of Intangible Assets. The amortization and impairment of intangible assets increased $0.8 million during the six months ended June 30, 2014, primarily due to the amortization of definite-lived intangible assets from the acquisition of Talon in July 2013 (through which we acquired MARQIBO distribution rights).

Total Other Expenses. Total other expenses increased by $5.1 million and was primarily due to (i) $3.2 million increase in interest expense attributable to our convertible senior notes issued in December 2013, and (ii) a $1.7 million increase to our “acquisition-related contingent obligations” liability to the former shareholders of Talon and Ligand in the current period, which resulted in an equal charge to our “change in fair value of contingent consideration related to acquisitions”; and (iii) a $0.2 million unrealized loss for intercompany obligations denominated in foreign currency.

 

     Six months ended June 30,      $ Change     % Change  
     2014      2013       
     ($ in millions)               

Benefit for income taxes

   $ 1.2       $ 5.3       $ (4.1     (77.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Benefit for Income Taxes. Our current period benefit of $1.2 million for income taxes primarily represents the amount that we expect to be refunded from taxing authorities (for income taxes we paid for fiscal year 2012) upon the filing our 2014 U.S. income tax return–based on our operating results in the first half of 2014 and our projected full-year operating results. This amount is partially offset by $1.2 million related to the correction of our prior year estimate of carryback of federal net operating losses and of credits ineligible for offset against federal income taxes.

LIQUIDITY AND CAPITAL RESOURCES

 

     June 30,
2014
     December 31,
2013
     June 30,
2013
 
     (in thousands, except financial metrics data)  

Cash and cash equivalents

   $ 132,405       $ 156,306       $ 121,103   

Marketable securities

   $ 3,306       $ 3,471       $ 3,312   

Accounts receivable, net

   $ 56,742       $ 48,880       $ 52,379   

Total current assets

   $ 220,133       $ 235,190       $ 212,282   

Total current liabilities

   $ 77,479       $ 89,984       $ 102,295   

Working capital surplus (a)

   $ 142,654       $ 145,206       $ 109,987   

Days sales outstanding (“DSO”) (b)

     110         110         143   

Current ratio (c)

     2.9         2.6         2.1   

 

(a) Total current assets at period end minus total current liabilities at period end.
(b) Net accounts receivable at period end divided by revenue, net for the second quarter multiplied by the number of days in the quarter.
(c) Total current assets at period end divided by total current liabilities at period end.

Net Cash (Used In) Provided by Operating Activities

Cash used in operating activities was $24.3 million for the six months ended June 30, 2014, as compared to cash provided by operating activities of $3.4 million in the prior year period. The decrease in cash provided by operating activities during the current year, as compared to the prior year is primarily a function of the working capital drivers of (i) decreased customer collections (see below), (ii) increased payments to our vendors to reduce trade payables between these periods (see below), and (iii) a $10.0 payment for product milestone achievement (see Note 13(b)(ix)).

 

38


Table of Contents

For the six months ended June 30, 2014 and 2013, our cash collections from customers totaled $113.7 million and $123.0 million, respectively, representing 130.7% and 171.1% of reported net revenue for the same years. This decrease in customer collections is due to our accounts receivable, net, balances as of December 31, 2013 and 2012 of $49.5 million and $92.2 million, respectively, and corresponded with our decrease in product sales in 2013 as compared to 2012.

For the six months ended June 30, 2014 and 2013, cash payments to our employees and vendors for products, services, and rebates totaled $135.0 million and $163.5 million, respectively.

Net Cash Used in Investing Activities

Net cash used in investing activities of $0.4 million in the first six months of 2014 was due to purchases of computer software and hardware to support our general business growth.

Net Cash (Used In) Provided By Financing Activities

Net cash (used in) provided by financing activities of $1.1 million for the first six months ended June 30, 2014 relates to (i) $1.3 million of proceeds from the issuance of common stock as a result of the exercise of employee stock options, and (ii) $ 0.3 million of proceeds from employee stock purchases under our employee stock purchase plan. These proceeds were partially offset by our $0.6 million purchase and retirement at vesting of restricted stock at our employees’ election, so that corresponding minimum employee tax obligations could be met.

 

39


Table of Contents

Convertible Senior Notes Due 2018

On December 17, 2013, we entered into an agreement for the sale of $120.0 million aggregate principal amount of 2.75% Convertible Senior Notes due December 2018 (the “2018 Convertible Notes”). The 2018 Convertible Notes are convertible into shares of our common stock at a conversion rate of 95 shares per $1,000 principal amount of the 2018 Convertible Notes, totaling 11.4 million common shares if fully converted. The in-the-money conversion price is equivalent to $10.53 per common share. The conversion rate and conversion price are subject to adjustment under certain limited circumstances. Initially, we may only settle conversions of the 2018 Convertible Notes by delivering shares of our common stock. However, if we obtain stockholder approval in accordance with applicable NASDAQ rules, we may then settle conversions of the 2018 Convertible Notes by paying or delivering, as the case may be, cash, shares of our common stock, or a combination of cash and shares, at our election.

The 2018 Convertible Notes bear interest at a rate of 2.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2014. The 2018 Convertible Notes will mature and become payable on December 15, 2018, subject to earlier conversion into common stock at the holders’ option.

The sale of the 2018 Convertible Notes closed on December 23, 2013 and our net proceeds were $115.4 million, after deducting banker and professional fees of $4.6 million. We used a portion of these proceeds to simultaneously enter into “bought call” and “sold warrant” transactions with Royal Bank of Canada (collectively, the “Note Hedge”). We recorded the Note Hedge on a net cost basis of $13.1 million, as a reduction to “additional paid-in capital” in our accompanying Condensed Consolidated Balance Sheets. Under applicable GAAP, the Note Hedge transaction is not expected to be marked-to-market through earnings or comprehensive income in future reporting periods.

Retired Credit Facility

On September 5, 2012, we entered into a credit agreement with Bank of America, N.A., as the administrative agent and an initial lender and Wells Fargo Bank, National Association, as an initial lender (the “Credit Agreement”). The Credit Agreement provided us with a committed $50.0 million revolving line of credit facility (the “Credit Facility”). The Credit Facility was to expire on September 5, 2014, but was repaid in full and cancelled by us on December 20, 2013.

Future Capital Requirements

We believe that the future growth of our business will depend on our ability to successfully develop and acquire new drugs for the treatment of cancer and successfully bring these drugs to market.

The timing and amount of our future capital requirements will depend on many factors, including:

 

    the need for additional capital to fund future development programs;

 

    the need for additional capital to fund strategic acquisitions;

 

    the need for additional capital to fund licensing arrangements;

 

    our requirement for additional information technology infrastructure and systems; and

 

    adverse outcomes from potential litigation and the cost to defend such litigation.

We believe that our $135.7 million in aggregate cash and equivalents, and marketable securities as of June 30, 2014, will allow us to fund our current and planned operations for at least the next twelve months. We may seek to obtain additional capital through the sale of debt or equity securities, if necessary, especially in conjunction with opportunistic acquisitions or licensing arrangements.

We may be unable to obtain such additional capital when needed, or on terms favorable to us or our stockholders, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through the issuance of debt securities, the terms of such securities may place restrictions on our ability to operate our business.

 

40


Table of Contents

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements (except for operating leases) that provide financing, liquidity, market or credit risk support, or involve derivatives. In addition, we have no arrangements that may expose us to liability that are not expressly reflected in the accompanying Condensed Consolidated Financial Statements and/or notes thereto.

As of June 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, often referred to as “structured finance” or “special purpose entities,” established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not subject to any material financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates.

The primary objective of our investment activities is to preserve principal, while at the same time maximizing yields without significantly increasing risk. We do not utilize hedging contracts or similar instruments. Because of our ability to generally redeem these investments at par at short notice and without penalty, changes in interest rates would have an immaterial effect on the fair value of these investments. If a 10% change in interest rates were to have occurred on June 30, 2014, any decline in the fair value of our investments would not be material in the context of our accompanying Condensed Consolidated Financial Statements. In addition, we are exposed to certain market risks associated with credit ratings of corporations whose corporate bonds we may purchase from time to time. If these companies were to experience a significant detrimental change in their credit ratings, the fair market value of such corporate bonds may significantly decrease. If these companies were to default on these corporate bonds, we may lose part, or all, of our principal. We believe that we effectively manage this market risk by diversifying our investments, and investing in highly rated securities.

We are exposed to foreign currency exchange rate fluctuations relating to payments we make to vendors, suppliers and license partners using foreign currencies. In particular, some of our obligations are incurred in Euros. We mitigate such risk by maintaining a limited portion of our cash in Euros and other currencies.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, our chief executive officer and chief financial officer concluded that, as of that date, our disclosure controls and procedures were not effective because of the identification of the material weakness discussed below.

 

41


Table of Contents

Changes in Internal Control Over Financial Reporting

As of December 31, 2013, our management concluded that our internal control over financial reporting was not effective, as evaluated under the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992 framework). As part of this conclusion, our management determined that we had ineffective design and operating effectiveness of our internal control over financial reporting. This “material weakness” conclusion specifically pertained to the accurate and timely reporting of our operating expense accruals which comprised (i) the ineffective design and operation of controls over our process of estimating the required period-end accruals for services performed under open purchase orders, which resulted in overstated operating expenses and accrued liabilities in multiple reporting periods in, and prior to, 2013; and (ii) ineffective design and operation of controls over our identification and recording of liabilities for vendor invoices received subsequent to year-end that related to our 2013 activities. The remediation of these matters will not be completed and concluded upon until management’s next annual assessment as of December 31, 2014, thus this material weakness remained as of June 30, 2014.

A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Notwithstanding our continued material weakness, we have concluded that the financial statements and other financial information included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented.

Except as disclosed below, no change in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Remediation Steps to Address Material Weakness

We have developed, and are currently implementing, a remediation plan for this material weakness. We will continue to execute our previously communicated remediation plan, which includes hiring additional experienced accounting personnel and expanding training for our accounting personnel, as well as modifying and expanding our internal controls over our recording of complete and accurate period-end accruals. The successful remediation of this material weakness will require review and evidence of the effectiveness of the related internal controls as part of our next annual assessment of our internal controls over financial reporting as of December 31, 2014. As we continue these remediation efforts, we may determine that additional measures should be taken to address these or other control deficiencies, and/or that we should modify the remediation plan described above.

Limitations of the Effectiveness of Internal Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of inherent limitations in any control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls.

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are involved with various legal matters arising in the ordinary course of business. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. Although the ultimate resolution of these various matters cannot be determined at this time, we do not believe that such matters, individually or in the aggregate, will have a material adverse effect on our condensed consolidated results of operations, cash flows or financial condition.

 

42


Table of Contents

Certain of the legal proceedings in which we are involved are discussed in Note 13, “Commitments and Contingencies,” to our accompanying Condensed Consolidated Financial Statements, and are hereby incorporated by reference.

 

ITEM 1A. RISK FACTORS

As of the date of this filing, there have been no material changes to the RISK FACTORS included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 12, 2014.

 

43


Table of Contents
ITEM 6. EXHIBITS

 

Exhibit
Number

  

Description

  10.1+

   Lease Agreement, dated April 7, 2014, by and between Spectrum Pharmaceuticals, Inc. and 11500 South Eastern Avenue, LLC.

  10.2+

   First Amendment to Executive Employment Agreement, dated as of April 17, 2014, by and between Spectrum Pharmaceuticals, Inc. and Dr. Rajesh C. Shrotriya.

  10.3

   First Amendment to License Agreement, dated as of June 20, 2014, by and between Spectrum Pharmaceuticals, Inc. and Merck Eprova AG. (Filed as Exhibit 99.1 to Form 8-K, as filed with the Securities and Exchange Commission on June 26, 2014, and incorporated herein by reference.)

  31.1+

  

Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) promulgated under the

Securities Exchange Act of 1934.

  31.2+

  

Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) promulgated under the

Securities Exchange Act of 1934.

  32.1*

   Certification of Principal Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

  32.2*

   Certification of Principal Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

101.INS+

   XBRL Instance Document.

101.SCH+

   XBRL Taxonomy Extension Schema Document.

101.CAL+

   XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF+

   XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB+

   XBRL Taxonomy Extension Label Linkbase Document.

101.PRE+

   XBRL Taxonomy Extension Presentation Linkbase Document.

 

+ Filed herewith.
* Furnished herewith.

 

44


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SPECTRUM PHARMACEUTICALS, INC.
Date: August 8, 2014     By:  

/s/ Kurt A. Gustafson

      Kurt A. Gustafson
      Executive Vice President and Chief Financial Officer
      (Authorized Signatory and Principal Financial and Accounting Officer)

 

45

EX-10.1

Exhibit 10.1

Lease Agreement

For

11500 S. Eastern Avenue, Suites 220, 240 & 270, Henderson, Nevada 89052

Between

11500 South Eastern Avenue, LLC,

a Nevada limited liability company

“Landlord”

and

Spectrum Pharmaceuticals, Inc.,

a Delaware corporation

“Tenant”


LEASE AGREEMENT

 

DEFINITIONS      3   

1.1 Commencement Date

     3   

1.2 Lease Term

     3   

1.3 Property

     3   

1.4 Leased Premises

     3   

1.5 Building

     3   

1.6 Tenant’s Allocated Share

     3   

1.7 Permitted Use

     3   

1.8 Tenant’s Minimum Liability Coverage

     3   

1.9 Address for Notices

     3   

1.10 Additional Definitions

     3   

1.11 Prepaid Rent

     4   

1.12 Security Deposit

     4   
DEMISE AND POSSESSION      4   

2.1 Lease of Premises

     4   

2.2 Construction of Improvements

     4   

2.3 Delivery and Acceptance of Possession

     4   

2.4 Early Occupancy

     4   

RENT

     4   

3.1 Base Monthly Rent

     4   

3.2 Additional Rent

     4   

3.3 Payment of Rent

     5   

3.4 Late Charge and Interest Upon Default

     5   

3.5 Security Deposit

     5   

3.6 Prepayment of Rent

     5   
USE OF LEASED PREMISES      5   

4.1 Limitation on Use

     5   

4.2 Compliance with Laws and Private Restrictions

     6   

4.3 Insurance Requirements

     6   

4.4 Outside Areas

     6   

4.5 Signs

     6   

4.6 Rules and Regulations

     7   

4.7 Window Covering

     7   

4.8 Auctions

     7   

4.9 Parking

     7   

4.10 Access and Security

     7   

 

i


TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS      8   

5.1 Trade Fixtures

     8   

5.2 Leasehold Improvements

     8   

5.3 Alterations Required by Law

     8   

5.4 Landlord’s Improvements

     8   

5.5 Liens

     8   
REPAIR, MAINTENANCE, SERVICES AND UTILITIES      9   

6.1 Repair and Maintenance

     9   

6.2 Landlord’s Obligations

     9   

6.3 Tenant’s Repair Obligations

     9   

6.4 Services and Utilities, Landlord’s Obligation

     9   

6.5 Services and Utilities, Tenant’s Obligation

     9   

6.6 Excess Usage by Tenant

     10   

6.7 Provider of Services

     10   

6.8 Energy and Resource Consumption

     10   

6.9 No Rent Reduction or Abatement

     10   

6.10 Tenant’s Obligation to Reimburse

     11   

6.11 Common Operating Expenses Defined

     11   

6.12 Control of Common Area

     12   

6.13 Tenant’s Negligence

     12   
WASTE DISPOSAL      13   

7.1 Waste Disposal

     13   
REAL PROPERTY TAXES      13   

8.1 Real Property Taxes Defined

     13   

8.2 Tenant’s Obligation to Reimburse

     13   

8.3 Taxes on Tenant’s Property

     14   
INSURANCE      14   

9.1 Tenant’s Insurance

     14   

9.2 Landlord’s Insurance

     15   

9.3 Tenant’s Obligation to Reimburse

     15   

9.4 Release and Waiver of Subrogation

     15   
LIMITATION ON LANDLORD’S LIABILITY AND INDEMNITY      16   

10.1 Limitation on Landlord’s Liability

     16   

10.2 Indemnification of Landlord

     16   

10.3 Indemnification of Tenant

     16   
DAMAGE TO LEASED PREMISES      16   

11.1 Landlord’s Duty to Restore

     16   

11.2 Landlord’s Right to Terminate

     17   

 

ii


11.3 Tenant’s Right to Terminate

     17   

11.4 Abatement of Rent

     18   

11.5 Waiver of Statutory Rights

     18   
CONDEMNATION      18   

12.1 Taking of Leased Premises

     18   

12.2 Restoration Following the Taking

     18   

12.3 Abatement of Rent

     18   

12.4 Temporary Taking

     18   

12.5 Division of Condemnation Award

     18   

12.6 Waiver of Statutory Rights

     18   
DEFAULTS AND REMEDIES      19   

13.1 Events of Tenant’s Default

     19   

13.2 Landlord’s Remedies

     19   

13.3 Cumulative Remedies of Landlord

     20   

13.4 Landlord’s Default and Tenant’s Remedies

     20   

13.4 Waiver

     20   
ASSIGNMENT AND SUBLETTING      20   

14.1 By Tenant

     20   

14.2 By Landlord

     22   
TERMINATION      22   

15.1 Surrender of the Leased Premises

     22   

15.2 Holding Over

     23   
GENERAL PROVISIONS      23   

16.1 Landlord’s Right to Enter

     23   

16.2 Subordination

     23   

16.3 Tenant’s Attornment

     24   

16.4 Mortgagee Protection

     24   

16.5 Estoppel Certificates and Financial Statements

     24   

16.6 Notices

     24   

16.7 Attorneys’ Fees

     24   

16.8 Corporate Authority

     25   

16.9 Additional Definitions

     25   

16.10 Nevada Law

     25   

16.11 Miscellaneous

     25   

16.11 Limitation on Tenant’s Recourse

     26   

16.12 Brokers and Agents

     26   

16.13 Entire Agreement

     26   

16.14 Waiver of Jury Trial

     26   

 

iii


BASIC LEASE INFORMATION

Lease Date: April 7, 2014

Landlord: 11500 South Eastern Avenue, LLC, a Nevada limited liability company

Tenant: Spectrum Pharmaceuticals, Inc., a Delaware corporation

Commencement Date: May 1, 2014

Lease Term: Sixty (60) Months

Base Year: 2014

Property Description: 11500 South Eastern Avenue, Henderson, Nevada 89052

Approximate Property Gross Rentable Area: 40,794 square feet

Premises Description: 11500 S. Eastern Avenue, Suites 220, 240 & 270, Henderson, Nevada 89052

Approximate Premises Gross Rentable Area: 11,507 square feet

Approximate Premises Gross Useable Area: 9,090 square feet

Tenant’s Allocated Share: 28.68%

Tenant’s Permitted Use: General office and other legally permitted uses compatible with office buildings of comparable quality to the Building, but only to the extent permitted by the City in which the Leased Premises are located and all agencies and governmental authorities having jurisdiction of the Leased Premises.

Tenant’s Minimum Liability Insurance Coverage: $1,000,000 each occurrence (excluding products) and $2,000,000 general aggregate

Prepaid Rent: $21,287.95

Security Deposit: None.

Base Monthly Rent:

 

Period

  

Base Monthly Rent

Months 1-4

   $0.00 (Full Service Gross)*

Months 5-12

   $21,287.95 (Full Service Gross)

Months 13-24

   $21,863.30 (Full Service Gross)

Months 25-36

   $22,438.65 (Full Service Gross)

Months 37-48

   $23,589.35 (Full Service Gross)

Months 49-60

   $24,164.70 (Full Service Gross)

 

Landlord’s Address For Notices:      

   11500 South Eastern Avenue, LLC
  

c/o Commercial Property Advisors, LLC

  

8965 South Eastern Avenue, Suite 300

  

Las Vegas, Nevada 89123

  

Attention: Mary Rossetti

  

Phone: (702) 547-1115

  

Fax: (702) 547-1121

 

1


With copy to:    Kevin Nishida
   Sky River Management
   3465 Waialae Ave. Suite 220
   Honolulu, HI 96816
   Phone: 808-748-1417
   Fax: 808-585-7540
Tenant’s Address For Notices:    Spectrum Pharmaceuticals, Inc.
   11500 S. Eastern Avenue, Suite 240
   Henderson, Nevada 89052
   Attention: Head of Legal Department
   Phone: (702) 835-6434
With copy to:    Spectrum Pharmaceuticals, Inc.
   157 Technology Drive
   Irvine, CA 92618
   Attention: Chief Financial Officer
   Phone: (949) 743-9278

Brokers: Voit Real Estate Services, representing the Tenant, and Commercial Property Advisors, LLC, representing Landlord. See Section 16.12 below.

Exclusive Parking: None.

Non-Exclusive Parking: Tenant’s Allocated Share.

Guarantor: Not Applicable.

This Basic Lease Information Document is part of that certain lease agreement between the parties for the premises, referenced above, and the terms of this document are incorporated into the lease agreement and the terms of the lease agreement are incorporated into this document. In the event of a conflict between this Basic Lease Information and the terms of the Lease Agreement, the terms of the Lease Agreement shall control.

 

2


LEASE AGREEMENT

This Lease Agreement is dated as of the date on the Basic Lease Information Page, for reference purposes only, by and between Landlord and Tenant who agree as follows.

ARTICLE 1

DEFINITIONS

1.1 Commencement Date: The term “Commencement Date:” shall mean the date set forth on the Basic Lease Information Page.

1.2 Lease Term: The term “Lease Term” shall mean the term of this Lease set forth on the Basic Lease Information Page, commencing on the Commencement Date (plus any partial month, if any, immediately following the Commencement Date if not included in the Lease Term so that the Lease Term ends on the last day of a calendar month).

1.3 Property: The term “Property” shall mean that real property with all improvements now or hereafter located thereon set forth on the Basic Lease Information Page and depicted on Exhibit “A”, if attached, the aggregate gross rentable area of which is the amount set forth on the Basic Lease Information Page (the “Property Gross Rentable Area”); provided, however, that Landlord may change the boundaries and composition of the Property by adding or improving land and/or buildings and thereafter the term “Property” shall refer to such real property as so enlarged or reduced and the amount of the “Property Gross Rentable Area” shall be appropriately adjusted. Tenant acknowledges that there exists various methods of measuring square footages and the square footages set forth herein are deemed to be correct regardless of later different measurements by Landlord or Tenant. Tenant has had the opportunity to take square footage measurements and is entering into this Lease knowing that the square footages herein are final and binding.

1.4 Leased Premises: The term “Leased Premises” shall mean that portion of the Property set forth on the Basic Lease Information Page and hatch marked on Exhibit “B”, if attached, containing approximately the gross rentable area set forth on the Basic Lease Information Page (“Tenant’s Gross Rentable Area”). Tenant acknowledges that there exists various methods of measuring square footages and the square footages set forth herein are deemed to be correct regardless of later different measurements by Landlord or Tenant. Tenant has had the opportunity to take square footage measurements and is entering into this Lease knowing that the square footages herein are final and binding.

1.5 Building: The term “Building” shall mean the structure in which the Leased Premises are located.

1.6 Tenant’s Allocated Share: The term “Tenant’s Allocated Share” shall mean the percentage obtained by dividing Tenant’s Gross Rentable Area by the Property Gross Rentable Area, which as of the date of this Lease is set forth on the Basic Lease Information Page.

1.7 Permitted Use: The term “Permitted Use” shall mean only the use set forth on the Basic Lease Information Page.

1.8 Tenant’s Minimum Liability Coverage: The term “Tenant’s Minimum Liability Insurance Coverage” shall mean the amount set forth on the Basic Lease Information Page.

1.9 Address for Notices: The term “Address for Notices” shall mean the addresses set forth on the Basic Lease Information Page.

1.10 Additional Definitions: Additional definitions are set forth in Paragraph 16.9, below.

 

3


1.11 Prepaid Rent: The term “Prepaid Rent” shall mean the sum set forth on the Basic Lease Information Page.

1.12 Security Deposit: The term “Security Deposit” shall mean the sum set forth on the Basic Lease Information Page.

ARTICLE 2

DEMISE AND POSSESSION

2.1 Lease of Premises: Landlord hereby leases to Tenant and Tenant leases from Landlord, upon the terms and conditions of this Lease, the Leased Premises together with (i) the non-exclusive right to use not more than Tenant’s Allocated Share of the non-reserved parking spaces within the Common Area (subject to the limitations set forth in paragraph 4.9) which right is non-exclusive unless otherwise expressly set forth on the Basic Lease Information Page, (ii) the non-exclusive right to use the surface of the Common Area for ingress to and egress from the Leased Premises and (iii) the non-exclusive right to use the Common Area of the Property as is available for all tenants of the Property consistent with the intended use of such common areas by all tenants. Tenant’s lease of the Leased Premises shall be subject to (i) all Laws, (ii) all Private Restrictions, easements and other matters of public record (none of which prohibit the use of the Leased Premises for general office use), and (iii) the reasonable rules and regulations from time to time promulgated by Landlord pursuant to paragraph 4.6.

2.2 Construction of Improvements: Any improvement work, and the payment therefore, to be performed by either Landlord or Tenant shall be set forth on a separate work agreement to be attached hereto as Exhibit “C”.

2.3 Delivery and Acceptance of Possession: Landlord shall deliver possession of the Leased Premises to Tenant upon the Commencement Date, or such earlier date as may be agreed upon between Landlord and Tenant, in writing. If the commencement date is not a fixed date set forth on the Basic Lease Information Page, then promptly upon Tenant commencing to operate its business upon the Leased Premises, Landlord and Tenant shall execute the supplemental agreement attached as Exhibit “D” setting forth the Commencement Date of this Lease. By taking possession of the Leased Premises, Tenant shall be conclusively deemed to have accepted the Leased Premises in its then existing condition “AS IS”.

2.4 Early Occupancy: If Landlord allows Tenant early occupancy, such shall only be pursuant to a written agreement and in such case the following shall apply, in addition to other terms and conditions as may be agreed upon between Landlord and Tenant in writing: (a) such occupancy may not interfere with Landlord’s contractors; and (b) Tenant must comply with all provisions of this Lease (except payment of Base Monthly Rent, unless otherwise agreed in writing) as though the Commencement Date had occurred, including, but not limited to, insurance requirements. Unless otherwise agreed, in writing, Tenant shall not be responsible for the payment of Base Monthly Rent during the early occupancy, however, Tenant shall be responsible for all other lease obligations as though the Commencement Date had occurred, including, but not limited to the payment of Tenant’s Allocated Share of operating expenses.

ARTICLE 3

RENT

3.1 Base Monthly Rent: Commencing on the Commencement Date and continuing throughout the Lease Term, Tenant shall pay to Landlord Base Monthly Rent as set forth on the Basic Lease Information Page.

3.2 Additional Rent: Commencing on the Commencement Date and continuing throughout the Lease Term, Tenant shall pay, as additional rent (the “Additional Rent”), (a) any late charges or interest due Landlord pursuant to paragraph 3.4, (b) Tenant’s share of the increase in Common Operating Expenses as provided in paragraph 6.10 over the Common Operating Expenses for the Base Year, (c) Tenant’s share of the increase in Real Property Taxes as provided in paragraph 8 over the Real Property Taxes for the Base Year, (d) Landlord’s share of the consideration received by Tenant from Transfers as provided in paragraph 14.1, and (e) any other charges due Landlord pursuant to this Lease.

 

4


3.3 Payment of Rent: The Base Monthly Rent shall be paid in advance on the first day of each calendar month during the Lease Term. Any additional rent shall be due and payable as set forth in this Lease or, if not specifically set forth, upon the date such charges are incurred. All rent shall be paid in lawful money of the United States, without any abatement, deduction or offset whatsoever, and without any prior demand therefor, to Landlord at its address set forth above or at such other place as Landlord may designate from time to time in advance by written notice. Tenant’s obligation to pay rent (including common operating expenses and taxes) shall be prorated at the commencement and expiration of the Lease Term. If prorated at the commencement, and the Lease Summary Information Sheet does not set forth one full month’s rent plus the first partial months rent, Tenant, on the first day of the first complete month following the Commencement Date, shall pay the balance of the first partial month as well as the first complete month.

3.4 Late Charge and Interest Upon Default: If any rent or other monetary obligation is not received by Landlord within five (5) days after it becomes due, Tenant shall immediately pay to Landlord a late charge equal to five percent (5%) of such delinquent rent. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any monetary obligation or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant’s failure to pay any monetary obligation due under this Lease in a timely fashion, or for any other default. If any monetary obligation remains delinquent for a period in excess of thirty (30) days, then, in addition to such late charge, Tenant shall pay to Landlord interest on such monetary obligation at the maximum legal interest rate allowed by law between contracting parties.

3.5 Security Deposit: Intentionally Deleted.

3.6 Prepayment of Rent: Tenant has paid to Landlord the Prepaid Rent concurrently with its execution of this Lease, as prepayment of rent for credit against the first installment(s) of Base Monthly Rent due hereunder.

ARTICLE 4

USE OF LEASED PREMISES

4.1 Limitation on Use: Tenant shall use the Leased Premises throughout the Lease Term solely for the Permitted Use (as described in Article 1) and for no other use. Tenant shall not do anything in or about the Leased Premises which shall (a) interfere with the rights of other tenants, if any, or other individuals outside the Leased Premises, (b) cause structural injury to the Leased Premises, or (c) cause damage to any part of the Leased Premises, except to the extent reasonably necessary for the installation of Tenant’s equipment and Trade Fixtures, and then only in a manner which has been first approved by Landlord and in which Tenant can repair the same upon expiration or termination of this Lease. Tenant shall not operate any equipment within the Leased Premises which shall injure, vibrate or shake the Leased Premises, which will overload existing electrical systems or other mechanical equipment servicing the Leased Premises, or which shall impair the efficient operation of the sprinkler system (if any) or the heating, ventilating or air conditioning (“HVAC”) equipment servicing the Leased Premises. Any dust, fumes, or waste products generated by Tenant’s use of the Leased Premises shall be contained and disposed of so that they do not create a fire or health hazard, damage the Leased Premises, or interfere with the business of other tenants, if any, or any other individuals outside the Leased Premises. Tenant shall not change the exterior of the Building or install any equipment or antennas on the building, and Tenant shall keep the Leased Premises in a clean, attractive and good condition, free from any nuisances.

A. Hazardous Substances. The term, “Hazardous Substance,” as used in this Lease, shall mean any product, substance, chemical, material, or waste whose presence, nature, quantity, and/or intensity of existence, use, manufacture, disposal, transportation, spill, release, or effect, either by itself or in combination with other materials expected to be on the Leased Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Leased Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Landlord to any governmental agency or third party under any applicable statute or common law theory. Hazardous

 

5


Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil, or any products or by-products thereof. Tenant shall not engage in any activity in or about the Leased Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Landlord and compliance in a timely manner (at Tenant’s sole cost and expense) with all Laws. Tenant may not store, use nor bring any Hazardous Substance upon the Leased Premises. Notwithstanding the foregoing, Tenant may, without Landlord’s prior consent, but upon notice to Landlord and in compliance with all Laws, use any ordinary and customary materials reasonably required to be used by Tenant in the normal course of the Permitted Use, so long as such use does not expose the Leased Premises or neighboring properties to any meaningful risk of contamination or damage, or expose Landlord to any liability therefor. Landlord and/or Landlord’s consultants may inspect the Leased Premises at any and all times to assure Tenant is in compliance with any and all laws applicable to Hazardous Substances. Tenant shall indemnify, defend and hold Landlord harmless from any actions, claims, liabilities or losses which might occur as a result of the presence of Hazardous Substances as a result of the actions of Tenant or its agents, employees and contractors.

B. Landlord Obligations. Landlord, at its sole cost and expense and not as a Common Operating Expense, shall be obligated to remove any Hazardous Substances existing prior to the commencement of tenant improvement construction, and Landlord shall indemnify, defend and hold Tenant harmless from any future actions, claims, liabilities or losses which might occur as a result of the presence of Hazardous Substances as a result of the actions of Landlord or its agents, employees and contractors. Further, Landlord’s cost for the removal of Hazardous Substances in the Building or in any other location affecting the Property shall be excluded from Common Operating Expenses so as not to be passed through to Tenant.

4.2 Compliance with Laws and Private Restrictions: Tenant shall not use the Leased Premises in any manner which violates any Laws or Private Restrictions. Tenant shall promptly comply with all Laws and Private Restrictions, now in affect or hereafter adopted (provided, however, Landlord shall not agree to any Private Restrictions during the Lease Term that would have an effect of prohibiting or impeding any Permitted Use), and shall indemnify and hold Landlord harmless from any liability resulting from Tenant’s failure to do so.

4.3 Insurance Requirements: Tenant shall not use the Leased Premises in any manner which will cause the existing rate of insurance upon the Leased Premises to be increased or cause a cancellation of any insurance policy covering the Leased Premises, and shall not sell, keep or use any article in or about the Leased Premises which is prohibited by Landlord’s fire and property damage insurance. Tenant shall comply with all requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters which are necessary to maintain, at standard rates, the insurance coverage carried by either Landlord or Tenant pursuant to this Lease.

4.4 Outside Areas: No materials, supplies, equipment, finished or semi-finished products, raw materials, or articles of any nature shall be stored upon or permitted to remain outside of the building upon the Leased Premises except in fully fenced and screened areas outside the building which have been designed for such purpose and have been approved in writing by Landlord for such use by Tenant.

4.5 Signs: At Tenant’s sole cost and expense, and subject to all applicable laws, Tenant shall be provided with lobby directory signage, Tenant shall be entitled to the use of Tenant’s Allocated Share of the East monument sign in front of the Building (i.e., the monument sign to the right of the entrance to the Building), and Tenant shall be permitted to install signage upon the entry door to the Premises, subject, however, to Landlord’s prior written consent as to the materials, size, style, color and aesthetics of such signs, such consent not to be unreasonably withheld or delayed. Except as set forth in the immediately preceding sentence, Tenant shall not place on any portion of the Property any sign, placard, lettering, banner, displays, or other advertising or communicative material which is visible from the exterior of the Building, upon the Leased Premises, including, but not limited to, the windows of the Leased Premises, without the prior written approval of Landlord. All such approved signs shall strictly conform to all Laws and Private Restrictions and shall be installed at the expense of Tenant. If Landlord so elects, Tenant shall, at the expiration or sooner termination of this Lease, remove all signs installed by it and repair any damage caused by such removal, including but not limited to repainting so that the repaired surface matches the surrounding surface. Tenant shall at all times maintain its Premises signs in good condition and repair, and Landlord shall maintain the Building monument signs and the lobby directory signage.

 

6


4.6 Rules and Regulations: Landlord may from time to time promulgate reasonable and nondiscriminatory rules and regulations applicable to all occupants of Landlord’s property of which the Leased Premises are a part, for the safety, care, cleanliness and orderly management of the Property (“Rules and Regulations”). The Rules and Regulations currently in place at the Property are set forth on Exhibit “E” attached hereto, and such Rules and Regulations and any successor Rules and Regulations shall be binding upon Tenant upon delivery of a copy thereof to Tenant, and Tenant agrees to abide by such Rules and Regulations. If there is a conflict between the Rules and Regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall not be responsible for the violation of any such Rules and Regulations by any other person to whom such Rules and Regulations apply.

4.7 Window Covering: If Landlord designates a standard window tinting for use throughout the Leased Premises, Tenant shall use this standard window covering to cover all windows in the Leased Premises.

4.8 Auctions: Tenant shall not conduct or permit to be conducted on any portion of the Leased Premises, any sale of any kind other than in the ordinary course of business, including (a) any public or private auction, fire sale, going out of business sale, distress sale, or other liquidation sale, or (b) any so-called flea market, open-air market, or any other similar activity.

4.9 Parking: Tenant shall have the non-exclusive right to use not more than the number of non-assigned parking spaces described in paragraph 2.1(i) for its use and the use of its employees and invitees, the location of which may be designated from time to time by Landlord (Landlord shall uniformly enforce such right against all tenants at the Property). Tenant shall not at any time use or permit its employees or invitees to use more parking spaces than the number so allocated to Tenant. If the Property contains tenants other that the Tenant hereunder: Tenant shall not have the exclusive right to use any specific parking space unless expressly agreed to in the Basic Lease Information Page; Landlord has the right to assign to one or more tenants the exclusive right to parking spaces as designated by Landlord (and Tenant shall not park in such spaces), provided, however, Landlord agrees that with respect to any exclusive parking rights granted to other tenants, Landlord shall grant Tenant similar exclusive parking rights; within ten (10) business days after written request therefor from Landlord, Tenant shall furnish Landlord with a list of its and its employees’ vehicle license numbers and Tenant shall thereafter from time to time notify Landlord of any changes in such list; Landlord reserves the right, to have any vehicles owned by Tenant or its employees or invitees utilizing parking spaces in excess of the parking spaces allowed for Tenant’s use to be towed away at Tenant’s cost; and Tenant shall not at any time park or permit the parking of its vehicles or the vehicles of others adjacent to loading areas so as to interfere in any way with the use of such loading areas. Tenant shall not at any time park or permit the parking of its vehicles or the vehicles of others on any portion of the Property not designated by Landlord as a parking area. All trucks and delivery vehicles used for delivering goods to Tenant shall be (i) parked at the rear of the Building, (ii) loaded and unloaded in a manner which does not interfere with the businesses of other occupants of the Property, and (iii) permitted to remain on the Property only so long as is reasonably necessary to complete loading and unloading. In the event Landlord elects or is required by any Law to limit or control parking on the Property (including, but not limited to, granting exclusive parking privileges), whether by validation of parking tickets or any other method, Tenant agrees to participate in such validation or other program under such reasonable rules and regulations as are from time to time established by Landlord.

4.10 Access and Security: Tenant shall have access twenty-four (24) hours per day, seven (7) days per week, and fifty-two (52) weeks per year to the Leased Premises, the common areas of the Property (as may be changed and modified by Landlord at its sole discretion from time to time) designated for the common use by all tenants. Tenant shall (1) lock the doors to the Leased Premises and Property and take other reasonable steps to secure the Leased Premises and the personal property of all parties upon the Leased Premises from unlawful intrusion, theft and other hazards; (2) keep and maintain in good working order all security and safety devices installed in the Leased Premises by or for the benefit of the Tenant (such as locks, fire sprinklers and burglar alarms); and (3) cooperate with Landlord and all

 

7


other tenants in the Building on Building safety matters and safety and security matters affecting the common areas and parking lot of the Building and property from unlawful intrusion, theft and other hazards. Tenant acknowledges that any security or safety measures employed by Landlord are for the protection of Landlord’s own interests; that Landlord is not a guarantor of security or safety of the Tenant or their property; and that security and safety matters are the responsibility of Tenant and local law enforcement authorities.

ARTICLE 5

TRADE FIXTURES AND LEASEHOLD IMPROVEMENTS

5.1 Trade Fixtures: Throughout the Lease Term, Tenant shall provide, install, and maintain in good condition all Trade fixtures required in the conduct of its business in the Leased Premises. All Trade Fixtures shall remain Tenant’s property.

5.2 Leasehold Improvements: Tenant shall not construct any Leasehold Improvements or otherwise alter the Leased Premises without Landlord’s prior approval if the cumulative cost therefor exceeds Ten Thousand Dollars ($10,000.00) or such work affects the structural parts or exterior of the Building, and not until Landlord shall have first approved the plans and specifications therefor, which approvals shall not be unreasonably withheld or delayed. All such approved Leasehold Improvements shall be installed by Tenant at Tenant’s expense, using a licensed and financially sound contractor first approved by Landlord, in substantial compliance with the approved plans and specifications therefor. All construction done by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using new materials of good quality. Tenant shall not commence construction of any Leasehold improvements until (a) all required governmental approvals and permits shall have been obtained, (b) all requirements regarding insurance imposed by this Lease shall have been satisfied, (c) Tenant shall have given Landlord at least five (5) days prior written notice of the actual date for which such construction shall commence, (d) Tenant shall have notified Landlord by telephone of the commencement of construction on or before the day it commences, and (e) Tenant shall have obtained contingent liability and broad form builder’s risk insurance in an amount satisfactory to Landlord if there are any perils relating to the proposed construction not covered by insurance carried pursuant to Article 9. All Leasehold Improvements shall remain the property of Tenant during the Lease Term but shall not be altered or removed from the Leased Premises. At the expiration or sooner termination of the Lease Term, all Leasehold Improvements shall be surrendered to Landlord as part of the realty and shall then become Landlord’s property, and Landlord shall have no obligation to reimburse Tenant for all or any portion of the value or cost thereof; provided, however, that if Landlord requires Tenant to remove any Leasehold Improvements in accordance with the provisions of Article 15, then Tenant shall so remove such Leasehold Improvements and restore the Leased Premises to their condition prior to the installation of such improvements prior to the expiration or sooner termination of the Lease Term.

5.3 Alterations Required by Law: Tenant shall comply with all laws, rules and regulations that are now in effect or may hereafter be applicable to the Leased Premises. Without limiting the foregoing, Tenant shall make all alterations, additions or changes, of any sort, whether structural or otherwise, to the Leased Premises that is required by any Law (a) for Tenant to operate its business upon the Leased Premises (to the extent any Law is specifically applicable to Tenant’s business and not generally applicable to businesses using property for general office use), (b) because of Tenant’s use or change of use of the Leased Premises, (c) because of Tenant’s application for any permit or governmental approval, or (c) because of Tenant’s construction or installation of any Leasehold Improvements or Trade Fixtures.

5.4 Landlord’s Improvements: All fixtures, improvements or equipment which are installed or constructed on or attached to the Leased Premises shall become a part of the realty and belong to Landlord. The provisions of this Lease shall in no way restrict or prohibit the right of the Association or Declarant (as defined therein) to make repairs, construct improvements, or otherwise exercise their rights under the Private Restrictions.

5.5 Liens: Tenant shall keep the Leased Premises and the Property free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Leased Premises, if any claim of

 

8


lien is recorded. Tenant shall bond against or discharge the same within thirty (30) days after the same has been recorded against the Leased Premises. Should any lien be filed against the Leased Premises or any action commenced affecting title to the Leased Premises, the party receiving notice of such lien or action shall immediately give the other party written notice thereof.

ARTICLE 6

REPAIR, MAINTENANCE, SERVICES AND UTILITIES

6.1 Repair and Maintenance: Except in the case of damage to or destruction of the Premises, the Building or the Property subject to the provisions of Article 11 of this Lease, the parties shall have the obligations and responsibilities with respect to the repair and maintenance of the Premises, the Building and the Common Areas as set forth in this Article 6.

6.2 Landlord’s Repair Obligations: Landlord shall, at all times during the Lease Term, continuously maintain in good order, condition and repair (a) the exterior and structural parts of the Building (including foundation, load-bearing and exterior walls, sub-flooring and roof); (b) the Common Areas (including all walkways, driveways, parking areas and landscaped areas within the Property and the common entryways, lobbies, corridors and common area restrooms within the Building); and (c) the electrical, mechanical, utility, plumbing, sewage and heating, ventilating and air conditioning systems installed or furnished by Landlord to service the Building.

6.3 Tenant’s Repair Obligations: Except for the services furnished by Landlord pursuant to Section 6.4 below, Tenant shall, at all times during the Lease Term, continuously maintain in good order, condition and repair the Premises and every part thereof and all appurtenances thereto.

6.4 Services and Utilities, Landlord’s Obligation: During the Lease Term, Landlord agrees to furnish at the following times the following services:

A. At all times, so long as it is available from the appropriate utility company, water in the Common Area restrooms within the Building sufficient for lavatory purposes and at designated locations within the Common Areas to be determined by Landlord sufficient for drinking purposes;

B. At all times, so long as it is available from the appropriate utility company, electric current to the Premises sufficient to provide standard office lighting and to operate the usual types of fractional horsepower office business machines during normal business hours of generally recognized business days; provided, however, Tenant shall pay for any electric current used in excess of such amounts as reasonably determined and allocated by Landlord;

C. From 8:00 a.m. to 6:00 p.m. Monday through Friday (excepting generally recognized holidays), so long as electricity sufficient to operate such system(s) is available from the appropriate utility company, heating, ventilating and air conditioning (“HVAC”) service sufficient to heat, ventilate and/or air condition the Premises as reasonably required; provided, however, Landlord shall not charge Tenant for any after-hours HVAC usage for the comfortable use and occupancy of the Premises during said periods of time for general office use;

D. Daily janitorial service (except on Saturdays, Sundays and generally recognized holidays); and

E. Tenant acknowledges that Landlord is not responsible for the security of the Premises, Building, Common Area or Property, or the protection of Tenant’s property, employees, invitees or contractors.

6.5 Services and Utilities, Tenant’s Obligation: Tenant shall arrange for, obtain, provide and pay for all other utilities or services (i.e. utilities and services other than those which Landlord has expressly agreed to provide) which may be required by Tenant in its use of the Lease Premises, such as telephone, security protection for the Premises and/or waste disposal services in excess of normal janitorial services to be provided by Landlord. If Tenant shall require water and/or electric current in

 

9


excess of that agreed to be furnished or supplied by Landlord, Tenant shall first procure the written consent of Landlord and shall make satisfactory arrangements with Landlord for the supply of same and for the payment by Tenant of all costs for such excess usage in accordance with Section 6.6 of this Lease. Landlord makes no representation as to the availability of sufficient utility supply and connection, including without limitation, the number of telephone lines, for Tenant’s use at the Premises and Tenant assumes the entire risk as to such supply and availability.

6.6 Excess Usage by Tenant: If Landlord determines that Tenant is using water or electric service in excess of the amount agreed to be provided by Landlord pursuant to Section 6.4 of this Lease, then Landlord at its election may (a) periodically charge Tenant, as Additional Rent, a sum equal to Landlord’s estimate of the cost of Tenant’s excess usage of such utility service, or (b) install (or require Tenant to install) at Tenant’s sole cost, a separate meter to measure the utility service supplied to the Premises and, based upon periodic readings of such meters, periodically charge Tenant, as Additional Rent, a sum equal to Landlord’s estimate of the cost of such excess usage. In the event Landlord shall install such a separate meter, Tenant shall pay to Landlord upon demand, (said demand may be prior to and a condition of the performance of such work) the costs incurred by Landlord in purchasing, installing and subsequently maintaining such meters. The cost of Tenant’s excess usage shall include any costs to Landlord in keeping account of such usage and all governmental fees, public charges or the like attributable to or based upon such usage (e.g. sewer use fees which are based upon water usage) to the extent of such excess usage. Tenant agrees to pay to Landlord, within ten (10) days of billing therefore, the costs for all such excess water and/or electric current used, as so reasonably estimated by Landlord.

6.7 Provider of Services: There may be a provider of telecommunications, satellite, wireless technology, or other similar service in the Building which offers services to tenants of the Building. Landlord makes no warranty, representation, endorsement, or claim regarding said provider, or regarding said services provided by said provider. Tenant’s use of said provider is at the sole discretion of Tenant and is not based upon any guarantee, assurance, endorsement, warranty or representation of Landlord. Tenant hereby agrees to hold harmless, waive, and release Landlord against any expense, claim, damage, loss, or liability, including but not limited to attorney fees and costs in defense of any action which shall be or may be caused by or arise out of anything done or omitted to be done by such provider of services, and/or regarding said services provided by said provider.

6.8 Energy and Resource Consumption: Landlord may voluntarily cooperate with the efforts of all governmental agencies or utility suppliers in reducing energy or other resource consumption within the Property. Tenant shall not be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all reasonable rules established by Landlord (a) in order to maximize the efficient operation of the electrical, HVAC systems and all other energy or other resource consumption systems within the Property and/or (b) in order to comply with the requirements and recommendations of utility suppliers and governmental agencies regulating the consumption of energy and/or other resources.

6.9 No Rent Reduction or Abatement: Tenant agrees that Landlord shall not be liable for damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service (including telephone and telecommunication services) or for diminution in the quantity or quantity of any service. Tenant shall not be entitled to terminate this Lease nor be entitled to any reduction in or abatement of Rent by reason of (a) Landlord’s failure to perform any maintenance or repairs to the Property, or (b) any failure, interruption, rationing or other curtailment in the supply of water, electric current, gas or other utility service to the Premises, the Building or the Property from whatever cause, or (c) the unauthorized intrusion or entry into the Premises by third parties (other than Landlord). Any of the foregoing shall not be considered to constitute an eviction or a disturbance of Tenant’s use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Landlord shall not be liable under any circumstances for a loss of or injury to property or for injury to or interference with Tenant’s business, including loss of profits through, in connection with, or incidental to a failure to furnish or interruption in any utilities or services. Regardless of the forgoing, if the Premises should become unusable for Tenant’s permitted use for a period of five (5) consecutive days as a consequence of a cessation of utilities to the Premises due to Landlord’s active negligence or intentional misconduct, then Tenant shall be entitled to an equitable abatement of rent to the extent of the interference with Tenant’s permitted use of the Premises for the period of such utility interruption that continually occurs in excess of such five (5) day period.

 

10


6.10 Tenant’s Obligation to Reimburse: As additional rent, Tenant shall pay Tenant’s Allocated Share of all increases in “Common Operating Expenses” (as defined below) over the Base Year, as set forth in Section 3.2 above. Payment shall be made by whichever of the following methods is from time to time designated by Landlord, and Landlord may change the method of payment at any time. Tenant shall pay such share of the increase in actual Common Operating Expenses incurred or paid by Landlord but not theretofore billed to Tenant within thirty (30) days after receipt of a written bill therefor from Landlord, on such periodic basis as Landlord shall designate, but in no event more frequently than monthly. Alternatively Landlord shall deliver to Tenant Landlord’s reasonable estimate of the increase in Common Operating Expenses it anticipates will be paid or incurred for the calendar year in question. Tenant shall pay such share of the estimated increase in Common Operating Expenses in advance in equal monthly installments due with the installment of Base Monthly Rent and as soon as reasonable practicable after the end of such calendar year, Landlord shall furnish to Tenant a statement in reasonable detail of the actual Common Operating Expenses paid or incurred by Landlord in accordance with this Article during the just ending calendar year and the amount paid in the Base Year, and thereupon there shall be an adjustment between Landlord and Tenant, with payment to or a rent credit by Landlord, as the case may require, within thirty (30) days after delivery by Landlord to Tenant of said statement, to the end that Landlord shall receive the entire amount of Tenant’s share of the increase in Common Operating Expenses for such calendar year over the Base Year. Tenant shall have the right, exercisable upon reasonable prior notice to Landlord in writing, to inspect Landlord’s books and records relating to Common Operating Expenses at Landlord’s or Landlord’s property manager’s office for the purpose of verifying the charges contained in such statement; provided, however, Tenant may not inspect Landlord’s books and records relating to Common Operating Expenses that are more than three (3) years old. Tenant may not withhold payment pending completion of such inspection. If less than 95% of the total rentable area of the Building is occupied during the Base Year and/or any calendar year during the term of this Lease, then Common Operating Expenses shall be adjusted to equal Landlord’s reasonable estimate of Common Operating Expenses had such percentage of the total rentable area of the Building been occupied. Controllable Common Operating Expenses shall not increase by more than four percent (4%) per year over the Lease Term in any year. “Controllable Common Operating Expenses” shall be all Common Operating Expenses except for Real Property Taxes, Landlord’s insurance premiums, insurance deductibles, and utility expenses.

A. Within three (3) years after Tenant’s receipt of Landlord’s expense reconciliation statement and after delivery to Landlord of at least thirty (30) days prior written notice, Tenant, at its sole cost and expense through any certified public accountant designated by it (who is not compensated on a contingency fee basis), shall have the right to examine and/or audit the books and records evidencing such costs and expenses for the previous three (3) calendar years, during Landlord’s reasonable business hours and at Landlord’s office but not more frequently than once for such three year period (or any portion thereof). The results of any such audit (and any negotiations between the parties related thereto) shall be maintained strictly confidential by Tenant and its accounting firm and shall not be disclosed, published or otherwise disseminated to any other party other than to Landlord and its authorized agents. Landlord and Tenant each shall use their best efforts to cooperate in such negotiations and to promptly resolve any discrepancies between Landlord and Tenant in the accounting of such costs and expenses. If through such audit it is determined that there is a discrepancy of more than two percent (2%) in the total of actual Common Operating Expenses, then Landlord shall reimburse Tenant for the reasonable accounting costs incurred by Tenant in performing such audit, not to exceed $5,000.00. However, if through such audit it is determined that there is a discrepancy of two percent (2%) or less, then Tenant shall reimburse Landlord for the reasonable expenses incurred by Landlord (both in house personnel and third parties) in connection with such audit, such costs not to exceed $5,000.00.

6.11 Common Operating Expenses Defined: The term “Common Operating Expenses” shall mean each and every expense incurred by Landlord to operate, maintain, repair, replace, and manage any portion of the Property, including, but not limited to, the following:

A. All costs and expenses paid or incurred by Landlord for the following: (i) maintenance of the liability, fire, property damage and other insurance relating to the Property carried by

 

11


Landlord (including the payment of reasonable “deductibles” and the pre-payment of premiums for coverage of up to one year); (ii) maintaining, repairing, operating, and replacing, when necessary, roofs, HVAC equipment, utility facilities, elevators, and other building service equipment (provided that any replacement costs shall be amortized, and the sum that shall be passed through as an Common Operating Expense shall be equal to the sum of the (a) quotient obtained by dividing the cost of the replacement by Landlord’s reasonable estimate of the number of months of useful life of such replacement plus (b) an amount equal to the cost of the replacement times 1/12 of the lesser of 10% or the maximum annual interest rate permitted by law); (iii) complying with all applicable Laws and Private Restrictions including payment of charges assessed pursuant to any Private Restrictions; (iv) operating, maintaining, repairing, cleaning, painting, restriping, and resurfacing the Common Area; and (v) replacement or installation of lighting fixtures, irrigation systems and all landscaping in the Common Area;

B. That portion of all compensation (including benefits and premiums for worker’s compensation and other insurance) paid to, or for the benefit of, employees of Landlord involved in the performance of the work described by sub-paragraphs A and B above that is fairly allocable to the Property;

C. Property management fees actually incurred with respect to a third party property manager, or if Landlord manages the Property itself, an amount equal to the greater of ten percent (10%) of Common Operating Expenses or six percent (6%) of the gross rental income of the Property; provided, however, if after the Base Year Landlord transitions from using a third party property manager to managing the Property itself, and the property management fees paid to Landlord exceed the property management fees that Landlord was paying to Landlord’s third party property manager, then, on a one-time basis, Landlord shall adjust the property management fees incurred in the Base Year to equal the new and higher property management fees paid to Landlord;

D. Nothing set forth herein shall impose upon Landlord an obligation to so repair, maintain and/or replace any items unless such obligation is otherwise expressly set forth elsewhere in this Lease.

6.12 Control of Common Area: Landlord shall at all times have exclusive control of the Common Area, if any. Landlord shall have the right, without the same constituting an actual or constructive eviction and without entitling Tenant to any abatement of rent, to : (a) close any part of the Common Area to prevent a dedication thereof or the accrual of any prescriptive rights therein; (b) temporarily close the Common Area to perform maintenance, (c) designate other property outside the boundaries of the Property to become part of the Property; (d) construct parking structures on any part of the Common Area; (e) change the shape, size or location of the Common Area; (f) eliminate or add any buildings or improvements; (g) make changes to the Common Area including, without limitation, changes in the location of driveways, entrances, passageways, doors and doorways, elevators, stairs, restrooms, exits, parking spaces, parking areas, sidewalks or the direction of the flow of traffic and/or (h) change the name or address of the Building. Landlord reserves the right to use the air space above the Common Area for the construction of improvements or for any other purpose. Notwithstanding anything to the contrary contained in the foregoing, Landlord shall give Tenant reasonable prior notice of any of the foregoing and Landlord shall not make any changes to the Common Area that materially adversely affects Tenant’s benefits under this Lease.

A. Joint Use Facilities. Tenant acknowledges and agrees that the Building’s conference room, the Building’s lobby, and the Building’s kitchen, are part of the Common Area of the Property and are for the use and enjoyment of all tenants at the Property. The use of the conference room is on a first come first serve basis, and reservations may currently be made through the Building’s front desk (it being acknowledged and agreed that Landlord shall have the right to determine in its reasonable discretion, from time to time, how reservations for the conference room may be made). In addition, Landlord shall have the right to adopt reasonable rules and regulations regarding the use and reservation of the conference room at any time.

6.13 Tenant’s Negligence: Tenant shall pay for all damage to the Property caused by the negligent act or omission of Tenant, its agents, employees, contractors, or invitees or by the failure of Tenant to comply with the terms of this Lease, except as otherwise provided by paragraph 9.4. Tenant shall make payment therefor on demand by Landlord.

 

12


ARTICLE 7

WASTE DISPOSAL

7.1 Waste Disposal: Tenant shall store its waste either inside the Leased Premises or in containers with lids that are kept closed (e.g. “dumpsters”) located within outside trash enclosures that are (a) fully fenced and screened in compliance with all Private Restrictions, (b) designed for such purpose to be used either exclusively by Tenant or in common with others as designated by Landlord, and (c) first approved by Landlord (in Landlord’s sole discretion). All entrances to such outside trash enclosures shall be kept closed, and waste shall be stored in containers in such manner so that the container lids are kept closed and such waste is not visible from the exterior of such outside enclosures. Except for normal janitorial trash removal, as set forth above, Tenant shall cause all of its waste to be regularly removed from the Property. Tenant shall keep all fire corridors and mechanical equipment rooms in the Leased Premises free and clear of all obstructions at all times.

ARTICLE 8

REAL PROPERTY TAXES

8.1 Real Property Taxes Defined: The term “Real Property Taxes” as used herein shall mean (a) all taxes, assessments, levies, and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay for any general or special assessments for public improvements, services, or benefits and any increases resulting from reassessments, new construction, or change in valuation), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against or with respect to (i) the value, occupancy or use of the Property (as now constructed or as may at any time hereinafter be constructed, altered or otherwise changed), (ii) the fixtures, equipment, and other real or personal property of Landlord that are an integral part of the Property, (iii) the gross receipts, income, and rentals from the Property, or (iv) the use of energy within the Property; (b) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Property; (c) any excise, transaction, sales, privilege or other tax now or hereafter imposed upon Landlord as a result of any leases for any portion of the Property; (d) all costs and fees (including attorneys’ fees) reasonably incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax; and (e) all assessments charged by any property owners’ associations established with respect to the Leased Premises or otherwise levied against the Leased Premises pursuant to the Private Restrictions. If at any time during the Lease Term the taxation or assessment of the Property shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate, substitute, or additional tax or charge (a) on the value, use or occupancy of the Property, (b) on or measured by the gross receipts, income, or rentals from the Property, or on Landlord’s business of leasing the Property, or (c) computed in any manner with respect to the operation of the Property, then any such tax or charge, however designated, shall be included within the meaning of the term “Real Property Taxes” for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Property, then only that part of such Real Property Tax that is fairly allocable to the Property shall be included within the meaning of the term “Real Property Taxes.” Notwithstanding the foregoing, the term “Real Property Taxes” shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state income tax imposed on Landlord’s income from all sources.

8.2 Tenant’s Obligation to Reimburse: As additional rent, Tenant shall pay Tenant’s Allocated Share of the increase all Real Property Taxes assessed against the Property which become due during the Lease Term over and above the Base Year. Tenant shall pay its share of the Real Property Taxes increases (a) within twenty (20) days after being billed for the same by Landlord, or (b) no later than ten (10) days before such Real Property Taxes become delinquent, whichever last occurs. Alternatively Landlord shall deliver to Tenant Landlord’s reasonable estimate of the increase in taxes it anticipates will be paid or incurred for the calendar year in question. Tenant shall pay such share of the estimated increase in taxes in advance in equal monthly installments due with the installment of Base

 

13


Monthly Rent and within a reasonable time after the end of such calendar year, Landlord shall furnish to Tenant a statement in reasonable detail of the actual taxes paid or incurred by Landlord in accordance with this Article during the just ending calendar year, and the amount paid for the Base Year, and thereupon there shall be an adjustment between Landlord and Tenant, with payment to or a rent credit by Landlord, as the case may require, within twenty (20) days after delivery by Landlord to Tenant of said statement, to the end that Landlord shall receive the entire amount of the increase of all taxes for such calendar year. If requested by Tenant in writing within thirty (30) days of receipt of a bill for Tenant’s Allocated Share of the increase in Real Property Taxes, Landlord shall furnish Tenant with such evidence as is reasonably available to Landlord with respect to the amount of any increase in Real Property Tax which is part of such bill. Landlord acknowledges and agrees that Real Property Taxes for the Base Year will be grossed up to reflect a full assessment of Real Property Taxes for the Base Year. Tenant may not withhold payment of such bill pending receipt and/or review of such evidence. If any Lender requires Landlord to impound Real Property Taxes on a periodic Basis during the Lease Term, then Tenant, on notice from Landlord indicating this requirement, shall pay a sum of money toward its liability under this Article to Landlord on the same period basis in accordance with the Lender’s requirements. Landlord shall impound the Real Property Tax payments received from Tenant in accordance with the requirements of the Lender. If any assessments are levied against the Property, Landlord may elect to either pay the assessment in full or allow the assessment to go to bond. If Landlord pays the assessment in full, Tenant shall pay to Landlord each time payment of Real Property Taxes is made a sum equal to that which would have been payable (as both principal and interest) had Landlord allowed the assessment to go to bond.

8.3 Taxes on Tenant’s Property: Tenant shall pay before delinquency any and all taxes, assessments, license fees, and public charges levied, assessed, or imposed against Tenant, Tenant’s estate in this Lease, the property of Tenant situated upon the Property, or Leasehold Improvements, which become due during the Lease Term.

ARTICLE 9

INSURANCE

9.1 Tenant’s Insurance: Tenant shall maintain in full force and effect during the Lease Term the following insurance:

A. Tenant shall maintain a policy or policies of commercial general liability insurance, including property damage, against liability for personal injury, bodily injury, death, and damage to property occurring in or about, or resulting from an occurrence in or about, the Leased Premises with combined single limit coverage of not less than the amount of Tenant’s Minimum Liability Insurance coverage set forth in Article 1. Such commercial general liability insurance shall contain a “contractual liability” endorsement insuring Tenant’s performance of Tenant’s obligation to indemnify Landlord as set forth in Article 10. If Landlord’s Lender or Landlord’s insurance advisor or counsel reasonably determines at any time that the amount of such coverage is not adequate, Tenant shall increase such coverage to such amount as Landlord’s Lender, insurance advisor or counsel reasonably deems adequate, not to exceed the level of coverage then commonly carried by comparable businesses similarly situated.

B. Tenant shall maintain a policy or policies of fire and property damage insurance in “Special Risk” form with a sprinkler leakage endorsement (if the Building contains fire sprinklers) insuring the personal property, inventory, Trade Fixtures, and Leasehold Improvements within the Leased Premises for the full replacement cost thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured.

C. If Tenant undertakes or authorizes any construction, alteration, improvements or the like in the Leased Premises, then Tenant shall maintain contingent liability and broad form builder’s risk insurance with coverage in an amount satisfactory to Landlord.

D. Tenant shall maintain a policy or policies of workers compensation insurance and any other employee benefit insurance sufficient to comply with all workers compensation Laws.

E. Landlord and Landlord’s Lender, if any, shall be named as additional insureds on the policies of insurance described in this Article. Landlord, as an additional insured, shall be entitled

 

14


to coverage commensurate with the Tenant’s indemnification obligations as set forth in Section 10.2. All insurance required by this Article (i) shall be primary insurance which provides that the insurer shall be liable for the full amount of the loss up to and including the total amount of liability set forth in the declarations without the right of contribution from any other insurance coverage of Landlord, (ii) shall be in a form satisfactory to Landlord, (iii) shall be carried with companies reasonably acceptable to Landlord, (iv) shall contain a “cross liability” provision providing in substance that Landlord, although named as an insured, shall nevertheless be entitled to recover under the policy for any loss suffered by Landlord by reason of the negligence of Tenant, and (v) shall not have a “deductible” in excess of Ten Thousand Dollars ($10,000.00) per occurrence. Tenant shall provide that such policies shall not be subject to cancellation or change except after at least fifteen (15) days prior written notice to Landlord. Copies of such policy or policies, or duly executed certificates for them, together with satisfactory evidence of the payment of the premium therefor, shall be deposited with Landlord prior to the time Tenant enters into possession of the Leased Premises and upon renewal of such policies, but not less than three (3) days prior to the expiration of the term of such coverage.

9.2 Landlord’s Insurance: During the Lease Term, Landlord shall have the following obligations and options regarding insurance:

A. Landlord shall maintain a policy or policies of fire and property damage insurance in so-called “fire and extended coverage” form insuring Landlord (and such others as Landlord may designate) against loss of rents and from physical damage to the Leased Premises with coverage limits as Landlord may elect up to not less than 80% of the full replacement cost. Landlord may so insure the Leased Premises separately, or may insure the Leased Premises with other buildings and improvements which Landlord elects to insure together under the same policy or policies. The foregoing notwithstanding, such fire and property damage insurance, at Landlord’s election, (i) may be written in so-called “all-risk” form to include such perils as are commonly covered by such form of coverage, (ii) may provide coverage for physical damage to the improvements so insured up to the then full replacement cost thereof, (iii) may be endorsed to cover loss caused by such additional perils against which Landlord may elect to insure, including earthquake and/or flood, (iv) may provide coverage for loss of rents for a period of up to twelve (12) months, and (v) may contain “deductibles” of One Thousand Dollars ($1,000.00) per occurrence or such greater amount as selected by Landlord. Landlord is not obligated to cause such insurance to cover any Trade Fixtures, Leasehold Improvements, or any inventory or other personal property of Tenant. If Landlord increases the level of coverage during the Lease Term, the cost of such insurance shall be adjusted for the Base Year so that Tenant is only liable for any increases in costs over Base Year for the same coverages.

B. Landlord shall maintain a policy or policies of commercial general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring or resulting from an occurrence in, on or about the Common Areas of the Property, with combined single limit coverage as Landlord may, in good faith, from time to time determine is consistent with the level of coverage then commonly carried by comparable businesses similarly situated.

9.3 Tenant’s Obligation to Reimburse: The cost of the insurance which Landlord is either obligated or elects to carry pursuant to this Article 9 and any deductible amount paid by Landlord and excluded from the coverage of such insurance shall be a common area expense pursuant to Article 6. If Landlord’s insurance rates are increased at any time during the Lease Term as a result of the nature of Tenant’s use of the Leased Premises and Landlord does not elect to terminate the Lease, Tenant shall reimburse Landlord for the full amount of such increase immediately upon receipt of a bill from Landlord therefor. If less than 95% of the total rentable area of the Property is occupied during the Base Year or any calendar year during the term of this Lease, then Landlord’s insurance costs under this Article 9 shall be adjusted to equal Landlord’s reasonable estimate of Landlord’s insurance costs had 95% of the total rentable area of the Property been occupied.

9.4 Release and Waiver of Subrogation: The parties hereto release each other, and their respective agents and employees, from any liability for injury to any person or damage to property that is caused by or results from any risk insured against under any valid and collectible insurance policy required to be carried by either of the parties, hereunder, which contains a waiver of subrogation by the

 

15


insurer and is in force at the time of such injury or damage; provided, however, that any such person or entity shall not be released from such liability to the extent any damages resulting from such injury or damage are not covered by the recovery obtained by the insured. This release shall be in effect only so long as the applicable insurance policy contains a clause to the effect that this release shall not affect the right of the insured to recover under such policy. Each party shall use its reasonable efforts, at reasonable cost, to cause each insurance policy required to be obtained by it, hereunder, to provide that the insurer waives all right of recovery by way of subrogation against the other party and its agents and employees in connection with any injury or damage covered by such policy.

ARTICLE 10

LIMITATION ON LANDLORD’S LIABILITY AND INDEMNITY

10.1 Limitation on Landlord’s Liability: Landlord shall not be liable to Tenant nor shall Tenant be entitled to any abatement of rent, for any injury to Tenant, its agents, employees, contractors, or invitees, damage to Tenant’s property, or loss to Tenant’s business resulting from any cause, provided, however, that Landlord shall not be released from liability for loss or damage caused solely by its willful misconduct or gross negligence. Except as set forth above, Tenant’s sole remedy is to rely upon insurance it is either required to maintain hereunder or may obtain to adequately cover such potential losses.

10.2 Indemnification of Landlord: Tenant shall hold harmless, indemnify and defend Landlord and its employees and agents, with competent counsel reasonably satisfactory to Landlord, from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments arising by reason of any death, bodily injury, personal injury or property damage (a) resulting from any cause or causes whatsoever (other than the willful misconduct or sole negligence of Landlord) occurring in or about or resulting from an occurrence in or about the Leased Premises during the Lease Term or while Tenant is occupying the Leased Premises, or (b) resulting from the breach of this Agreement, or the negligence or willful misconduct of Tenant, its agents, employees and contractors, wherever the same may occur. The provisions of this paragraph shall survive the expiration or sooner termination of this Lease with respect to any claims or liability occurring prior to such expiration or sooner termination and the date Tenant vacates possession of the Leased Premises.

10.3 Indemnification of Tenant: Landlord shall hold harmless, indemnify and defend Tenant and its employees and agents, with competent counsel reasonably satisfactory to Tenant, from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments arising by reason of any death, bodily injury, personal injury or property damage resulting from the breach of this Agreement by Landlord, or the gross negligence or willful misconduct of Landlord, its agents, employees and contractors, wherever the same may occur. The provisions of this paragraph shall survive the expiration or sooner termination of this Lease with respect to any claims or liability occurring prior to such expiration or sooner termination.

ARTICLE 11

DAMAGE TO LEASED PREMISES

11.1 Landlord’s Duty to Restore: Except as set forth above, if the Leased Premises are damaged by any peril after the Commencement Date of this Lease, Landlord shall restore the Leased Premises unless the Lease is terminated by either Landlord or Tenant pursuant to this Article. All insurance proceeds available from fire and property damage insurance carried by Landlord pursuant to Article 9 shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to this Article then all insurance proceeds available from insurance carried by Tenant which covers loss to property that is Landlord’s property or would become Landlord’s property on the termination of this Lease shall be paid to and become the property of Landlord. If this Lease is not so terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Leased Premises, to the extent then allowed by Law, to substantially the same condition in which the Leased Premises were immediately prior to such damage. Landlord’s obligation to restore shall be limited to the Leased Premises as they existed as of the Commencement Date, excluding any Leasehold Improvements, Trade Fixtures, and/or personal property constructed or installed by Tenant in the Leased Premises. Tenant shall forthwith replace or fully repair all Leasehold Improvements and Trade Fixtures installed by Tenant and existing at the time of such damage or destruction.

 

16


11.2 Landlord’s Right to Terminate: Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to terminate, not later than thirty (30) days after receipt of a written notice from Tenant, following such damage, requesting Landlord’s election:

A. The Leased Premises or Building is damaged by any peril either (i) covered by the type of insurance Landlord is required to carry pursuant to Article 9 or (ii) covered by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction, to such an extent that more than Twenty Five (25) percent of the Building or Leased Premises is materially damaged or destroyed.

B. The Leased Premises or the Building is damaged by any peril both (i) not fully covered by the type of insurance Landlord is required to carry pursuant to Article 9 and (ii) not fully covered by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction, unless Tenant elects to pay to Landlord the uninsured amount necessary to fully restore the Leased Premises or Building, in which case the Lease shall not terminate. Such election by Tenant must be made, in writing, within ten (10) days of notice from Landlord that some or all of the damage is uninsured and Tenant must deposit with Landlord the full amount of the estimated uninsured damage within ten (10) days of receipt of Landlord’s estimate(s), and following completion Tenant shall immediately pay the deficiency or shall be credited the overpayment, as appropriate, based upon the actual restoration costs and payments made by Tenant.

C. The Leased Premises are damaged by any peril during the last six (6) months of the Lease Term to such an extent that the reasonable time to restore the Leased Premises exceeds Sixty (60) days provided, however, that Landlord may not terminate this Lease pursuant to this subparagraph if Tenant, at the time of such damage, has an express written option to further extend the term of this Lease for a period of at least two (2) years and Tenant exercises such option to so further extend the Lease Term within ten (10) days following the date of such damage, or

D. The Building is damaged by any peril and, because of the Laws then in force, (i) may not be restored at reasonable cost to substantially the same condition in which it was prior to such damage, (ii) may not be used for the same use being made thereof before such damage whether or not restored as required by this Article, or (iii) such damage is not fully covered by insurance then in effect or required to be maintained by Landlord as set forth herein.

11.3 Tenant’s Right to Terminate: If the Leased Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to this Article, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord’s architect or construction consultant as to when the restoration work required of Landlord may be completed. Should the Leased Premises be reasonably unsuitable for Tenant’s continued use of the same as a result of such damage, Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Landlord of a written notice of election to terminate within ten (10) days after Tenant receives from Landlord the estimate of the time needed to complete such restoration:

A. The Leased Premises are damaged by any peril and, in the reasonable opinion of Landlord’s architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within One Hundred Eighty (180) days after the date of such damage, or

B. The Leased Premises are damaged by any peril within the last twelve (12) months of the Lease Term (and an option to extend, if any, has not been exercised), and, in the reasonable opinion of Landlord’s architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within Sixty (60) days after the date of such damage.

 

17


11.4 Abatement of Rent: In the event of damage to the Leased Premises which does not result in the termination of this Lease, the Base Monthly Rent shall be temporarily abated during the period of restoration based upon the ratio of the square footage of the Leased Premises in proportion to the square footage of the portion of the Leased Premises damaged or destroyed and not actually occupied by Tenant. Tenant shall not be entitled to any compensation from Landlord for loss of Tenant’s property or loss to Tenant’s business caused by such damage or restoration.

11.5 Waiver of Statutory Rights: Tenant hereby waives any statutory right to terminate this Lease or to have a reduction of rent in the event of casualty loss or destruction, the rights of Tenant in such instance shall be determined by this Article 11.

ARTICLE 12

CONDEMNATION

12.1 Taking of Leased Premises: If all or any part of the Leased Premises or more than twenty-five percent (25%) of the Common Area is taken by means of (a) any taking by the exercise of the power of eminent domain, whether by legal proceedings or otherwise, (b) a voluntary sale or transfer by Landlord to any condemnor under threat of condemnation or while legal proceedings for condemnation are pending, or (c) any taking by inverse condemnation (a “Condemnation”), then Landlord shall have the option to terminate this Lease. If all or any part of the Leased Premises or Common Area are taken by Condemnation and the Leased Premises or Common Area cannot be reconstructed within one hundred and eighty (180) days and thereby made reasonably suitable for Tenant’s continued occupancy for the Permitted Use, then Tenant shall have the option to terminate this Lease. Any such option to terminate by either Landlord or Tenant must be exercised within a reasonable period of time, not to exceed 20 days after notice of the taking, to be effective as of the date that possession of the Leased Premises is taken by the condemnor.

12.2 Restoration Following the Taking: If any part of the Leased Premises or any Common Area is taken by Condemnation and this Lease is not terminated, then Landlord shall make such repairs and alterations that are reasonably necessary to make that which is not taken a complete architectural unit, but Landlord shall not be obligated to (a) spend more than the amount of any condemnation award recovered by Landlord for such restoration to the Leased Premises, or (b) deviate significantly from the work originally required to construct the Leased Premises.

12.3 Abatement of Rent: Except in the case of a temporary taking, if any portion of the Leased Premises is taken by Condemnation and this Lease is not terminated, then as of the date possession is taken, the Base Monthly Rent shall be reduced in the same proportion that the square footage of that part of the Leased Premises so taken (less any addition thereto by reason of any reconstruction) bears to the original square footage of the Leased Premises.

12.4 Temporary Taking: If any portion of the Leased Premises is temporarily taken by Condemnation for a period which does not extend beyond the natural expiration of the Lease Term, and such taking materially and adversely affects Tenant’s ability to use the Leased Premises for the Permitted Use, and such taking is to continue for a period of one hundred eighty (180) days or longer, then Landlord and Tenant shall each independently have the option to terminate this Lease, effective on the date possession is taken by the condemnor, so long as notice is provided of such termination within 20 days of knowledge of such taking and that such taking is to exceed one hundred eighty (180) days.

12.5 Division of Condemnation Award: Any award made as a result of any condemnation of the Leased Premises or any Common Area shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award, provided, however, that Tenant shall be entitled to receive any Condemnation award that is made directly to Tenant (a) for the taking of personal property or Trade Fixtures belonging to Tenant or (b) for the interruption of Tenant’s business or for its moving costs.

12.6 Waiver of Statutory Rights: Tenant hereby waives any statutory right to terminate this Lease or to have a reduction of rent in the event of any Condemnation, the rights of Tenant in such instance shall be determined by this Article 12.

 

18


ARTICLE 13

DEFAULTS AND REMEDIES

13.1 Events of Tenant’s Default: Tenant shall be in default of this Lease, allowing Landlord to pursue any of the remedies set forth below or any other remedies afforded by law or equity, if any of the following events occur:

A. Tenant fails to pay any payment obligation (Base Monthly Rent, Additional Rent and/or any other monetary payments due hereunder) when due;

B. Tenant fails to perform any term, covenant, or condition of this Lease, except those payment obligations referred to in the immediately preceding subparagraph, and Tenant fails to cure such default within thirty (30) days after delivery of written notice from Landlord informing Tenant of such default or Tenant fails to commence such cure within such 30-day period and thereafter continuously, with due diligence, prosecute such cure to completion where such default could not reasonably be cured within said thirty (30) day period. It is expressly agreed that such 10 day notice of Landlord may be in the form of notice pursuant to Nevada Revised Statutes §40.2516, or any successor statute, providing 30 days to cure and if Tenant fails to so cure no further such notice shall be required of Landlord to commence an unlawful detainer proceeding;

C. Tenant makes an assignment, sublease, or other Transfer in violation of Article 14;

D. Tenant makes a general assignment of its assets for the benefit of its creditors;

E. There occurs an attachment of execution on, the appointment of a custodian or receiver with respect to, or other judicial seizure of (i) substantially all of Tenant’s assets, (ii) any property of Tenant essential to the conduct of Tenant’s business in the Leased Premises, or (iii) the leasehold created by this Lease, and Tenant fails to obtain a return or release of such property within ninety (90) days thereafter or prior to sale or other disposition, whichever is earlier; or

F. A court makes or enters any decree or order with respect to Tenant or Tenant submits to or seeks a decree or order (or a petition or pleading is filed in connection therewith) which: (i) grants or constitutes (or seeks) an order for relief, appointment of a trustee, or confirmation of a reorganization plan under the bankruptcy laws of the United States; (ii) approves as properly filed (or seeks such approval of) a petition seeking liquidation or reorganization under said bankruptcy laws or any other debtor’s relief law or statute of the United States or any state thereof, or (iii) otherwise directs (or seeks) the winding up or liquidation of Tenant; provided, however that if any such petition, decree or order is not voluntarily filed or made by Tenant, that Tenant shall not be in default until such petition, decree or order remains undischarged for a period of ninety (90) days.

13.2 Landlord’s Remedies: In the event of any default by Tenant, Landlord shall have the following remedies, in addition to all other rights and remedies provided by any Law or otherwise provided in this Lease, to which Landlord may resort cumulatively, or in the alternative: (1) re-enter the Leased Premises in the manner provided by law, (2) declare this Lease at an end and terminated, (3) recover from Tenant the Rent due and to become due under the Lease, and for any actual damages sustained by Landlord, and (4) continue this Lease in effect and relet the Leased Premises on such terms and conditions as Landlord may deem reasonably advisable with Tenant remaining liable for the monthly rent and all other sums payable under this Lease, plus the reasonable cost of obtaining possession of the Leased Premises and of reletting the Leased Premises, including broker’s commissions, and of any repairs and alterations necessary to prepare the Leased Premises for reletting, less the rentals actually received from such reletting, if any. Landlord shall use reasonable efforts to mitigate damages and relet the Leased Premises. Any recovery of future rent from Tenant, will be discounted if and to the extent the same is required by law. Nothing in this paragraph shall limit Landlord’s right to indemnification from Tenant as provided in Article 10.

 

19


13.3 Cumulative Remedies of Landlord: No action of Landlord shall be construed as an election to terminate the Lease or to accept a surrender of the Leased Premises unless written notice of such intention be given to Tenant. Neither acceptance of Rent by Landlord, nor acceptance of partial payment of Rent or other partial performance, with or without knowledge of breach, nor failure of Landlord to take action on account of any breach hereof or to enforce its rights hereunder shall be deemed a waiver of any breach, and absent written notice or consent, the breach shall be a continuing one. The mention in the Lease of any remedies shall not be deemed to be a waiver by Landlord of any other or further remedies available at law or in equity or under other provisions of this Lease, all of which are expressly preserved and shall be available to Landlord including, without limitation, Landlord’s statutory lien rights.

13.4 Landlord’s Default and Tenant’s Remedies: In the event Landlord fails to perform any of its obligations under this Lease and fails to cure such default within thirty (30) days after written notice from Tenant specifying the nature of such default where such default could reasonably be cured within said thirty (30) day period, or fails to commence such cure within said thirty (30) day period and thereafter continuously, with due diligence, prosecutes such cure to completion where such default could not reasonably be cured within said thirty (30) day period, then Tenant may proceed in law or in equity to compel Landlord to perform its obligations. Tenant waives the provisions of any Laws regarding Tenant’s right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under the Lease. Without limiting the foregoing, Tenant waives any and all rights to assert constructive eviction. Tenant hereby waives any right of redemption or relief from forfeiture under the laws of the State of Nevada, or under any other present or future law.

13.4 Waiver: One party’s consent to or approval of any act by the other party requiring the first party’s consent or approval shall not be deemed to waive or render unnecessary the first party’s consent to or approval of any subsequent similar act by the other party. The receipt of acceptance by Landlord of any rent with or without knowledge of the breach of any provision hereof shall not be deemed a waiver of any such breach unless such waiver is in writing and signed by Landlord. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or hereafter occurring. The waiver by either party of any breach of any provision of the Lease shall not be deemed to be a waiver of any subsequent breach of the same or of any other provisions herein contained.

ARTICLE 14

ASSIGNMENT AND SUBLETTING

14.1 By Tenant: The following provisions shall apply to any assignment, subletting or other transfer by Tenant or any subtenant or assignee or other successor in interest of the original Tenant (collectively referred to in this paragraph as “Tenant”):

A. Tenant shall not do any of the following (collectively referred to herein as “Transfer”), whether voluntarily, involuntarily, or by operation of law, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed: (i) assign or otherwise transfer its interest in this Lease or in the Leased Premises; (ii) sublet all or any part of the Leased Premises or allow it to be sublet, occupied, or used by any person or entity other than Tenant; (iii) transfer any right appurtenant to this Lease or the Leased Premises; (iv) mortgage or encumber the Lease (or otherwise use the Lease as a security device) in any manner; or (v) terminate or materially amend or modify an assignment, sublease or other transfer that has been previously approved by Landlord. Tenant shall reimburse Landlord for all reasonable costs and attorney’s fees incurred by Landlord in connection with the processing and/or documentation of any requested Transfer, whether or not Landlord’s consent is granted. Any Transfer so approved by Landlord shall not be effective until Tenant has paid all such costs and attorneys’ fees to Landlord and delivered to Landlord an executed counterpart of the document evidencing the Transfer which (i) is in form approved by Landlord, (ii) contains the same terms and conditions as stated in Tenant’s notice given to Landlord pursuant to subparagraph B, below, and (iii) contains the agreement of the proposed Transferee to assume all obligations of Tenant related to the Transfer arising after the effective date of such Transfer and to remain jointly and severally liable therefor with Tenant. Any attempted Transfer without Landlord’s consent shall constitute a default by Tenant and

 

20


shall be voidable at Landlord’s option. Landlord’s consent to any one Transfer shall not constitute a waiver of the provisions of this paragraph as to any subsequent transfer nor a consent to any subsequent Transfer. No Transfer, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay the rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease nor to be a consent to any Transfer. Notwithstanding anything to the contrary contained herein, Tenant shall be permitted to sublease up to twenty-five percent (25%) of the Leased Premises, without first obtaining Landlord prior written consent, and such subletting shall not be considered a Transfer hereunder, so long as such subleased space is not separately demised.

B. Tenant shall give Landlord at least twenty (20) days prior written notice of any desired Transfer and of the proposed terms of such Transfer including but not limited to (i) the name and legal composition of the proposed Transferee; (ii) an audited financial statement, if available, or an unaudited financial statement if an audited statement is not available, of the Transferee prepared in accordance with generally accepted accounting principles for a period ending not more than one year prior to the proposed effective date of the Transfer; (iii) the nature of the proposed Transferee’s business to be carried on in the Leased Premises; (iv) all consideration to be given on account of the Transfer; (v) a current financial statement of Tenant and (vi) such other information as may be reasonably requested by Landlord. Tenant’s notice shall not be deemed to have been served or given until such time as Tenant has provided Landlord with all information required by this subparagraph. Landlord may not withhold its consent to a Transfer solely because the proposed Transferee is an existing tenant in the Building.

C. In the event that Tenant seeks to make any Transfer, Landlord shall have the right to withhold its consent to such Transfer, as permitted pursuant to this Article, or to exercise any of the rights set forth in this subparagraph, by giving Tenant written notice of its election within twenty (20) days after Tenant’s notice of intent to Transfer has been given to Landlord. Without otherwise limiting the criteria upon which Landlord may withhold its consent to any proposed Transfer, if Landlord withholds its consent where the proposed Transferee’s net worth (according to generally accepted accounting principles) is less than the net worth of Tenant as of the Commencement Date, such withholding of consent shall be presumptively reasonable.

D. If Tenant is a corporation, any dissolution, merger, consolidation, or other reorganization of Tenant, or the sale or transfer in the aggregate over the Lease Term of a controlling percentage of the capital stock of Tenant, shall be deemed a voluntary assignment of Tenant’s interest in this Lease, provided, however, that the foregoing shall not apply to a corporation the capital stock of which is publicly traded. The phrase “controlling percentage” includes, but is not limited to, the ownership of and the right to vote stock possessing more than fifty percent (50%) of the total combined voting power of all classes of Tenant’s capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, any withdrawal or substitution (whether voluntary, involuntary, or by operation of law and whether occurring at one time or over a period of time) of any partner(s) owning twenty-five percent (25%) or more (cumulatively) of any interest in the capital or profits of the partnership, or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant’s interest in this Lease.

E. Tenant irrevocably assigns to Landlord, as security for Tenant’s obligations under this Lease, all rent or other consideration not otherwise payable to Landlord by reason of any Transfer. Landlord, as assignee of Tenant, or a receiver for Tenant appointed on Landlord’s application, may collect such rent or other consideration and apply it toward Tenant’s obligation under this Lease, provided, however, that until occurrence of any default by Tenant, Tenant shall have the right to collect such rent or other consideration.

 

21


F. The assignment or subletting by Tenant of all or any portion of this Lease or the Leased Premises to a corporation or entity which (i) is Tenant’s parent corporation, (ii) is a wholly-owned subsidiary of Tenant or Tenant’s parent corporation, (iii) is a corporation which Tenant or Tenant’s parent owns in excess of twenty-five percent (25%) of the outstanding capital stock, (iv) is the result of a merger or consolidation with Tenant and/or Tenant’s parent, or (v) acquires substantially all of Tenant’s assets (all such persons or entities described in clauses (i), (ii), (iii), (iv and (v) being sometimes herein referred to as “Affiliates”) shall not be deemed a Transfer under this Section 14.1 (hence, the aforesaid events shall not be subject to obtaining Landlord’s prior consent), provided in all instances that:

(1) any such Affiliate was not formed as a subterfuge to avoid the obligations of this Section;

(2) Tenant gives Landlord prior notice of any such assignment or sublease to an Affiliate;

(3) any such assignment or sublease shall be subject to all of the terms and provisions of this Lease, and such assignee or sublessee (i.e. any such Affiliate), other than in the case of an Affiliate resulting from a merger or consolidation as described above, shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord upon or prior to the effective date of such assignment or sublease, all the obligations of Tenant under this Lease;

(4) the Affiliate shall have a net worth which is at least equal to Tenant’s net worth as of the date of this Lease;

(5) the parent of the Affiliate (and a entity may not be created as a parent to limit liability) shall guaranty in writing all obligations of Tenant under this Lease in form and content reasonably acceptable to Landlord; and

(6) Tenant shall remain fully liable for all obligations to be performed by Tenant under this Lease.

G. Notwithstanding anything to the contrary in this Section 14.1, Tenant shall have the right to assign or sublease to, or from, any other tenant in the Building, provided that all terms and conditions of this Section 14.1 shall continue to apply to such Transfer, except for Paragraph 14.1(C) (i.e., in no event may Landlord withhold its consent to such a Transfer).

14.2 By Landlord: Landlord and its successors in interest shall have the right to transfer their interest in the Leased Premises and the Property at any time and to any person or entity. In the event of any such transfer, the Landlord originally named herein (and in the case of any subsequent transfer, the transferor) from the date of such transfer, (a) shall be automatically relieved, without any further act by any other person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer if its transferee agrees to assume and be bound by the terms of this Lease and to perform all obligations of the Landlord hereunder from and after the date of such transfer, and (b) shall be relieved of all liability for the performance of the obligations of the Landlord hereunder which have accrued before the date of transfer if its transferee agrees to assume and be bound by the terms of this Lease and to perform all obligations of the Landlord hereunder without limitation as to when such obligations accrue or have accrued. As used herein, the term “Landlord” shall mean the Landlord originally named herein, but following any transfer of its interest in the Leased Premises and the Property, the term “Landlord” shall thereafter mean the transferee of such interest.

ARTICLE 15

TERMINATION

15.1 Surrender of the Leased Premises: Immediately prior to the expiration or upon the earlier termination of this Lease, Tenant shall remove all Tenant’s Trade Fixtures and other personal property, repair all damage caused by the installation and removal of such property, and vacate and surrender the Leased Premises to Landlord immediately upon expiration or the earlier termination in the same condition as existed at the Commencement Date, reasonable wear and tear excepted, with (a) all interior walls and painted surfaces cleaned, (b) all holes in walls and floors repaired, (c) all carpets cleaned, and (d) all floors cleaned; all to the reasonable satisfaction of Landlord. If Landlord so requests, Tenant shall prior to the expiration or earlier termination of this Lease or within ten (10) days of Landlord’s request, whichever is later: (a) remove any Leasehold Improvements designated by Landlord, (b) repair all damage caused by such removal and (c) restore the Leased Premises to the condition existing prior to the time such removed Leasehold Improvements were initially installed. In the alternative

 

22


Landlord may elect that Tenant pay to Landlord the amount to so restore the Leased Premises to the condition required by Landlord hereunder. If the Leased Premises are not so surrendered at the expiration or earlier termination of this Lease, Tenant shall be liable to Landlord for all costs reasonably incurred by Landlord in returning the Leased Premises to the required condition, plus interest on all costs incurred at the Agreed Interest Rate. Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Leased Premises, including, without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. Any furniture, Trade Fixtures, equipment, and other personal property of Tenant or any other person left on the Leased Premises after Tenant has abandoned, vacated, or surrendered the Leased Premises shall be deemed to be abandoned and Landlord may dispose of such property as it deems expedient, at Tenant’s expense. Notwithstanding the foregoing and/or anything to the contrary contained in this Lease, Landlord acknowledges and agrees that Tenant shall not be required to remove any of the initial Tenant Improvements (as such term is defined in Exhibit C attached hereto) at the expiration or earlier termination of this Lease.

15.2 Holding Over: This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration of the Lease Term without Landlord’s written consent shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the Leased Premises. Any holding over after such expiration with the consent of Landlord shall be construed to be a tenancy from month to month on the same terms and conditions herein specified insofar as applicable except that Base Month Rent shall be increased to an amount equal to one hundred fifty percent (150%) of the Base Monthly Rent required during the last month of the Lease Term unless otherwise agreed in writing between Landlord and Tenant.

ARTICLE 16

GENERAL PROVISIONS

16.1 Landlord’s Right to Enter: Landlord and its agents may enter the Leased Premises at any time for the purpose of attending to an emergency or (upon forty-eight (48) hours prior notice to Tenant) for the purpose of (a) inspecting the same, (b) posting notices of nonresponsibility, (c) supplying any service to be provided by Landlord to Tenant, (d) showing the Leased Premises to prospective purchasers, mortgagees or tenants, (e) making necessary alterations, additions or repairs, (f) performing Tenant’s obligations when Tenant has failed to do so, and/or (g) accessing the Building utility closet, the Building timer mechanisms, and/or any other Building equipment or controls. For each of the aforesaid purposes, Landlord may enter the Leased Premises by means of a master key, and Landlord shall have the right to use any means Landlord may deem necessary to enter the Leased Premises in an emergency.

16.2 Subordination: The following provisions shall govern the relationship of this Lease to any underlying lease, mortgage or deed of trust which now or hereafter affects the Property, and any renewal, modification, consolidation, replacement, or extension thereof (a “Security Instrument”).

A. Landlord represents that, as of the date of this Lease, there are no existing Security Instruments.

B. At Landlord’s election, this Lease shall become subject and subordinate to any Security Instrument created after the Effective Date. Notwithstanding such subordination, Tenant’s right to quiet possession of the Leased Premises shall not be disturbed so long as Tenant is not in default and performs all of its obligations under this Lease, unless this Lease otherwise terminates pursuant to its terms.

C. Tenant shall execute any document or instrument required by Landlord or any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily requires in connection with such agreements, including provisions that the Lender not be liable for (i) the return of the Security Deposit unless the Lender receives it from Landlord, and (ii) any defaults on the part of Landlord occurring prior to the time the Lender takes possession of the Property in connection with the enforcement of its Security Instrument. Tenant’s failure to execute any such document or instrument shall constitute a default by Tenant.

 

23


D. With respect to a Security Instrument entered into by Landlord after the execution of this Lease, Tenant’s subordination of this Lease shall be subject to Lessee receiving a “nondisturbance agreement” from the Security Instrument holder on the Security Instrument holder’s then current commercially reasonable form providing that Tenant’s possession and this Lease will not be disturbed so long as Tenant is not in default and attorns to the record owner of the Leased Premises.

16.3 Tenant’s Attornment: Tenant shall attorn (a) to any purchaser of the Leased Premises at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the Property, (b) to any grantee or transferee designated in any deed given in lieu of foreclosure, or (c) to the Landlord under any underlying ground lease should such ground lease be terminated.

16.4 Mortgagee Protection: In the event of any default on the part of Landlord, Tenant will give notice by certified mail to any Lender whose name has been provided to Tenant and shall offer such Lender a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or judicial foreclosure or other appropriate legal proceedings, if such should prove necessary to effect a cure.

16.5 Estoppel Certificates and Financial Statements: Either party agrees, following any request by the other party, to promptly (and in no event greater than twenty (20) calendar days) execute and deliver to the requesting party an estoppel certificate upon which the requesting party and others it designates may rely (a) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (b) stating the date to which the rent and other charges are paid in advance, if any, (c) acknowledging that there are not, to the responding party’s knowledge, any uncured defaults on the part of the requesting party hereunder, or if there are uncured defaults on the part of the requesting party, stating the nature of such uncured defaults and (d) certifying such other information about this Lease as may be reasonably required by the requesting party. the responding party’s failure to deliver an estoppel certificate within twenty (20) days after delivery of the requesting party’s request therefor shall be a conclusive admission by the responding party that, as of the date of the request for such statement, (a) this Lease is unmodified except as may be represented by the requesting party in said request and is in full force and effect, (b) there are no uncured defaults in the requesting party’s performance, and (c) no rent has been paid in advance. At any time during the Lease Term, Tenant shall, upon ten (10) days’ prior written notice from Landlord, provide Tenant’s most recent financial statement and financial statements covering the twenty-four (24) months prior to the date of such most recent financial statement to any existing Lender or to any potential Lender or buyer of the Property; provided, however, the foregoing shall not apply to any Tenant that is a public company inasmuch as its financial statements are publicly available. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant.

16.6 Notices: Except as provided in any applicable unlawful detainer statutes, in which case this notice provision shall not apply, any notice required or desired to be given regarding this Lease shall be in writing and may be personally served, or in lieu of personal service, may be given by mail. If given by mail, such notice shall be deemed to have been given (a) on the third business day after mailing if such notice was deposited in the United States mail, first class, postage prepaid, addressed to the party to be served at its address first above set forth (unless mailed from or to an address in Hawaii, in which case such notice shall be deemed to have been given on the fifth business day after mailing) and (b) in all other cases when actually received. Either party may change its address by giving notice of same in accordance with this paragraph.

16.7 Attorneys’ Fees: Tenant agrees to pay all reasonable attorneys’ fees and other costs and expenses incurred by Landlord in enforcing any of Tenant’s obligations under this Lease. In the event either party shall bring any action or legal proceeding for an alleged breach of any provision of this Lease, to recover rent, to terminate this Lease or to otherwise enforce, protect or establish any term or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover as a part of such action or proceedings or in a separate action brought for that purpose, reasonable attorneys’ fees and court costs as may be fixed by the court.

 

24


16.8 Corporate Authority: If Landlord or Tenant is a corporation (or a partnership), such party represents and warrants that each individual executing this Lease on behalf of said corporation (or partnership) is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or in the case of a partnership, in accordance with the agreement of said partnership) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Landlord or Tenant is a corporation, such party shall, within ten (10) days after execution of this Lease and request therefor, deliver to the other a certified copy of the resolution of the board of directors of said corporation authorizing or ratifying the execution of this Lease.

16.9 Additional Definitions: Any term that is given a special meaning by any provision in this Lease shall have such meaning when used in this Lease or any addendum or amendment hereto. As used herein, the following terms shall have the following meanings:

A. Agreed Interest Rate: The term “Agreed Interest Rate” shall mean an interest rate of the maximum applicable rate permitted by Law.

B. Effective Date: The term “Effective Date” shall mean the reference date of this Lease appearing above.

C. Laws: The term “Law” or “Laws” shall mean all laws, rules, regulations, ordinances, directives, covenants, easements, and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, relating in any manner to the Leased Premises (including but not limited to matters pertaining to (a) industrial hygiene, (b) environmental conditions on, in, under, or about the Leased Premises, including soil and groundwater conditions, and (c) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect.

D. Leasehold Improvements: The term “Leasehold Improvements” shall mean all improvements, additions, alterations, and fixtures hereinafter installed in the Leased Premises by Tenant or at its expense which are not Trade Fixtures.

E. Private Restrictions: The term “Private Restrictions” shall mean all recorded covenants, conditions and restrictions, private agreements, and any other recorded instruments affecting the use of the Property, as they may exist from time to time, including, but not limited to, the Declaration of Covenants, Conditions and Restrictions for Anthem Village Center, the Supplemental Declaration relating to the Property, the Design Guidelines for Anthem Village Center, the Articles of Incorporation and Bylaws of Anthem Village Center Association, Inc. (“Association”), and any other governing documents related to the Association.

F. Trade Fixtures: The term “Trade Fixtures” shall mean anything affixed to the Leased Premises by Tenant at its expense for purposes of trade, manufacture, or ornament (except where Tenant replaced similar work or material originally installed by Landlord) that is specifically unique to Tenant’s business as opposed to being useful to tenants of the Leased Premises generally, which can be removed without injury to the Leased Premises unless such thing has, by the manner in which it is affixed, become an integral part of the Leased Premises, provided, however, that all of Tenant’s signs shall be Trade Fixtures regardless of how affixed to the Leased Premises.

16.10 Nevada Law: This Lease shall be governed by the Laws of the State of Nevada.

16.11 Miscellaneous: Should any provision of this Lease prove to be invalid or illegal, such invalidity shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. Any executed copy of this Lease shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. If Tenant consists of more than one person or entity, then all members of Tenant

 

25


shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the laws of the State of Nevada. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant, regardless of which party caused the same to be prepared. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. Where Tenant is obligated not to perform any act, Tenant is also obligated to restrain any others within its control from performing such act, including agents, invitees, contractors, subcontractors, and employees. Landlord shall not become or be deemed a partner or a joint venturer of Tenant by reason of this Lease.

16.11 Limitation on Tenant’s Recourse: Without limiting anything to the contrary set forth in this Lease Agreement, Tenant expressly agrees that Tenant shall have recourse only to Landlord’s equity in the real property (more particularly described in Exhibit “A” attached hereto) of which the Leased Premises are a part for the satisfaction of any monetary obligations hereunder and Tenant shall not have recourse against any other assets of Landlord whatsoever.

16.12 Brokers and Agents: Except for the Brokers referenced on the Lease Summary Information Sheet each party represents that no other Broker has represented such party with respect to this Lease transaction. Landlord shall pay to the Brokers a commission pursuant to a separate written agreement.

16.13 Entire Agreement: The Lease and any addenda or amendments hereto which are executed by Landlord and Tenant concurrently with this Lease and are attached hereto (and by this reference incorporated herein), are the entire agreement between the parties, and there are no binding agreements or representations between the parties except as expressed herein. Tenant acknowledges that neither Landlord nor Landlord’s agent(s) has made any representation or warranty as to (a) whether the Leased Premises may be used for the Permitted Use under existing Law or (b) the suitability of the Leased Premises or the Common Area for the conduct of Tenant’s business, or (c) the condition of any improvements located upon the Leased Premises or Common Areas. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease. There are no representations between Landlord and Tenant other than those contained in this Lease, and all reliance with respect to any representations is upon the representations contained herein. No subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto.

16.14 Waiver of Jury Trial: Tenant hereby waives the right to have any dispute relating to this Agreement or, in any way relating to Tenant’s occupancy of the Leased Premises, tried before a jury.

IN WITNESS WHEREOF, Landlord and Tenant hereafter execute this Lease as a binding agreement between them.

 

LANDLORD
11500 South Eastern Avenue, LLC,

a Nevada limited liability company

 

By:  

/s/ Matthew J. Deakin

  Matthew J. Deakin
Its: Agent
Date:   April 10, 2014
TENANT  
Spectrum Pharmaceuticals, Inc.,
a Delaware corporation
By:  

/s/ Ken Keller

 

Ken Keller, Executive VP

and Chief Operating Officer

Date:   April 7, 2014

 

26


EXHIBIT A

PROPERTY DEPICTION

The Property is as follows:

Property Legal Description:

ALL THAT REAL PROPERTY SITUATED IN THE COUNTY OF CLARK, STATE OF NEVADA, BOUNDED AND DESCRIBED AS FOLLOWS:

PARCEL 1 AS SHOWN BY MAP THEREOF ON FILE IN FILE 93 OF PARCEL MAPS, PAGE 74, IN THE OFFICE OF THE COUNTY RECORDER OF SAID CLARK COUNTY, NEVADA.

Property Tax ID Number: 190-06-101-005

Depiction of Property:

 

1


 

LOGO

 

2


EXHIBIT B

LEASED PREMISES DEPICTION

The Leased Premises are commonly known as 11500 S. Eastern Avenue, Suites 220, 240 & 270, Henderson, Nevada 89052 and are depicted as the hatch-marked areas below:

 

LOGO

 

1


EXHIBIT C

TENANT IMPROVEMENTS

This Exhibit (Exhibit C) is dated April 7, 2014, and is incorporated as a part of that certain Lease Agreement dated April 7, 2014 (the “Lease”), by and between 11500 South Eastern Avenue, LLC, a Nevada limited liability company (“Landlord”), and Spectrum Pharmaceuticals, Inc., a Delaware corporation (“Tenant”), for the leasing of those certain premises commonly known as 11500 S. Eastern Avenue, Suites 220, 240 & 270, Henderson, Nevada 89052 (the “ Leased Premises”). Any capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms as set forth in the Lease. Landlord and Tenant agree that the Lease is hereby modified and supplemented as follows:

1. Tenant To Construct Tenant Improvements. Subject to the provisions below, Tenant shall be solely responsible for the planning, construction and completion of the interior tenant improvements (“Tenant Improvements”) to the Leased Premises in accordance with the terms and conditions of this Exhibit C. The Tenant Improvements shall not include any of Tenant’s personal property, trade fixtures, furnishings, equipment or similar items (other than an electronic security system for the Premises).

2. Tenant Improvement Plans.

A. Preliminary Plans and Specifications. Tenant shall retain a licensed and insured architect (“Architect”) to prepare preliminary working architectural and engineering plans and specifications (“Preliminary Plans and Specifications”) for the Tenant Improvements. Tenant shall deliver the Preliminary Plans and Specifications to Landlord. The Preliminary Plans and Specifications shall be in sufficient detail to show locations, types and requirements for all heat loads, people loads, floor loads, power and plumbing, regular and special HVAC needs, telephone communications, telephone and electrical outlets, lighting, lighting fixtures and related power, and electrical and telephone switches. Landlord shall reasonably approve or disapprove the Preliminary Plans and Specifications within ten (10) business days after Landlord receives the Preliminary Plans and Specifications and, if disapproved, Landlord shall return the Preliminary Plans and Specifications to Tenant, who shall make all necessary revisions within ten (10) business days after Tenant’s receipt thereof. This procedure shall be repeated until Landlord approves the Preliminary Plans and Specifications. The approved Preliminary Plans and Specifications, as modified, shall be deemed the “Final Preliminary Plans and Specifications”.

B. Final Plans and Specifications. After the Final Preliminary Plans and Specifications are approved by Landlord and are deemed to be the Final Preliminary Plans and Specifications, Tenant shall cause the Architect to prepare in twenty (20) days following Landlord’s approval of the Final Preliminary Plans and Specifications the final working architectural and engineering plans, specifications and drawings, (“Final Plans and Specifications”) for the Tenant Improvements. Tenant shall then deliver the Final Plans and Specifications to Landlord. Landlord shall reasonably approve or disapprove the Final Plans and Specifications within five (5) business days after Landlord receives the Final Plans and Specifications and, if disapproved, Landlord shall return the Final Plans and Specifications to Tenant who shall make all necessary revisions within ten (10) days after Tenant’s receipt thereof. This procedure shall be repeated until Landlord approves, in writing, the Final Plans and Specifications. The approved Final Plans and Specifications, as modified, shall be deemed the “Construction Documents”.

C. Miscellaneous. All deliveries of the Preliminary Plans and Specifications, the Final Preliminary Plans and Specifications, the Final Plans and Specifications, and the Construction Documents shall be delivered by messenger service, by personal hand delivery or by overnight parcel service. While Landlord has the right to approve the Preliminary Plans and Specifications, the Final Preliminary Plans and Specifications, the Final Plans and Specifications, and the Construction Documents, Landlord’s interest in doing so is to protect the Leased Premises, the Building and Landlord’s interest. Accordingly, Tenant shall not rely upon Landlord’s approvals and Landlord shall not be the guarantor of, nor responsible for, the adequacy and correctness or accuracy of the Preliminary Plans and Specifications, the

 

1


Final Preliminary Plans and Specifications, the Final Plans and Specifications, and the Construction Documents, or the compliance thereof with applicable laws, and Landlord shall incur no liability of any kind by reason of granting such approvals.

D. Building Standard Work. The Construction Documents shall provide that the Tenant Improvements to be constructed in accordance therewith must be at least equal, in quality, to Landlord’s building standard materials, quantities and procedures then in use by Landlord (“Building Standards”) and shall consist of improvements which are generic in nature unless otherwise agreed to by Landlord.

E. Construction Agreements. Tenant hereby covenants and agrees that a provision shall be included in each and every agreement made with the Architect and the Contractor with respect to the Tenant Improvements specifying that Landlord shall be a third party beneficiary thereof, including without limitation, a third party beneficiary of all covenants, representations, indemnities and warranties made by the Architect and/or Contractor.

3. Permits. Tenant at its sole cost and expense (subject to the provisions of Paragraph 5 below) shall obtain all governmental approvals to the full extent necessary for the issuance of a building permit for the Tenant Improvements based upon such Construction Documents. Tenant at its sole cost and expense shall also cause to be obtained all other necessary approvals and permits from all governmental agencies having jurisdiction or authority for the construction and installation of the Tenant Improvements in accordance with the approved Construction Documents. Tenant at its sole cost and expense (subject to the provisions of Paragraph 5 below) shall undertake all steps necessary to insure that the construction of the Tenant Improvements is accomplished in compliance with all statutes, laws, ordinances, codes, rules, and regulations applicable to the construction of the Tenant Improvements and the requirements and standards of any insurance underwriting board, inspection bureau or insurance carrier insuring the Leased Premises and/or the Building.

4. Construction.

A. Tenant shall be solely responsible for the construction, installation and completion of the Tenant Improvements in accordance with the Construction Documents approved by Landlord and is solely responsible for the payment of all amounts when payable in connection therewith without any cost or expense to Landlord, except for Landlord’s obligation to contribute the Tenant Improvement Allowance in accordance with the provisions of Paragraph 5 below. Tenant shall diligently proceed with the construction, installation and completion of the Tenant Improvements in accordance with the Construction Documents and the completion schedule reasonably approved by Landlord. No material changes shall be made to the Construction Documents and the completion schedule approved by Landlord without Landlord’s prior written consent, which consent shall not be unreasonably withheld or delayed.

B. Tenant at its sole cost and expense (subject to the provisions of Paragraph 5 below) shall employ a licensed, insured and bonded general contractor (“Contractor”), reasonably acceptable to Landlord, to construct the Tenant Improvements in accordance with the Construction Documents. The construction contracts between Tenant and the Contractor and between the Contractor and subcontractors shall be subject to Landlord’s prior written approval, which approval shall not be unreasonably withheld or delayed. Proof that the Contractor is licensed in Nevada, is bonded as required under Nevada law, and has the insurance specified in Exhibit C-1, attached hereto and incorporated herein by this reference, shall be provided to Landlord at the time that Tenant requests approval of the Contractor from Landlord. Tenant shall comply with or cause the Contractor to comply with all other terms and provisions of Exhibit C-1.

C. Prior to the commencement of the construction and installation of the Tenant Improvements, Tenant shall provide the following to Landlord, all of which shall be to Landlord’s reasonable satisfaction:

(i) An estimated budget and cost breakdown for the Tenant Improvements.

(ii) Estimated completion schedule for the Tenant Improvements.

 

2


(iii) Copies of all required approvals and permits from governmental agencies having jurisdiction or authority for the construction and installation of the Tenant Improvements; provided, however, if prior to commencement of the construction and installation of Tenant Improvements Tenant has not received the electrical, plumbing or mechanical permits, Tenant shall only be required to provide Landlord with evidence that Tenant has made application therefor, and, upon receipt by Tenant of such permits, Tenant shall promptly provide Landlord with copies thereof.

(iv) Evidence of Tenant’s procurement of insurance required to be obtained pursuant to the provisions of Paragraphs 4.B and 4.G.

D. Landlord shall at all reasonable times have a right to inspect the Tenant Improvements (provided Landlord does not materially interfere with the work being performed by the Contractor or its subcontractors) and Tenant shall immediately cease work upon written notice from Landlord if the Tenant Improvements are not in compliance with the Construction Documents approved by Landlord. If Landlord shall give notice of faulty construction or any other deviation from the Construction Documents, Tenant shall cause the Contractor to make corrections promptly. However, neither the privilege herein granted to Landlord to make such inspections, nor the making of such inspections by Landlord, shall operate as a waiver of any rights of Landlord to require good and workmanlike construction and improvements constructed in accordance with the Construction Documents.

E. Subject to Landlord complying with its obligations in Paragraph 5 below, Tenant shall pay and discharge promptly and fully all claims for labor done and materials and services furnished in connection with the Tenant Improvements. The Tenant Improvements shall not be commenced until after Landlord has received prior notice from Tenant stating the date the construction of the Tenant Improvements is to commence so that Landlord can post and record any appropriate Notice of Non-responsibility.

F. Tenant acknowledges and agrees that the agreements and covenants of the Lease shall be fully applicable to Tenant’s construction of the Tenant Improvements.

G. Tenant shall maintain, and cause to be maintained, during the construction of the Tenant Improvements, at its sole cost and expense, insurance of the types and in the amounts specified in Exhibit C-1 and in the Lease, together with builders’ risk insurance for the amount of the completed value of the Tenant Improvements on an all-risk non-reporting form covering all improvements under construction, including building materials, and other insurance in amounts and against such risks as the Landlord shall reasonably require in connection with the Tenant Improvements.

H. No materials, equipment or fixtures shall be delivered to or installed upon the Leased Premises pursuant to any agreement by which another party has a security interest or rights to remove or repossess such items, without the prior written consent of Landlord, which consent shall not be unreasonably withheld.

I. Landlord reserves the right to establish reasonable rules and regulations for the use of the Building during the course of construction of the Tenant Improvements, including, but not limited to, construction parking, storage of materials, hours of work, use of elevators, and clean-up of construction related debris.

J. Upon completion of the Tenant Improvements, Tenant shall deliver to Landlord the following, all of which shall be to Landlord’s reasonable satisfaction:

(i) Any certificates required for occupancy, including a permanent and complete Certificate of Occupancy (or the jurisdictional equivalent) issued by the city in which the Leased Premises are located.

(ii) A Certificate of Completion signed by the Architect who prepared the Construction Documents, reasonably approved by Landlord.

(iii) A cost breakdown itemizing all expenses for the Tenant Improvements, together with invoices and receipts for the same or other evidence of payment.

 

3


(iv) Final and unconditional mechanic’s lien waivers for all the Tenant Improvements.

(v) A Notice of Completion for execution by Landlord, which certificate once executed by Landlord shall be recorded by Tenant in the official records of the county in which the Leased Premises are located, and Tenant shall then deliver to Landlord a true and correct copy of the recorded Notice of Completion.

(vi) A true and complete copy of all as-built plans and drawings for the Tenant Improvements.

5. Tenant Improvement Allowance.

A. Subject to Tenant’s compliance with the provisions of this Exhibit C, Landlord shall provide an allowance for the planning, designing, obtaining approvals of, permitting, and construction of the Tenant Improvements to be performed in the Leased Premises, as described in the Initial Plans and the Approved Final Drawings, in the amount of Seventy Two Thousand Seven Hundred and Twenty Dollars ($72,720.00) (the “Tenant Improvement Allowance”). Tenant shall not be entitled to any credit, abatement or payment from Landlord in the event that the amount of the Tenant Improvement Allowance specified above exceeds the actual Tenant Improvement Costs. The Tenant Improvement Allowance shall only be used for tenant improvements typically installed by Landlord in buildings similar to that of which the Leased Premises are located which are generic in nature and that will likely be used by a subsequent tenant for normal use of the Leased Premises (referred to herein as “Generic Improvements”). For example, Generic Improvements would include items such as new or relocated office demising walls and Building Standard electrical, any electronic security systems, plumbing and mechanical fixtures, equipment and distribution and telecommunications and network installations useable by any subsequent tenant, while items such as lab equipment and cabling and piping specific to Tenant’s business operations would not be considered Generic Improvements. The Tenant Improvement Allowance shall be the maximum contribution by Landlord for the Tenant Improvement Costs and shall be subject to the provisions of Section 10 below. Landlord shall pay to Tenant all or any portion of the Tenant Improvement Allowance in monthly progress payments as set forth in Section 5(B) below, and Tenant shall comply with all time requirements hereunder. The costs to be paid out of the Tenant Improvement Allowance shall include all reasonable costs and expenses associated with the design, preparation, approval, planning, construction and installation of the Tenant Improvements and shall include the cost of any signage permitted by this Lease (the “Tenant Improvement Costs”). The Tenant Improvement Allowance shall be the maximum contribution by Landlord for the Tenant Improvement Costs, and the disbursement of the Tenant Improvement Allowance is subject to the terms contained hereinbelow.

B. Payment of the Allowance shall be made in monthly progress payments, and Tenant’s written request for each monthly progress payment shall include: (a) receipt by Landlord of unconditional mechanics’ lien releases from the Contractor and all subcontractors, labor suppliers and materialmen for all work performed; (b) receipt by Landlord of any and all documentation reasonably required by Landlord detailing the work that has been completed and the materials and supplies used, including, without limitation, invoices, bills, or statements for the work completed and the materials and supplies used; and (c) Tenant’s architect’s certification that all work and materials billed for has been completed and installed in the Premises. Landlord shall have the right to perform any inspections of the work completed and materials and supplies used as deemed reasonably necessary by Landlord to assure that the payment request is proper. The monthly progress payments of the Allowance shall be paid to Tenant within fifteen (15) days from the satisfaction of the conditions set forth in the immediately preceding sentence and Tenant’s compliance with all other terms of this agreement. Landlord shall not be obligated to pay any Allowance payment if on the date Tenant is entitled to receive the Allowance payment Tenant is in default of the Lease. Furthermore, Landlord shall have no obligation to pay to Tenant all or any portion of the Tenant Improvement Allowance unless Tenant timely complies with all time requirements hereunder and such that all work is completed and the Tenant Improvement Allowance is to be paid within eighteen (18) months from the date of the Lease.

C. Should the total cost of constructing the Tenant Improvements be less than the Tenant Improvement Allowance, the Tenant Improvement Allowance shall be automatically reduced to the amount equal to said actual cost.

 

4


D. The term “Excess Tenant Improvement Costs” as used herein shall mean and refer to the aggregate of the amount by which the actual Tenant Improvement Costs exceed the Tenant Improvement Allowance all of which shall be paid for by Tenant.

6. Termination. If the Lease is terminated prior to the date on which the Tenant Improvements are completed, for any reason due to the default of Tenant hereunder, in addition to any other remedies available to Landlord under the Lease, Tenant shall pay to Landlord as Additional Rent under the Lease, within five (5) days of receipt of a statement therefor, any and all costs incurred by Landlord and not reimbursed or otherwise paid by Tenant through the date of termination in connection with the Tenant Improvements to the extent planned, installed and/or constructed as of such date of termination, including, but not limited to, any costs related to the removal of all or any portion of the Tenant Improvements and restoration costs related thereto.

7. Change Requests. No material changes or revisions to the Approved Final Drawings which require Landlord’s consent hereunder shall be made by Tenant unless approved in writing by Landlord. Upon Tenant’s request and submission by Tenant (at Tenant’s sole cost and expense) of the necessary information and/or plans and specifications for any such changes or revisions to the Approved Final Drawings and/or for any work other than the Work described in the Approved Final Drawings (“Change Requests”) and the approval by Landlord of such Change Request(s), which approval Landlord agrees shall not be unreasonably withheld and which will be confirmed by Landlord’s initialing the same, Tenant shall perform the additional work associated with the approved Change Request(s), subject to reimbursement to the extent of any then remaining balance of the Tenant Improvement Allowance.

8. Lease Provisions; Conflict. The terms and provisions of the Lease, insofar as they are applicable, in whole or in part, to this Exhibit C, are hereby incorporated herein by reference. In the event of any conflict between the terms of the Lease and this Exhibit C, the terms of this Exhibit C shall prevail. Any amounts payable by Tenant to Landlord hereunder shall be deemed to be Additional Rent under the Lease and, upon any default in the payment of same, Landlord shall have all rights and remedies available to it as provided for in the Lease.

 

5


EXHIBIT C-1

CONSTRUCTION INSURANCE REQUIREMENTS

Before commencing work, the contractor shall procure and maintain at its sole cost and expense until completion and final acceptance of the work, at least the following minimum levels of insurance.

A. Workers’ Compensation in statutory amounts and Employers Liability Insurance in the minimum amounts of $100,000 each accident for bodily injury by accident and $100,000 each employee for bodily injury by disease with a $500,000 policy limit, covering each and every worker used in connection with the contract work.

B. Commercial General Liability Insurance on an occurrence basis including, but not limited to, protection for Premises/Operations Liability, Broad Form Contractual Liability, Owner’s and Contractor’s Protective, and Products/Completed Operations Liability*, in the following minimum limits of liability.

Bodily Injury, Property Damage, and

Personal Injury Liability                                    $1,000,000/each occurrence

                                                                                      $2,000,000/aggregate

 

* Products/Completed Operations Liability Insurance is to be provided for a period of at least one (1) year after completion of work.

Coverage should include protection for Explosion, Collapse and Underground Damage.

C. Comprehensive Automobile Liability Insurance with the following minimum limits of liability.

Bodily Injury and Property                                $1,000,000/each occurrence

Damage Liability                                                $2,000,000/aggregate

This insurance will apply to all owned, non-owned or hired automobiles to be used by the Contractor in the completion of the work.

D. Intentionally Omitted.

E. Equipment and Installation coverages in the broadest form available, but excluding coverage for Contractor’s tools and equipment and material not accepted by Tenant. Tenant will provide Builders Risk Insurance on all accepted and installed materials.

All policies of insurance, duplicates thereof or certificates evidencing coverage shall be delivered to Landlord prior to commencement of any work and shall name Landlord, and its partners and lenders as additional insureds as their interests may appear. All insurance policies shall (1) be issued by a company or companies licensed to be business in the state of Nevada, (2) provide that no cancellation, non-renewal or material modification shall be effective without thirty (30) days prior written notice provided to Landlord, (3) provide no deductible greater than $15,000 per occurrence, (4) contain a waiver to subrogation clause in favor of Landlord, and its partners and lenders, and (5) comply with the requirements of the Lease to the extent such requirements are applicable.

 

6


EXHIBIT D

COMMENCEMENT DATE AGREEMENT

 

Landlord: 11500 South Eastern Avenue, LLC

 

Tenant: Spectrum Pharmaceuticals, Inc.

 

Lease Date: April 7, 2014

 

Leased Premises: 11500 S. Eastern Avenue, Suites 220, 240 & 270, Henderson, Nevada 89052

Tenant hereby accepts the Leased Premises as being in the condition required under the Lease.

The Commencement Date of the Lease is                                         ,                      .

The Expiration Date of the Lease is                                         ,                         .

The Base Rent schedule is as follows:

 

Period

  

Base Monthly Rent

            -                     [Months 1-4]

   $0.00 (Full Service Gross)*

            -                     [Months 5-12]

   $21,287.95 (Full Service Gross)

            -                     [Months 13-24]

   $21,863.30 (Full Service Gross)

            -                     [Months 25-36]

   $22,438.65 (Full Service Gross)

            -                     [Months 37-48]

   $23,589.35 (Full Service Gross)

            -                     [Months 49-60]

   $24,164.70 (Full Service Gross)

LANDLORD

11500 South Eastern Avenue, LLC,

a Nevada limited liability company

 

By:  

 

Its:  

Date:

 

 

TENANT

Spectrum Pharmaceuticals, Inc.,

a Delaware corporation

By:  

 

Kurt A. Gustafson, Executive Vice President and Chief Financial Officer


EXHIBIT E

RULES AND REGULATIONS

1. Tenant, or its officers, agents, employees, contractors or vendors, shall not obstruct sidewalks, doorways, vestibules, halls, corridors, stairways, 1obbies and other common areas (the “Public Areas”) with refuse, furniture, boxes, or other items. The Public Areas shall not be used for any purpose other than ingress and egress to and from Leased Premises, or for going from one part of the Building to another part of the Building. Tenant’s doors to the Leased Premises shall not be blocked open and shall remain closed at all times unless first approved in writing by Landlord in its sole discretion.

2. Plumbing, fixtures and appliances shall be used only for the purposes for which constructed and no unsuitable material shall be placed therein.

3. No signs, directories, posters, advertisements, or notices shall be painted on or affixed to any portion of the Building or Leased Premises or other parts of the Building. Including within Tenant’s Leased Premises, which are visible from any Public Areas or the Building exterior, except in such color, size, and style, and in such places, as shall be first approved in writing by Landlord at its sole discretion. The Leased Premises shall be identified by a standard suite sign, which Landlord shall order at Tenant’s expense. Landlord shall have the right to remove all unapproved signs without notice to Tenant, at Tenant’s expense.

4. Tenant shall not do, or permit anything to be done in or about the Building, or bring or keep anything there in, that will in any way increase the possibility of fire or other hazard or increase rate of fire or other insurance on the Building. Tenant shall not use or keep in the Building any Inflammable or explosive fluid or substance or any illuminating materials. No space heater or portable fans shall be operated in the Building. Tenant must submit to Landlord a certificate of Fire Retardancy for any fresh evergreens (i.e., Christmas tree, wreaths) to be brought onto the Leased Premises.

5. Tenant shall notify Landlord when safes or other heavy equipment are to be taken in or out of the Building, and such moving shall only be done after written permission is obtained from Landlord on such conditions as Landlord may require at its sole discretion. Landlord shall have the power to prescribe the weight and position of heavy equipment or other objects, which may overstress any portion of the Building. All damage done to the Building by such heavy items will be repaired at the sole expense of the responsible Tenant,

6. During normal business hours, Tenant may receive routine deliveries at the Leased Premises (i.e., office supplies, bottled water, mail couriers and parcel shipments). All such deliveries must be made via the Building’s designated service access route and under no circumstances through the front lobby door. Tenant’s initial move-in, move-out and all other non-routine deliveries (i.e., furnishings, large equipment) must occur after normal business hours and only after written permission is obtained from Landlord, on such conditions as Landlord may require in its sole discretion.

7. Tenant shall cooperate with Landlord in keeping the Leased Premises neat and clean.

8. Tenant shall not cause or permit any improper noises in the Building, or allow any unpleasant odors to emanate from the Leased Premises, or otherwise interfere, injure or annoy in any way other Tenants in the Building, or persons having business with them.

9. No animals shall be brought into or kept in or about the Building, with the exception of aid animals such as Seeing Eye dogs.

10. When conditions are such that Tenant must dispose of small shipping crates or boxes, it will be the responsibility of Tenant to break down and dispose of same in the refuse container designated by Landlord. The disposal of large shipping crates or boxes (or other large objects or quantities), which in Landlord’s sole determination could overload the designated refuse container, must be accommodated through Tenant’s mover or vendor or may otherwise be prearranged through Landlord at an additional charge to Tenant’s account.

 

1


11. No machinery of any kind, other than ordinary office machines such as typewriters, calculators, facsimile equipment and personal computer equipment shall be operated on the Leased Premises unless first approved in writing by Landlord in its sale discretion.

12. No bicycles, motorcycles or similar vehicles will be allowed in the Building. Segways and other similar multi-purpose motorized vehicles shall not be allowed in the building unless, and only to the extent that, they are necessary to assist a bona fide medical condition and do not otherwise interfere with the operation of the Building or the use of the Building by other tenants.

13. No nails, hooks, or screws shall be driven into or inserted in any part of the Building unless first approved in writing by Landlord in its reasonable discretion.

14. After normal business hours, Landlord reserves the right to exclude from the Building any person who does not possess an authorized means of access such as a key, card key, or a prearranged written authorization and who is otherwise not an employee or guest of Tenant. Tenant and its officers, agents or employees shall utilize card keys only as instructed by Landlord and in no event shall Tenant allow access to anyone, other than its officers, agents, employees, guests or vendors.

15. Canvassing, soliciting and peddling in Public Areas, or otherwise within the Building, are strictly prohibited. Unless otherwise approved by Landlord in writing, Tenant shall not use the Leased Premises for the sale of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to other tenants in the Building or the general public. Tenant shall not use the Leased Premises for any business or activity other than that specifically provided for in Tenant’s lease. Tenant shall not make door-to-door solicitation of business from other tenants in the Building.

16. Landlord shall initially provide tenant up to five (5) keys to the Leased Premises. Tenant shall make no duplicates of such keys. Additional keys shall be obtained only from Landlord at a cost of material + 10% plus labor fee of $40/hr (minimum labor fee $20). Replacement of door locks will be at cost of material + 10% plus labor fee of $40/hr (minimum labor fee $20). Any keying of offices within the Leased Premises must be done by Landlord’s locksmith. Upon termination of Tenant’s lease, Tenant shall surrender all keys to the Leased Premises (and, if applicable, card keys and key fobs) to Landlord and shall otherwise give Landlord the combination of all locks on the Leased Premises. If applicable, initial five (5) key fobs for security access to the building will be provided to the Tenant. Replacement key fobs will be at a cost of $12/each.

17. Tenant will not locate furnishings or cabinets adjacent to mechanical or electrical access panels or over air conditioning outlets so as to prevent operating personnel from servicing such units us routine or emergency access may require. Cost of moving such furnishings for Landlord’s access will be billed to Tenant. The lighting and air conditioning equipment of the Building is the within the exclusive control of Landlord and its employees.

18. Tenant shall comply with all parking rules and regulations as posted and distributed by Landlord from time to time.

19. No portion of the Building shall be used for the purpose of lodging rooms.

20. Tenant shall use commercially reasonable efforts not to waste electricity, water or other utilities. Tenant will comply with any governmental energy-saving rules, laws or regulations of which Tenant has received notice. Tenant agrees to cooperate fully with Landlord to assure the effective operation of the Building’s Heating and air conditioning and to refrain from adjusting thermostat controls.

21. Tenant shall not place vending machines or dispensing machines of any kind in the Leased Premises, unless first approved in writing by Landlord in its sale discretion.

 

2


22. Landlord’s written approval, which shall be at Landlord’s sole discretion, must be obtained prior to changing from the standard blinds. Landlord will control all blinds and internal lighting that may be visible from the exterior or Public Areas of the Building and shall have the right to change any unapproved blinds and lighting at Tenant’s expense.

23. Except as provided in the Lease, Tenant shall not make any changes or alterations to any portion of the Building without Landlord’s prior written approval, which may be given on such conditions as Landlord may require in its sole discretion. Except as otherwise directed by Landlord, all such work shall be done by Landlord or by Landlord’s contractors and/or workers approved by Landlord (at Tenant’s expense), who must work under Landlord’s supervision and within Landlord’s standards and guidelines.

24. Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant’s address, without Landlord’s prior written approval, which may be given on such conditions as Landlord may require in its sole discretion.

25. Tenant shall comply with all safety, fire protection, and evacuation procedures and regulations established by Landlord or any governmental agency, Landlord has the right to evacuate the Building in the event of all emergency or catastrophe. Landlord reserves the right to prevent access to the Building in cases of invasion, mob, riot, bomb threat, public excitement or other commotion by closing the doors or by taking other appropriate action.

26. Tenant assumes any and all responsibility for protecting the Leased Premises from theft, robbery and pilferage, which includes keeping doors locked when the Leased Premises are not fully inhabited.

27. Smoking is permitted outside in designated areas only.

28. Tenant shall have the non-exclusive us of the common area amenities to the Building. Such amenities shall include the kitchen, balcony and related furniture and conference room. A Tenant’s use of such amenities must be coordinated through the building management. Each Tenant is responsible for returning the condition of such amenities in the same condition in which it was found.

29. Landlord has the right to designate a property management company to, among other things, monitor and enforce the Rules and Regulations,

30. Tenant is solely responsible for the cost to maintain and repair any and all “Above Standard” items installed within their Leased Premises (i.e., computer room air conditioning unit, sinks, garbage disposals, dishwashers, custom locking devices, specialty lighting. private restroom fixtures. etc.)

31. Subject to the terms and conditions of the Lease, Landlord, in its reasonable discretion, reserves the right to rescind any of these rules and regulations and to make such other and further reasonable rules and regulations that are customary in the industry as shall from time to time be required for the successful and professional operation of’ the Building, which rules shall be binding upon each tenant and its officers, agents, employees, guests and vendors upon delivery to tenant.

 

3


ADDENDUM ONE

TENANT’S RIGHT OF FIRST OFFER FOR ADDITIONAL SPACE

This Addendum (the “Addendum”) is incorporated as a part of that certain Lease Agreement dated April 7, 2014 (the “Lease”), by and between 11500 South Eastern Avenue, LLC, a Nevada limited liability company (“Landlord”), and Spectrum Pharmaceuticals, Inc., a Delaware corporation (“Tenant”), for the leasing of those certain premises commonly known as 11500 S. Eastern Avenue, Suites 220, 240 & 270, Henderson, Nevada 89052 (the “Leased Premises”). Any capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms as set forth in the Lease.

1. Right of First Offer. During the of Lease Term, Tenant shall have a one time right of first offer (“First Offer Right”) to lease that certain space more commonly known as 11500 S. Eastern Avenue, Suite 250, Henderson, Nevada 89052 as is depicted on Exhibit A, attached hereto (the “First Offer Space”), which may become available for lease as provided hereinbelow and as determined by Landlord. For purposes hereof, the First Offer Space shall become available for lease to Tenant when Landlord decides to begin marketing such space for lease and, in any event, before Landlord executes a lease for such space to any tenant other than Imagine Marketing. Notwithstanding anything herein to the contrary, Tenant’s First Offer Right set forth herein shall be subject and subordinate (i) to all expansion, first offer and similar rights currently set forth in any lease which has been executed as of the date of execution of the Lease, as such leases may be modified, amended or extended, and (ii) to any negotiations between Landlord and the existing tenant in the First Offer Space, Imagine Marketing (collectively, the “Superior Rights”).

2. Terms and Conditions. Landlord shall give Tenant written notice (the “First Offer Notice”) that the First Offer Space will or has become available for lease as provided above (as such availability is determined by Landlord) pursuant to the terms of Tenant’s First Offer Right, as set forth in this Addendum, provided that no holder of Superior Rights desires to lease all or any portion of such space. Any such Landlord’s First Offer Notice delivered by Landlord in accordance with the provisions of Section 1 above shall set forth, the anticipated date upon which the First Offer Space will be available for lease by Tenant. As of the commencement of the First Offer Space term, Landlord shall deliver to Tenant possession of the First Offer Space in its then existing condition and state of repair, “AS IS”, without any obligation of Landlord to remodel, improve or alter the First Offer Space, to perform any other construction or work of improvement upon the First Offer Space, or to provide Tenant with any construction or refurbishment allowance. Tenant acknowledges that no representations or warranties of any kind, express or implied, respecting the condition of the First Offer Space or the Building have been made by Landlord or any agent of Landlord to Tenant, except as expressly set forth herein. Tenant further acknowledges that neither Landlord nor any of Landlord’s agents, representatives or employees have made any representations as to the suitability or fitness of the First Offer Space for the conduct of Tenant’s business, or for any other purpose. Any exception to the foregoing provisions must be made by express written agreement signed by both parties.

3. Procedure for Acceptance. On or before the date which is ten (10) days after Tenant’s receipt of Landlord’s First Offer Notice (the “Election Date”), Tenant shall deliver written notice to Landlord (“Tenant’s Election Notice”) pursuant to which Tenant shall have the one-time right to elect either to: (i) expand the Leased Premises to include the entire First Offer Space described in the First Offer Notice upon the same rental rate then in effect hereunder and the same other terms as in the Lease (with the Base Monthly Rent and Tenant’s Allocated Share increased proportionately based on the square footage increase of the Leased Premises); or (ii) refuse to lease such First Offer Space identified in the First Offer Notice. If Tenant does not respond in writing to Landlord’s First Offer Notice by the Election Date, Tenant shall be deemed to have elected not to lease the First Offer Space. If Tenant elects or is deemed to have elected not to lease the First Offer Space, then Tenant’s First Offer Right set forth in this Addendum shall terminate and Landlord shall thereafter have the right to lease all or any portion of such First Offer Space to anyone to whom Landlord desires on any terms Landlord desires.

 

1


4. Lease of First Offer Space. If Tenant timely exercises this First Offer Right as set forth herein, Tenant shall provide Landlord a non-refundable deposit, equivalent to the first month’s Base Monthly Rent for the First Offer Space and the parties shall have ten (10) business days after Landlord receives Tenant’s Election Notice and deposit from Tenant in which to execute an amendment to the Lease adding such First Offer Space to the Leased Premises on all of the terms and conditions as applicable to the initial Premises, as modified to reflect the terms and conditions as set forth above except that the commencement date of the First Offer Space shall be the date of its availability for Tenant. Notwithstanding anything to the contrary contained herein, Tenant must elect to exercise its First Offer Right provided herein, if at all, with respect to all of the space offered by Landlord to Tenant in Landlord’s First Offer Notice, and Tenant may not elect to lease only a portion thereof.

5. Limitations on, and Conditions to, First Offer Right. Notwithstanding anything in the foregoing to the contrary, at Landlord’s option, and in addition to all of Landlord’s remedies under the Lease, at law or in equity, the First Offer Right hereinabove granted to Tenant shall not be deemed to be properly exercised if any of the following events occur or any combination thereof occur: (i) Tenant is then in default of the performance of any of the covenants, conditions or agreements to be performed under the Lease, or Tenant has been in default of the performance of any particular covenant, condition or agreement to be performed under the Lease on more than three (3) separate occasions; and/or (ii) on the scheduled commencement date for Tenant’s lease of the First Offer Space, Tenant is in default under the Lease; and/or (iii) Tenant has assigned its rights and obligations under all or part of the Lease or Tenant has subleased all or part of the Leased Premises; and/or (iv) Tenant has failed to exercise properly this First Offer Right in a timely manner in accordance with the provisions of this Addendum; and/or (v) if the Lease has been terminated earlier, pursuant to the terms and provisions of the Lease; and/or (vii) Tenant has previously elected not to lease all or any portion of the First Offer Space following notice from Landlord as set forth above. In addition, Tenant’s First Offer Right to lease the First Offer Space is personal to the original Tenant executing the Lease, and may not be assigned or exercised, voluntarily or involuntarily, by or to, any person or entity other than the original Tenant, and shall only be available to and exercisable by the Tenant when the original Tenant is in actual and physical possession of the entire Premises.

6. Brokers. Tenant warrants that it has had no dealings with any real estate broker or agent that could claim a commission through Tenant as a result of this First Offer Right. If Tenant has dealt with any person, real estate broker or agent with respect to this First Offer Right, Tenant shall be solely responsible for the payment of any fee due to said person or firm, and Tenant shall indemnify, defend and hold Landlord free and harmless against any claims, judgments, damages, costs, expenses, and liabilities with respect thereto, including attorneys’ fees and costs. Landlord warrants that it has had no dealings with any real estate broker or agent that could claim a commission through Landlord as a result of this First Offer Right. If Landlord has dealt with any person, real estate broker or agent with respect to this First Offer Right, Landlord shall be solely responsible for the payment of any fee due to said person or firm, and Landlord shall indemnify, defend and hold Tenant free and harmless against any claims, judgments, damages, costs, expenses, and liabilities with respect thereto, including attorneys’ fees and costs.

 

2


EXHIBIT A TO ADDENDUM ONE

DEPICTION OF FIRST REFUSAL SPACE

The First Refusal Space is commonly known as 11500 S. Eastern Avenue, Suite 250, Henderson, Nevada 89052 and is depicted as the hatch-marked area below:

 

LOGO

 

3

EX-10.2

Exhibit 10.2

FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

This FIRST AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT (this “Amendment”), is dated effective as of April 17, 2014, 2014 (the “Effective Date”) between Spectrum Pharmaceuticals, Inc., a Delaware corporation (“Corporation”), and Dr. Rajesh C. Shrotriya (“Executive”).

WHEREAS, Executive and Corporation entered into an Executive Employment Agreement dated January 2, 2008 (the “Agreement”); and

WHEREAS, Executive and Corporation desire to amend the Agreement on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Agreement is hereby amended effective as of the Effective Date as set forth in this Amendment:

1. Section 1.1 of the Agreement shall be amended and restated in its entirety by the following:

“The Corporation shall hereby continue to employ Executive and Executive hereby accepts such continuing employment as Chairman and Chief Executive Officer of Corporation upon the terms and provisions set forth in this Agreement. Executive shall be the most senior executive officer at Corporation. All other executive officers of Corporation and its subsidiaries, as applicable, shall report exclusively to Executive (on a direct or indirect basis), and Executive shall report to the Board of Directors of the Corporation (the “Board”). Executive shall devote his full working time and effort to the business and affairs of the Corporation as necessary to faithfully discharge the duties and responsibilities of his office.”

2. The first sentence of Section 6.8 of the Agreement shall be amended and restated in its entirety by the following:

“Other than pursuant to the circumstances of a Change of Control, as defined in Section 7.4, in which case Section 7.2 shall apply, if during the Term Executive suffers: a material diminution of base salary; a material diminution in Executive’s title, authority, duties or responsibilities, including another executive officer of Corporation failing to exclusively (on a direct or indirect basis) report to Executive without Executive’s consent or a requirement that Executive must report to someone other than the Board; a material diminution in the budget over which Executive retains authority; a material change in geographic location at

 

1


which Executive must perform his services; or any other action or inaction that constitutes a material breach of the terms of this Agreement, then Executive shall have “Good Reason” to voluntarily resign his employment with the Corporation.”

3. Miscellaneous. This Amendment shall inure to the benefit of and be binding upon each of the Executive and Corporation and each of their respective successors and assigns. This Amendment may be executed in counterparts, each of which is deemed an original, but all of which constitutes one and the same agreement. Delivery of an executed counterpart of this Amendment electronically or by facsimile shall be effective as delivery of an original executed counterpart of this Amendment.

4. Except as specifically modified herein, the Agreement shall continue in full force and effect in accordance with all of the terms and conditions thereof.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

 

2


IN WITNESS WHEREOF, Executive and Corporation have executed this Amendment effective as of the Effective Date.

 

SPECTRUM PHARMACEUTICALS, INC.
By:  

/s/ Kurt A. Gustafson

Name:   Kurt A. Gustafson
Title:   EVP & Chief Financial Officer

 

/s/ Rajesh C. Shrotriya

DR. RAJESH C. SHROTRIYA

Signature Page to First Amendment to Executive Employment Agreement

 

3

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Rajesh C. Shrotriya, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Spectrum Pharmaceuticals, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 8, 2014   

/s/ Rajesh C. Shrotriya

   Rajesh C. Shrotriya, MD
   Chairman and Chief Executive Officer
EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Kurt A. Gustafson, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Spectrum Pharmaceuticals, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 8, 2014   

/s/ Kurt A. Gustafson

   Kurt A. Gustafson
   Executive Vice President and Chief Financial Officer
EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Rajesh C. Shrotriya, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Quarterly Report of Spectrum Pharmaceuticals, Inc. on Form 10-Q for the quarterly period ended June 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents in all material respects the financial condition and results of operations of Spectrum Pharmaceuticals, Inc.

 

Date: August 8, 2014     By:  

/s/ Rajesh C. Shrotriya

    Name:   Rajesh C. Shrotriya, MD
    Title:   Chairman and Chief Executive Officer

This certification accompanies the Report pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities and Exchange Act of 1934, or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, or, the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporated by reference.

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Kurt A. Gustafson, certify, pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report of Spectrum Pharmaceuticals, Inc. on Form 10-Q for the quarterly period ended June 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents in all material respects the financial condition and results of operations of Spectrum Pharmaceuticals, Inc.

 

Date: August 8, 2014     By:  

/s/ Kurt A. Gustafson

    Name:   Kurt Gustafson
    Title:   Executive Vice President and Chief Financial Officer

This certification accompanies the Report pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities and Exchange Act of 1934, or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, or, the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporated by reference.