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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
¨
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 
 
https://cdn.kscope.io/494437963b1b8db757763026f96c560c-sppicompanylogoa20.jpg
SPECTRUM PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
93-0979187
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
11500 South Eastern Avenue, Suite 240
Henderson, Nevada
 
89052
(Address of principal executive offices)
 
(Zip Code)
(702) 835-6300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Emerging Growth Company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 31, 2017, 100,662,238 shares of the registrant’s common stock were outstanding.


Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS
Item
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 
Items 2 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

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



2

Table of Contents

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

September 30,
2017

December 31,
2016
ASSETS



Current assets:



Cash and cash equivalents
$
247,468


$
158,222

Marketable securities
248


247

Accounts receivable, net of allowance for doubtful accounts of $88 and $88, respectively
37,767


39,782

Other receivables
5,876


5,754

Inventories
8,983


8,715

Prepaid expenses and other assets
2,957


3,930

Total current assets
303,299


216,650

Property and equipment, net of accumulated depreciation
615


449

Intangible assets, net of accumulated amortization and impairment charges
144,036


164,234

Goodwill
18,131


17,886

Other assets
35,736


29,549

Total assets
$
501,817


$
428,768

LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable and other accrued liabilities
$
49,635


$
52,483

Accrued payroll and benefits
7,636


8,981

Deferred revenue
2,783


3,188

FOLOTYN development liability
153


861

Total current liabilities
60,207


65,513

FOLOTYN development liability, less current portion
12,273


12,269

Deferred revenue, less current portion
324


323

Acquisition-related contingent obligations
4,551


1,315

Deferred tax liabilities
6,829


6,675

Other long-term liabilities
11,127


9,604

Convertible senior notes
101,770


97,043

Total liabilities
197,081


192,742

Commitments and contingencies



Stockholders’ equity:



Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding
—


—

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; no shares issued and outstanding.
—


—

Common stock, $0.001 par value; 175,000,000 shares authorized; 94,061,740 and 80,466,735 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
94


80

Additional paid-in capital
765,754


640,166

Accumulated other comprehensive income (loss)
3,673


(1,579
)
Accumulated deficit
(464,785
)

(402,641
)
Total stockholders’ equity
304,736


236,026

Total liabilities and stockholders’ equity
$
501,817


$
428,768

See accompanying notes to these unaudited condensed consolidated financial statements.

3

Table of Contents

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

Nine Months Ended
September 30,
 
2017

2016

2017

2016
Revenues:







Product sales, net
$
31,234


$
30,272


$
88,235


$
96,401

License fees and service revenue
5,161


3,121


11,562


14,807

Total revenues
$
36,395


$
33,393


$
99,797


$
111,208

Operating costs and expenses:







Cost of sales (excludes amortization and impairment charges of intangible assets)
12,179


7,503


31,618


18,715

Cost of service revenue
—


2,221


4,221


5,716

Selling, general and administrative
18,880


19,465


54,595


69,047

Research and development
13,878


13,293


43,670


43,037

Amortization and impairment charges of intangible assets
6,928


6,907


20,718


19,052

Total operating costs and expenses
51,865


49,389


154,822


155,567

Loss from operations
(15,470
)

(15,996
)

(55,025
)

(44,359
)
Other (expense) income:







Interest expense, net
(2,014
)

(2,373
)

(6,196
)

(7,087
)
Change in fair value of contingent consideration related to acquisitions
(2,942
)

78


(3,236
)

(1,249
)
Other income, net
251


372


901


990

Total other expenses
(4,705
)

(1,923
)

(8,531
)

(7,346
)
Loss before income taxes
(20,175
)

(17,919
)

(63,556
)

(51,705
)
Benefit for income taxes
1,466


464


1,412


635

Net loss
$
(18,709
)

$
(17,455
)

$
(62,144
)

$
(51,070
)
Net loss per share:







Basic and diluted
$
(0.22
)

$
(0.22
)

$
(0.78
)

$
(0.73
)
Weighted average shares outstanding:







Basic and diluted
83,463,153


79,303,380


80,177,370


70,437,885

See accompanying notes to these unaudited condensed consolidated financial statements.


4

Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(18,709
)
 
$
(17,455
)
 
$
(62,144
)
 
$
(51,070
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net of income tax expense of $2,068, $342, and $2,068, $872 for the three and nine months ended September 30, 2017 and 2016, respectively.
5,047

 
465

 
3,903

 
2,975

Foreign currency translation adjustments
405

 
96

 
1,349

 
254

Other comprehensive income
5,452

 
561

 
5,252

 
3,229

Total comprehensive loss
$
(13,257
)
 
$
(16,894
)
 
$
(56,892
)
 
$
(47,841
)
See accompanying notes to these unaudited condensed consolidated financial statements.


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Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2017

2016
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(62,144
)
 
$
(51,070
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
20,965

 
19,493

Stock-based compensation
9,654

 
9,754

Accretion of debt discount, recorded to interest expense on 2018 Convertible Notes (Note 14)
4,236

 
4,246

Amortization of deferred financing costs, recorded to interest expense on 2018 Convertible Notes (Note 14)
491

 
521

Bad debt recovery
—

 
(15
)
Unrealized foreign currency exchange gain
(18
)
 
(155
)
Change in cash surrender value of corporate owned life insurance
(266
)
 
—

Research and development expense recognized for the value of common stock issued in connection with QAPZOLA (Note 16(b)(x)) and ROLONTIS (Note 16(b)(xiii)) milestone achievements
—

 
2,419

Deferred tax liabilities
154

 
(40
)
Income tax recognition on unrealized gain for available-for-sale securities
(2,068
)
 
—

Change in fair value of contingent consideration related to the Talon and EVOMELA acquisitions (Note 9)
3,236

 
1,249

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
2,143

 
(12,040
)
Other receivables
(88
)
 
5,571

Inventories
554

 
(6,768
)
Prepaid expenses
972

 
804

Other assets
183

 
(2,095
)
Accounts payable and other accrued obligations
(2,954
)
 
(6,595
)
Accrued payroll and benefits
(1,343
)
 
(451
)
FOLOTYN development liability (Note 15)
(704
)
 
(526
)
Acquisition related contingent obligations
—

 
(1,300
)
Deferred revenue
(483
)
 
(1,417
)
Other long-term liabilities
1,523

 
1,321

Net cash used in operating activities
(25,957
)

(37,094
)
Cash Flows From Investing Activities:
 
 
 
Payment for corporate-owned life insurance premiums
(601
)
 
—

Redemption of mutual funds
(1
)
 
(1
)
Purchases of property and equipment
(412
)
 
(61
)
Net cash used in investing activities
(1,014
)
 
(62
)
Cash Flows From Financing Activities:
 
 
 
Proceeds from exercise of stock options
3,051

 
190

Proceeds from sale of stock under employee stock purchase plan
406

 
383

Purchase and retirement of restricted stock to satisfy employees' tax liability at vesting
(1,476
)
 
(829
)
Payment of contingent consideration related to EVOMELA acquisition (Note 9(b))
—

 
(4,700
)
Proceeds from common shares sold under an at-market-issuance sales agreement (Note 18)
113,966

 
73,869

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

 
(6
)
Net cash provided by financing activities
115,947

 
68,907

Effect of exchange rates on cash and equivalents
270

 
113

Net increase in cash and cash equivalents
89,246

 
31,864

Cash and cash equivalents—beginning of period
158,222

 
139,741

Cash and cash equivalents—end of period
$
247,468

 
$
171,605

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
$
10

 
$
11

Cash paid for interest
$
1,513

 
$
1,650


See accompanying notes to these unaudited condensed consolidated financial statements.

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)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND OPERATING SEGMENT
(a) Description of Business
Spectrum Pharmaceuticals, Inc. (“Spectrum”, the “Company”, “we”, “our”, or “us”) is a biotechnology company, with a primary strategy comprised of acquiring, developing, and commercializing a broad and diverse pipeline of late-stage clinical and commercial products. We have an in-house clinical development organization with regulatory and data management capabilities, and a commercial infrastructure and field sales force for our marketed products. Currently, we have six approved oncology/hematology products (FUSILEV, FOLOTYN, ZEVALIN, MARQIBO, BELEODAQ, and EVOMELA) that target different types of cancer including: non-Hodgkin's lymphoma ("NHL"), advanced metastatic colorectal cancer, acute lymphoblastic leukemia, and multiple myeloma ("MM").
We also have three drugs in mid-to-late stage development (in Phase 2 or Phase 3 clinical trials):
•
ROLONTIS (formerly referred to as SPI-2012 or LAPS-G-CSF) for chemotherapy-induced neutropenia.
•
QAPZOLA (formerly referred to as APAZIQUONE) for immediate intravesical instillation in post-transurethral resection of bladder tumors in patients with non-muscle invasive bladder cancer ("NMIBC").
•
POZIOTINIB, a novel pan-HER inhibitor used in the treatment of patients with a variety of solid tumors, including breast and lung cancer.
(b) Basis of Presentation
Interim Financial Statements
The interim financial data for the three and nine months ended September 30, 2017 and 2016, respectively, is unaudited, and is not necessarily indicative of our operating results for a full year. In the opinion of our management, the interim data includes normal and recurring adjustments necessary for a fair presentation of our financial results for the three and nine months ended September 30, 2017 and 2016. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to U.S. Securities and Exchange Commission (“SEC”) rules and regulations relating to interim financial statements. The December 31, 2016 balances reported herein are derived from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 14, 2017 (our "2016 Form 10-K"). The accompanying Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and Notes thereto included in our 2016 Form 10-K.
Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and with the rules and regulations of the SEC. These financial statements include the financial position, results of operations, and cash flows of Spectrum and its subsidiaries, all of which are wholly-owned (except for Spectrum Pharma Canada ("SPC"), as discussed below). All inter-company accounts and transactions among these legal entities have been eliminated in consolidation.
Variable Interest Entity
We own fifty-percent of SPC, a legal entity organized in Quebec, Canada in January 2008. Some of our clinical studies are conducted through this “variable interest entity” (as defined under applicable GAAP). We fund all of SPC’s operating costs, and since we assume all risks and rewards for this entity, we meet the 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.

7

Table of Contents
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 nine months ended September 30, 2017 and 2016, respectively, all of our revenue and related expenses were solely attributable to these activities. Substantially all of our assets (excluding our cash and securities held in certain foreign bank accounts and by our Ex-U.S. entities, and our ZEVALIN distribution rights for the Ex-U.S. territory) are held in the U.S.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires our management to make informed estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. However, actual values may materially differ, since estimates are inherently uncertain. On an on-going basis, our management evaluates its estimates and assumptions, including those related to (i) gross-to-net revenue adjustments; (ii) the timing of revenue recognition; (iii) the collectability of customer accounts; (iv) whether the cost of our inventories can be recovered; (v) the fair value of our reported goodwill and intangible assets; (vi) the realization of our tax assets and estimates of our tax liabilities; (vii) the likelihood of payment and value of contingent liabilities; (viii) the fair value of our investments; (ix) the valuation of our stock options and the periodic expense recognition of stock-based compensation; and (x) the potential outcome of our ongoing or threatened litigation.
The estimates and assumptions that most significantly impact the presented amounts within these Condensed Consolidated Financial Statements are further described below:
(i) Revenue Recognition
(a) Product Sales: We sell our products to wholesalers/distributors (i.e., our customers), except for our U.S. sales of ZEVALIN in which case the end-user (i.e., clinic or hospital) is our customer. Our wholesalers /distributors in turn sell our products directly to clinics, hospitals, and private oncology-based practices. Revenue from product sales is recognized when title and risk of loss have transferred to our customer, and the following additional criteria are met:
(1)
appropriate evidence of a binding arrangement exists with our customer;
(2)
price is substantially fixed or determinable;
(3)
collection from our customer is reasonably assured;
(4)
our customer’s obligation to pay us is not contingent on resale of the product;
(5)
we do not have significant continued performance obligations to our customer; and
(6)
we have a reasonable basis to estimate returns.
Our gross revenue is reduced by our gross-to-net (“GTN”) estimates each period, resulting in our reported “product sales, net” in the accompanying Condensed Consolidated Statements of Operations. We defer revenue recognition in full if these estimates are not reasonably determinable at the time of sale. These estimates are based upon information received from external sources (such as written or oral information obtained from our customers with respect to their period-end inventory levels and their sales to end-users during the period), in combination with management’s informed judgments. Due to the inherent uncertainty of estimates, the actual amount we incur may be materially different than our GTN estimates, and require prospective revenue adjustments in periods after the initial sale was recorded.
Our GTN estimates are comprised of the following categories:
Product Returns Allowances: Our FUSILEV, MARQIBO, and BELEODAQ customers are permitted to return purchased product beginning at its expiration date and within six months thereafter. Our EVOMELA customers are permitted to return purchased product beginning at six months prior to its expiration date, and within 12 months thereafter (as well as for overstock inventory, as determined by end-users). Returned product is generally destroyed and not resold. Returns outside of the above-referenced criteria or for expiry of ZEVALIN and FOLOTYN are not contractually, or customarily, allowed. We estimate expected product returns for our allowance based on our historical return rates.

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Table of Contents
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 pricing limits under certain federal government programs (e.g., Medicare and 340B Drug Pricing Program). Qualifying entities (i.e., end-users) purchase products from our customers at their qualifying discounted price. The chargeback amount we incur represents the difference between our contractual sales price to our customer, and the end-user’s applicable discounted purchase price under the government program. There may be significant lag time between our reported net product sales and our receipt of the corresponding government chargeback claims from our customers.
Prompt Pay Discounts: Discounts for prompt payment are estimated at the time of sale, based on our eligible customers’ prompt payment history and the contractual discount percentage.
Commercial Rebates: Commercial rebates are based on (i) our estimates of end-user purchases through a group purchasing organization ("GPO"), (ii) the corresponding contractual rebate percentage tier we expect each GPO to achieve, and (iii) our estimates of the impact of any prospective rebate program changes made by us.
Medicaid Rebates: Our products are subject to state government-managed Medicaid programs, whereby rebates are issued to participating state governments. These rebates arise when a patient treated with our product is covered under Medicaid, resulting in a discounted price for our product under the applicable Medicaid program. Our Medicaid rebate accrual calculations require us to project the magnitude of our sales, by state, that will be subject to these rebates. There is a significant time lag in us receiving rebate notices from each state (generally several months or longer after our sale is recognized). Our estimates are based on our historical claim levels by state, as supplemented by management’s judgment.
Distribution, Data, and GPO Administrative Fees: Distribution, data, and GPO administrative fees are paid to authorized wholesalers/distributors of our products (except for U.S. sales of ZEVALIN) for various commercial services including: contract administration, inventory management, delivery of end-user sales data, and product returns processing. These fees are based on a contractually-determined percentage of our applicable sales.
(b) License Fees: Our out-license arrangements with licensees for their limited rights to market our product(s) may include one or more of the following forms of consideration: (a) upfront license fees, (b) royalties from our licensees’ sales, (c) milestone receipts from our licensees’ sales, and (d) milestone receipts upon regulatory achievements by us or our licensees. We recognize revenue from these categories based on the contractual terms that establish the legal rights and obligations between us and our licensees. We complete the following steps in determining the dollar amount and timing of revenue recognition from our license fees:
(i)
We first assess the number of “units of accounting” for the elements in our out-license arrangements in accordance with multiple element arrangement guidance. We consider if elements (deliverables) have standalone value, and if standalone value does not exist for a deliverable, it is combined (as applicable) with other deliverables until the "bundle" has standalone value (as a single unit of accounting).

(ii)
Next, we allocate arrangement consideration among the separate units of accounting (using the "relative selling price method").

(iii)
Finally, we evaluate the timing of revenue recognition, which is impacted by the nature of the consideration to which we are entitled, as follows:

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

(b)
Royalties: We recognize revenue in the period that our licensees report product sales to us in their territory for which we are contractually entitled to a percentage-based royalty receipt (i.e., representing the period when earned and realizable).


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


(c)
Sales milestones: We recognize revenue in the period that our licensees report achievement of annual or aggregate product sales levels in their territories for which we are contractually entitled to a specified lump-sum receipt (i.e., representing the period when earned and realizable).

(d)
Regulatory milestones: Under the terms of the respective out-license, regulatory achievements may either be our responsibility, or that of our licensee.

•
When our licensee is responsible for the achievement of the regulatory milestone (and we have no on-going obligations), we recognize this revenue in the period that our product achieves specified regulatory approvals for which we are contractually entitled to a fixed receipt (i.e., representing the period when earned and realizable).

•
When we are responsible for the achievement of the regulatory milestone, we recognize this revenue in the period that our product achieves specified regulatory approvals for which we are contractually entitled to a fixed receipt. Regulatory approvals by governmental agencies are inherently uncertain, and require our substantial cost and effort in completing our submission for potential approval. Therefore, these regulatory milestones are “substantive” and these fixed receipts remain at-risk (i.e. unearned and unrealizable) until the period of achievement. We believe the amounts we are entitled to receive upon our achievement relates solely to our past performance and is commensurate with either (i) our performance in achieving the milestone, or (ii) the resulting enhancement in value of the drug compound.
(c) Service Revenue: We receive fees under certain arrangements for (a) sales and marketing services, (b) supply chain services, (c) research and development services, and (d) clinical trial management services. Payment for these services may be triggered by (i) an established fixed-fee schedule, (ii) the completion of product delivery in our capacity as a procurement agent, (iii) the successful completion of a phase of development, (iv) favorable results from a clinical trial, and/or (v) regulatory approval events.
We consider whether revenue associated with these service arrangements is “realizable and earned” each reporting period, based on our completed services or deliverables during the reporting period, and the contractual terms of the arrangement (which typically includes fee schedules). For any/all milestone achievements in the reporting period that contractually result in fixed payments due to us, we apply the “milestone method” of revenue recognition. Accordingly, this revenue recognition occurs as each “substantive” milestone (as discussed below) is achieved by us, since (1) all contingencies associated with each milestone is resolved upon its achievement, (2) the milestone achievement relates solely to our past performance, and (3) no remaining milestone performance obligations exist in relation to our receipt of payment.
In recognizing revenue under the milestone method, we first assess the number of “units of accounting” in the arrangement. We consider if the separate “deliverable” has standalone value to our licensee, and if standalone value does not exist for a deliverable, it is combined with other deliverables until the "bundle" has standalone value. The allocation of arrangement consideration and the recognition of revenue is determined for those combined deliverables as a single unit of accounting. This includes allocation of consideration associated with milestones achieved by our licensees.
Next, we measure and allocate arrangement consideration among the separate units of accounting. This fixed or determinable consideration is allocated to the units of accounting using the "relative selling price method". Variable fees subsequently earned (other than substantive milestone payments) are allocated to the units of accounting on the same basis.
We determine whether the milestone is substantive by considering (i) the extent of our effort to achieve the milestone and/or the enhancement of the value of the delivered item(s) as a result of milestone achievement, (ii) whether the milestone achievement relates solely to our past performance, and (iii) if the milestone payment is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
For service contracts without milestones, we recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) services have been rendered, (iii) fees are fixed or determinable, and (iv) collectability is reasonably assured.

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


(d) New Revenue Recognition Standard: ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), is effective for us beginning January 1, 2018. This new accounting standard requires that we recognize revenue in a manner that reasonably reflects the delivery of our goods or services to customers in return for expected consideration. To achieve this core principle, ASU 2014-09 provides the following steps in evaluating revenue arrangements: (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 are substantially complete with our evaluation of this new revenue standard, including (i) the impact on the value and timing of our revenue recognition for product sales, out-license arrangements, and service arrangements, (ii) the financial reporting transition requirements for adoption, and (iii) expanded footnote disclosures in our financial statements. We believe the adoption of ASU 2014-09 will not result in a material change of revenue recognition for our current product sales and out-license arrangements. We presently have no active service arrangements, though this new accounting standard would not have materially affected our historical revenue accounting practices for those types of arrangements. We will apply the "modified retrospective”transition method to implement ASU 2014-09 on January 1, 2018 (i.e., recognition of the cumulative effect of initially applying this standard to the opening balance of retained earnings), and as applicable, will include expanded revenue footnote disclosure requirements, beginning with our Form 10-Q for the period ended March 31, 2018.
(ii) Cash and Cash Equivalents
Our cash and cash equivalents consist of bank deposits and highly liquid investments with maturities of three months or less from the purchase date.
(iii) Marketable Securities
Our marketable securities consist of our holdings in mutual funds and bank certificates of deposit ("Bank CDs"). Since we classify these securities as “available-for-sale” under applicable GAAP, any unrealized gains or losses from their change in value is reflected in “unrealized gain on available-for-sale securities” on the accompanying Condensed Consolidated Statements of Comprehensive Loss. Realized gains and losses on available-for-sale securities are included in “other income, net” on the accompanying Condensed Consolidated Statements of Operations.
(iv) Accounts Receivable, Net of Allowance for Doubtful Accounts
Our accounts receivables are derived from our product sales and license fees (receivables related to our service revenue is recorded in "other receivables"), and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in our existing accounts receivable. Account balances are charged off against the allowance after appropriate collection efforts are exhausted.
(v) Inventories
We value our inventory at the lower of (i) the actual cost of its purchase or manufacture, or (ii) its current market value. Inventory cost is determined on the first-in, first-out method. We regularly review our inventory quantities in process of manufacture and on hand. When appropriate, we record a provision for obsolete and excess inventory to derive its new cost basis, which takes into account our sales forecast by product and corresponding expiry dates of each product lot.
Direct and indirect manufacturing costs related to the production of inventory prior to U.S. Food and Drug Administration ("FDA") approval are expensed through “research and development” on the accompanying Condensed Consolidated Statements of Operations, rather than being capitalized to inventory cost.
(vi) Property and Equipment, Net of Accumulated Depreciation
Our property and equipment is stated at historical cost, and is depreciated on a straight-line basis over an estimated useful life that corresponds with its designated asset category. We evaluate the recoverability of “long-lived assets” (which includes property and equipment) whenever events or changes in circumstances in our business indicate that the asset’s carrying amount may not be recoverable through on-going operations.

11

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


(vii) Goodwill and Intangible Assets, Net of Accumulated Amortization and Impairment Charges
Our goodwill represents the excess of our business acquisition cost over the estimated fair value of the net assets acquired in the corresponding transaction. Goodwill has an indefinite accounting life and is therefore not amortized. Instead, goodwill is evaluated for impairment on an annual basis (as of each October 1st), unless we identify impairment indicators that would require earlier testing.
We evaluate the recoverability of indefinite-lived intangible assets at least annually, or whenever events or changes in our business indicate that an intangible asset’s (whether indefinite or definite-lived) carrying amount may not be recoverable. Such circumstances could include, but are not limited to the following:
(a)
a significant decrease in the market value of an asset;
(b)
a significant adverse change in the extent or manner in which an asset is used; or
(c)
an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset.
Intangible assets with finite useful lives are amortized over their estimated useful lives on a straight-line basis. We review these assets for potential impairment if/when facts or circumstances suggest that the carrying value of these assets may not be recoverable.
(viii) Stock-Based Compensation
Stock-based compensation expense for equity awards granted to our employees and members of our board of directors is recognized on a straight-line basis over each award's vesting period. Recognized compensation expense is net of an estimated forfeiture rate, representing the percentage of awards that are expected to be forfeited (by termination of employment or service) prior to vesting. We use the Black-Scholes option pricing model to determine the fair value of stock options (as of the date of grant) which carry service conditions for vesting. We use the Monte Carlo valuation model to value equity awards (as of the date of grant) which carry combined market conditions and service conditions for vesting.
The calculation of the fair value of stock options and the recognition of stock-based compensation expense requires uncertain assumptions, including (a) the pre-vesting forfeiture rates of the awards, (b) the expected term of our stock options, (c) our stock price volatility over its expected term (and that of our designated peer group with respect to certain market-based awards), and (d) the "risk-free" interest rate over the expected term.
We estimate forfeiture rates based on our employees’ overall forfeiture history, which we believe will be representative of future results. We estimate the expected term of stock options granted based on our employees’ historical exercise patterns, which we believe will be representative of their future behavior. We estimate the volatility of our common stock on the date of grant based on historical volatility of our common stock for a look-back period that corresponds with the expected term. We estimate the risk-free interest rate based upon the U.S. Treasury yields in effect at award grant, for a period equaling the expected term of the stock option.
(ix) Foreign Currency Translation
We translate the assets and liabilities of our foreign subsidiaries that are stated in their functional currencies (i.e., local operating currencies), to U.S. dollars at the rates of exchange in effect at the reported balance sheet date. Revenues and expenses are translated using the monthly average exchange rates during the reported period. Unrealized gains and losses from the translation of our subsidiaries’ financial statements (that are initially denominated in the corresponding functional currency) are included as a separate component of “accumulated other comprehensive income (loss)” in the Condensed Consolidated Balance Sheets.
We record foreign currency transactions, when initially denominated in a currency other than the respective functional currency of our subsidiary, at the prevailing exchange rate on the date of the transaction. Resulting unrealized foreign exchange gains and losses from transactions with third parties are included in “accumulated other comprehensive income (loss)” in the Condensed Consolidated Balance Sheets.

12

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


Beginning April 1, 2015, all unrealized foreign exchange gains and losses associated with our intercompany loans are included in "accumulated other comprehensive income (loss)" in the Condensed Consolidated Balance Sheets, as these loans with our foreign subsidiaries are not expected to be settled in the "foreseeable future."
(x) Basic and Diluted Net Loss per Share
We calculate basic and diluted net loss 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 is 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 were to 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 that have not been previously accrued, such amounts would be included in “benefit for income taxes” within the Condensed Consolidated Statements of Operations in the period the notice was received.
(xii) Research and Development Costs
Our research and development costs are expensed as incurred, or as certain milestone payments become due, which are generally triggered by contractual clinical or regulatory events.
(xiii) Fair Value Measurements
We determine measurement-date fair value based on the proceeds that would be received through the sale of the asset, or that we would pay to settle or transfer the liability, in an orderly transaction between market participants. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include the following:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are publicly accessible at the measurement date.
Level 2: Observable prices that are based on inputs not quoted on active markets, but that are corroborated by market data. These inputs may include quoted prices for similar assets or liabilities or quoted market prices in markets that are not active to the general public.
Level 3: Unobservable inputs are used when little or no market data is available.
3. BALANCE SHEET ACCOUNT DETAIL
The composition of selected financial statement captions that comprise the accompanying Condensed Consolidated Balance Sheets are summarized below:
(a) Cash and Cash Equivalents and Marketable Securities

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


As of September 30, 2017 and December 31, 2016, our holdings included in “cash and cash equivalents” and “marketable securities” were at major financial institutions.
Our investment policy requires that investments in marketable securities be in only highly-rated instruments, which are primarily U.S. treasury bills or U.S. treasury-backed securities, and limited investments in securities of any single issuer. We maintain cash balances in excess of federally insured limits with reputable financial institutions. To a limited degree, the Federal Deposit Insurance Corporation ("FDIC") and other third parties insure these investments. However, these investments are not insured against the possibility of a complete loss of earnings or principal and are inherently subject to the credit risk related to the continued credit worthiness of the underlying issuer and general credit market risks. We manage such risks in our portfolio by investing in highly liquid, highly rated instruments, and limit investing in long-term maturity instruments.
 
The carrying amount of our equity securities, money market funds, Bank CDs, and mutual funds approximates their fair value (utilizing Level 1 or Level 2 inputs – see Note 2(xiii)) because of our ability to immediately convert these instruments into cash with minimal expected change in value.
The following is a summary of our presented “cash and cash equivalents” and “marketable securities”:
 
 
 
 
 
 
 
 
 
 
 
Marketable Securities
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Cash and Cash
Equivalents
 
Current
 
Long
Term
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
$
21,574

 
$
—

 
$
—

 
$
21,574

 
$
21,574

 
$
—

 
$
—

Money market funds
225,894

 
—

 
—

 
225,894

 
225,894

 
—

 
—

Bank certificates of deposits
248

 
—

 
—

 
248

 
—

 
248

 
—

Total cash and cash equivalents and marketable securities
$
247,716

 
$
—

 
$
—

 
$
247,716

 
$
247,468

 
$
248

 
$
—

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank deposits
$
23,915

 
$
—

 
$
—

 
$
23,915

 
$
23,915

 
$
—

 
$
—

Money market funds
128,563

 
—

 
—

 
128,563

 
128,563

 
—

 
—

Bank certificates of deposits
5,991

 
—

 
—

 
5,991

 
5,744

 
247

 
—

Total cash and cash equivalents and marketable securities
$
158,469

 
$
—

 
$
—

 
$
158,469

 
$
158,222

 
$
247

 
$
—

As of September 30, 2017, none of these securities had been in a continuous unrealized loss position longer than one year.
(b) Property and Equipment, Net of Accumulated Depreciation
“Property and equipment, net of accumulated depreciation” consist of the following: 
 
September 30, 2017
 
December 31, 2016
Computer hardware and software
$
2,933

 
$
2,550

Laboratory equipment
622

 
622

Office furniture
218

 
211

Leasehold improvements
2,938

 
2,912

Property and equipment, at cost
6,711

 
6,295

(Less): Accumulated depreciation
(6,096
)
 
(5,846
)
Property and equipment, net of accumulated depreciation
$
615

 
$
449

Depreciation expense (included within “total operating costs and expenses” in the accompanying Condensed Consolidated Statements of Operations) for the nine months ended September 30, 2017 and 2016, was $0.2 million and $0.4 million, respectively.
New Lease Accounting Standard

14

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


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

(c) Inventories
“Inventories” consist of the following: 
 
September 30, 2017
 
December 31, 2016
Raw materials
$
1,683

 
$
2,991

Work-in-process
7,457

 
7,838

Finished goods
3,439

 
2,305

(Less:) Non-current portion of inventories included within "other assets" *
(3,596
)
 
(4,419
)
Inventories
$
8,983

 
$
8,715


* The "non-current" portion of inventories is presented within "other assets" in the accompanying Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, respectively. This value of $3.6 million at September 30, 2017 represents product that we expect to sell beyond September 30, 2018.
(d) Prepaid Expenses and Other Assets
“Prepaid expenses and other assets” consist of the following:
 
September 30, 2017
 
December 31, 2016
Prepaid insurance
$
185

 
$
721

Inventory other
712

 
1,458

Other miscellaneous prepaid operating expenses
2,060

 
1,751

Prepaid expenses and other assets
$
2,957

 
$
3,930

(e) Other Receivables
“Other receivables” consist of the following:
 
September 30, 2017
 
December 31, 2016
FOLOTYN milestone for first sale in Japan (Note 16(b)(vii))
2,000

 
—

CASI note - short term*
1,515

 
—

Other miscellaneous receivables**
1,033

 
239

Employee receivables***
857

 
—

Reimbursements due from development partners for incurred research and development expenses
418

 
1,796

Insurance receivable
53

 
500

Receivable for contracted sales and marketing services (Note 13)
—

 
1,831

Income tax receivable
—

 
1,388

Other receivables
$
5,876

 
$
5,754

* This full balance was prospectively reclassified beginning March 31, 2017 to "other receivables" (presented within current assets on the accompanying Condensed Consolidated Balance Sheets) from "other assets" (presented within non-current assets) due to this note's maturity date - see Note 10.
** As of September 30, 2017, this balance is inclusive of $0.6 million of Medicaid rebate credits to be applied against future invoices for each respective state program.

15

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


*** This balance represents amounts due to us for exercises of stock options by employees. These exercises were executed by September 30, 2017, but the cash receipts did not post to our bank account until October 2017.
(f) Intangible Assets and Goodwill
“Intangible assets, net of accumulated amortization and impairment charges” consist of the following: 
 
 
 
September 30, 2017
 
Historical
Cost
 
Accumulated
Amortization
 
Foreign
Currency
Translation
 
Impairment
 
Net Amount
 
Full
Amortization
Period
(months)
 
Remaining
Amortization
Period
(months)
MARQIBO IPR&D (NHL and other novel indications)
$
17,600

 
$
—

 
$
—

 
$
—

 
$
17,600

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

 
(888
)
 
—

 
—

 
6,812

 
156
 
138
BELEODAQ distribution rights
25,000

 
(6,094
)
 
—

 
—

 
18,906

 
160
 
121
MARQIBO distribution rights
26,900

 
(16,102
)
 
—

 
—

 
10,798

 
81
 
30
FOLOTYN distribution rights (2)
118,400

 
(50,843
)
 
—

 
—

 
67,557

 
152
 
62
ZEVALIN distribution rights – U.S.
41,900

 
(36,688
)
 
—

 
—

 
5,212

 
123
 
18
ZEVALIN distribution rights – Ex-U.S.
23,490

 
(16,579
)
 
(2,763
)
 
—

 
4,148

 
96
 
30
FUSILEV distribution rights (3)
16,778

 
(9,618
)
 
—

 
(7,160
)
 
—

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

 
(13,874
)
 
—

 
(1,023
)
 
13,003

 
110
 
58
Total intangible assets
$
305,668

 
$
(150,686
)
 
$
(2,763
)
 
$
(8,183
)
 
$
144,036

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

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

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

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


16

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


 
 
 
December 31, 2016

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

 
$
—

 
$
—

 
$
—

 
$
17,600

EVOMELA distribution rights
7,700

 
(444
)
 
—

 
—

 
7,256

BELEODAQ distribution rights
25,000

 
(4,688
)
 
—

 
—

 
20,312

MARQIBO distribution rights
26,900

 
(12,863
)
 
—

 
—

 
14,037

FOLOTYN distribution rights
118,400

 
(41,036
)
 
—

 
—

 
77,364

ZEVALIN distribution rights – U.S.
41,900

 
(34,083
)
 
—

 
—

 
7,817

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

 
(13,649
)
 
(5,038
)
 
—

 
4,803

FUSILEV distribution rights
16,778

 
(9,618
)
 
—

 
(7,160
)
 
—

FOLOTYN out-license
27,900

 
(11,832
)
 
—

 
(1,023
)
 
15,045

Total intangible assets
$
305,668

 
$
(128,213
)
 
$
(5,038
)
 
$
(8,183
)
 
$
164,234


Intangible asset amortization and impairment expense recognized during the nine months ended September 30, 2017 and 2016 was $20.7 million and $19.1 million, respectively.

Estimated intangible asset amortization expense for the remainder of 2017 and the five succeeding fiscal years and thereafter is as follows:

Years Ending December 31,
 
Remainder of 2017
$
6,930

2018
27,719

2019
25,114

2020
19,761

2021
18,266

2022
15,882

2023 and thereafter
12,764

 
$
126,436

“Goodwill” is comprised of the following:
 
September 30, 2017
 
December 31, 2016
Acquisition of Talon (MARQIBO rights)
$
10,526

 
$
10,526

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

 
2,525

Acquisition of Allos (FOLOTYN rights)
5,346

 
5,346

Foreign currency exchange translation effects
(266
)
 
(511
)
Goodwill
$
18,131

 
$
17,886


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Table of Contents
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: 
 
September 30, 2017
 
December 31, 2016
Equity securities (see Note 10)*
$
17,751

 
$
11,533

Promissory note receivable - long term (see Note 10)**
—

 
1,510

Research & development supplies and other
267

 
224

Executive officer life insurance – cash surrender value
14,122

 
11,863

Inventories - non-current portion
3,596

 
4,419

Other assets
$
35,736

 
$
29,549


* These equity securities in CASI were excluded from “marketable securities” (see Note 3(a)) due to our intent to hold them for at least one year beyond September 30, 2017. The unrealized gain on these "available-for-sale" equity securities are recognized as an increase to "other assets" and "accumulated deficit" (as a component of "other comprehensive income") within the accompanying Condensed Consolidated Balance Sheets and totaled $3.9 million, net of income tax, for the nine months ended September 30, 2017. Effective January 1, 2018, under the new requirements of ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, we will recognize our unrealized holding gains and losses on our "available-for-sale" equity securities within "other (expense) income" on the Consolidated Statement of Operations (rather than through "other comprehensive income" on the Consolidated Statements of Comprehensive Loss).
** This note was reclassified to "other receivables" from "other assets" beginning March 31, 2017 due to its March 2018 maturity date.
(h) Accounts Payable and Other Accrued Liabilities
“Accounts payable and other accrued liabilities” are comprised of the following:
 
September 30, 2017
 
December 31, 2016
Trade accounts payable and other accrued liabilities
$
25,464

 
$
30,488

Accrued rebates
8,120

 
8,350

Accrued product royalty
4,610

 
4,723

Allowance for returns
3,458

 
2,309

Accrued data and distribution fees
4,344

 
4,222

Accrued GPO administrative fees
449

 
384

Accrued inventory management fee
1,347

 
540

Allowance for chargebacks
1,843

 
1,467

Accounts payable and other accrued liabilities
$
49,635

 
$
52,483

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

Rebates and
Chargebacks
 
Data and
Distribution,
GPO Fees, and
Inventory
Management
Fees
 
Returns
Balance as of December 31, 2015
$
20,167

 
$
3,386

 
$
1,394

Add: provisions
98,317

 
14,979

 
2,123

(Less): credits or actual allowances
(108,667
)
 
(13,219
)
 
(1,208
)
Balance as of December 31, 2016
9,817

 
5,146

 
2,309

Add: provisions
85,602

 
15,495

 
2,164

(Less): credits or actual allowances
(85,456
)
 
(14,501
)
 
(1,015
)
Balance as of September 30, 2017
$
9,963

 
$
6,140

 
$
3,458


18

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



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

September 30, 2017
 
December 31, 2016
ZEVALIN out-license deferred revenue in Asia/other territories (see Note 11)
$
—

 
$
1,255

EVOMELA deferred revenue*
2,731

 
1,887

ZEVALIN out-license in India territory (see Note 16(b)(iii))
376

 
369

Deferred revenue
$
3,107

 
$
3,511

* We commercialized EVOMELA beginning in April 2016, and have deferred revenue recognition (see Note 2(i)(a)) for any product shipped to our distributors, but not ordered and received by end-users as of September 30, 2017 and December 31, 2016. This deferral is a result of our present inability to estimate future customer returns and rebate levels for this recently launched product.
(j) Other Long-Term Liabilities
"Other long-term liabilities" are comprised of the following:
 
September 30, 2017
 
December 31, 2016
Accrued executive deferred compensation
$
10,250

 
$
8,352

Deferred rent (non-current portion)
83

 
167

Clinical study holdbacks, non-current
56

 
47

Other tax liabilities
738

 
738

Royalty liability
—

 
300

Other long-term liabilities
$
11,127

 
$
9,604

 
4. GROSS-TO-NET PRODUCT SALES
The below table presents a GTN product sales reconciliation for the accompanying Condensed Consolidated Statements of Operations:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Gross product sales
$
66,517

 
$
61,513

 
$
192,443

 
$
175,963

Commercial rebates and government chargebacks
(28,075
)
 
(26,167
)
 
(85,400
)
 
(67,389
)
Data and distribution fees, GPO fees, and inventory management fees
(5,864
)
 
(4,234
)
 
(15,503
)
 
(10,235
)
Prompt pay discounts
(455
)
 
(300
)
 
(1,143
)
 
(380
)
Product returns allowance
(889
)
 
(540
)
 
(2,162
)
 
(1,558
)
Product sales, net
$
31,234

 
$
30,272

 
$
88,235

 
$
96,401


5. COMPOSITION OF TOTAL REVENUE
The below table presents our net product sales by geography for the three and nine months ended September 30, 2017 and 2016:




19




 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
United States
$
29,184

 
93.4
%
 
$
29,576

 
97.7
%
 
$
82,049

 
93.0
%
 
$
93,392

 
96.9
%
Europe
2,050

 
6.6
%
 
696

 
2.3
%
 
6,186

 
7.0
%
 
3,009

 
3.1
%
Product sales, net
$
31,234

 
100.0
%
 
$
30,272

 
100.0
%
 
$
88,235

 
100.0
%
 
$
96,401

 
100.0
%
 

The below table presents our net product sales by drug for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
FUSILEV
$
1,792

 
5.7
%
 
$
4,893

 
16.2
%
 
$
6,426

 
7.3
%
 
$
30,568

 
31.7
%
FOLOTYN
11,576

 
37.1
%
 
11,315

 
37.4
%
 
32,031

 
36.3
%
 
35,577

 
36.9
%
ZEVALIN
2,737

 
8.8
%
 
2,627

 
8.7
%
 
7,881

 
8.9
%
 
8,224

 
8.5
%
MARQIBO
1,227

 
3.9
%
 
1,925

 
6.4
%
 
5,369

 
6.1
%
 
4,921

 
5.1
%
BELEODAQ
3,399

 
10.9
%
 
3,635

 
12.0
%
 
9,666

 
11.0
%
 
10,326

 
10.7
%
EVOMELA
10,503

 
33.6
%
 
5,877

 
19.4
%
 
26,862

 
30.4
%
 
6,785

 
7.0
%
Product sales, net
$
31,234

 
100.0
%
 
$
30,272

 
100.0
%
 
$
88,235

 
100.0
%
 
$
96,401

 
100.0
%
 
The below table presents our license fees and service revenues by source for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Sales and marketing contracted services (Note 13)
$
—

 
—
%
 
$
2,406

 
77.1
%
 
$
4,747

 
41.1
%
 
$
6,737

 
45.5
%
Out-license of ZEVALIN, FOLOTYN, BELEODAQ, MARQIBO: upfront cash receipt and subsequent royalties for the Canada territory (Note 16(b)(xv))
—

 
—
%
 
—

 
—
%
 
3

 
—
%
 
6,000

 
40.5
%
Out-license of ZEVALIN: recognition of upfront cash receipt and subsequent royalties for Asia and certain other territories, excluding China (Note 11)
—

 
—
%
 
474

 
15.2
%
 
1,245

 
10.8
%
 
1,308

 
8.8
%
Out-license of FOLOTYN in all countries except the U.S., Canada, Europe, and Turkey: royalties (Note 15)
5,148

 
99.7
%
 
229

 
7.3
%
 
5,530

 
47.8
%
 
705

 
4.8
%
Out-license of ZEVALIN: amortization of upfront cash receipt related to India territory (Note 16(b)(iii)) and other
13

 
0.3
%
 
12

 
0.4
%
 
37

 
0.3
%
 
57

 
0.4
%
License fees and service revenues
$
5,161

 
100.0
%
 
$
3,121

 
100.0
%
 
$
11,562

 
100.0
%
 
$
14,807

 
100.0
%

6. STOCK-BASED COMPENSATION
We report our stock-based compensation expense (inclusive of our incentive stock plan, employee stock purchase plan, and 401(k) contribution matching program) in the accompanying Condensed Consolidated Statements of Operations, based on the department to which the recipient belongs. Stock-based compensation expense included within “total operating costs and expenses” for the three and nine months ended September 30, 2017 and 2016, was as follows:

20


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Cost of sales
$
68

 
$
30

 
$
150

 
$
84

Research and development
592

 
470

 
1,438

 
1,461

Selling, general and administrative
2,750

 
2,650

 
8,066

 
8,209

Total stock-based compensation
$
3,410

 
$
3,150

 
$
9,654

 
$
9,754

 
7. NET LOSS PER SHARE
Net loss per share was computed by dividing net loss by the weighted average number of common shares outstanding for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(18,709
)
 
$
(17,455
)
 
$
(62,144
)
 
$
(51,070
)
Weighted average shares – basic and diluted
83,463,153

 
79,303,380

 
80,177,370

 
70,437,885

Net loss per share – basic and diluted
$
(0.22
)
 
$
(0.22
)
 
$
(0.78
)
 
$
(0.73
)
The below outstanding securities were excluded from the above calculation of net loss per share because their impact under the "treasury stock method" and "if-converted method" would have been anti-dilutive due to our net loss per share in the three and nine months ended September 30, 2017 and 2016, as summarized below:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
2018 Convertible Notes
10,454,799

 
11,401,284

 
10,454,799

 
11,401,284

Common stock options
3,144,969

 
1,603,028

 
1,504,155

 
1,498,034

Restricted stock awards
2,025,661

 
2,609,533

 
2,025,661

 
2,609,533

Common stock warrants
111,441

 
—

 
32,833

 
1,674

Preferred stock*
—

 
—

 
—

 
—

Total
15,736,870

 
15,613,845

 
14,017,448

 
15,510,525

 
* In June 2016, our then 20 outstanding shares of Series E convertible voting preferred stock were converted (at the election of the preferred stockholders) into an aggregate of 40,000 common shares; a $6 thousand dividend in arrears was paid upon this conversion.  

8. FAIR VALUE MEASUREMENTS
The table below summarizes certain asset and liability fair values that are included within our accompanying Condensed Consolidated Balance Sheets, and their designations among three fair value measurement categories (see Note

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


2(xiii)):
 
September 30, 2017
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets:

 

 

 

 
Bank certificates of deposits
$
—

 
$
248

 
$
—

 
$
248

 
Money market funds
—

 
225,894

 
—

 
225,894

 
Equity securities (Note 10)
17,751

 
—

 
—

 
17,751

 
Mutual funds
—

 
58

 
—

 
58

 
Deferred compensation investments (life insurance cash surrender value)
—

 
14,122

 
—

 
14,122

*

$
17,751

 
$
240,322

 
$
—

 
$
258,073

 
Liabilities:

 

 

 

 
Deferred executive compensation liability (Note 16(f))
$
—

 
$
10,250

 
$
—

 
$
10,250

*
FOLOTYN development liability (Note 15)
—

 
—

 
12,426

 
12,426

 
Talon CVR - MARQIBO (Note 9(a))
—

 
—

 
4,489

 
4,489

 
Corixa Liability - ZEVALIN (Note 16(b)(i))
—

 
—

 
62

 
62

 
 
$
—

 
$
10,250

 
$
16,977

 
$
27,227

 
 
 
December 31, 2016
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets:

 

 

 

 
Bank certificates of deposits
$
—

 
$
5,991

 
$
—

 
$
5,991

 
Money market funds
—

 
128,563

 
—

 
128,563

 
Equity securities (Note 10)
11,533

 
—

 
—

 
11,533

 
Mutual funds
—

 
56

 
—

 
56

 
Deferred compensation investments (life insurance cash surrender value)
—

 
11,863

 
—

 
11,863

*

$
11,533

 
$
146,473

 
$
—

 
$
158,006

 
Liabilities:

 

 

 

 
Deferred executive compensation liability (Note 16(f))
$
—

 
$
8,352

 
$
—

 
$
8,352

*
FOLOTYN development liability (Note 15)
—

 
—

 
13,130

 
13,130

 
Talon CVR - MARQIBO (Note 9(a))
—

 
—

 
1,253

 
1,253

 
Corixa Liability - ZEVALIN (Note 16(b)(i))
—

 
—

 
62

 
62

 

$
—

 
$
8,352

 
$
14,445

 
$
22,797

 
* The reported value of "deferred compensation investments" is based on the cash surrender value of the life insurance policies, while the value of the "deferred executive compensation liability" is based on the market value of the underlying investment holdings.

We did not have any transfers between "Level 1" and "Level 2" (see Note 2(xiii)) for all periods presented.
The table below summarizes the 2016 and 2017 activity of our liabilities that are valued with unobservable inputs (i.e, "Level 3"):

22

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


 
Fair Value Measurements of
Unobservable Inputs (Level 3)
Balance at December 31, 2015
$
21,352

Settlement of Ligand Contingent Consideration liability - EVOMELA (see Note 9(b))
(6,000
)
FOLOTYN development liability (see Note 15)
(1,556
)
Ligand Contingent Consideration fair value adjustment prior to settlement - EVOMELA (see Note 9(b))
773

Talon CVR fair value adjustment - MARQIBO (see Note 9(a))
(124
)
Balance at December 31, 2016
14,445

FOLOTYN development liability (see Note 15)
(704
)
Talon CVR fair value adjustment - MARQIBO (see Note 9(a))
3,236

Balance at September 30, 2017*
$
16,977

* This amount is comprised of the current and non-current portions of “FOLOTYN development liability” and the non-current portion of “acquisition-related contingent obligations” on our accompanying Condensed Consolidated Balance Sheets.
Our carrying amounts of financial instruments such as cash equivalents, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities, excluding acquisition-related contingent obligations, approximate their related fair values due to their short-term nature.

9. BUSINESS COMBINATIONS AND CONTINGENT CONSIDERATION
(a) Acquisition of Talon Therapeutics, Inc.
Overview of Talon Acquisition
On July 17, 2013, we purchased all of the outstanding shares of common stock of Talon Therapeutics, Inc. (“Talon”). Through the acquisition of Talon, we gained worldwide rights to MARQIBO. We accounted for this transaction as a business combination, which required that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the transaction date. The Talon purchase consideration was 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 (“Talon CVR”) initially valued at $6.5 million.
The Talon CVR was valued using a valuation model that probability-weights expected outcomes (ranging from 50% to 100%) and discounts those amounts to their present value, using an appropriate discount rate (these represent unobservable inputs and are therefore classified as Level 3 inputs – see Note 2 (xiii)). The Talon CVR has a maximum payout of $195 million if all sales and regulatory approval milestones are achieved, as summarized below:
 
•
$5 million upon the achievement of net sales of MARQIBO in excess of $30 million in any calendar year
•
$10 million upon the achievement of net sales of MARQIBO in excess of $60 million in any calendar year
•
$25 million upon the achievement of net sales of MARQIBO in excess of $100 million in any calendar year
•
$50 million upon the achievement of net sales of MARQIBO in excess of $200 million in any calendar year
•
$100 million upon the achievement of net sales of MARQIBO in excess of $400 million in any calendar year
•
$5 million upon receipt of marketing authorization from the FDA regarding Menadione Topical Lotion

Talon CVR Fair Value as of September 30, 2017 and December 31, 2016
The Talon 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 Talon CVR fair value are recognized within “change in fair value of contingent consideration related to acquisitions” in the accompanying Condensed Consolidated Statements of Operations. 

23

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


 
Fair Value
of Talon
CVR
December 31, 2016
$
1,253

Fair value adjustment for the nine months ended September 30, 2017
3,236

September 30, 2017
$
4,489

(b) Acquisition of Rights to EVOMELA and Related Contingent Consideration
Overview of Acquisition of Rights to EVOMELA
In March 2013, we completed the acquisition of exclusive global development and commercialization rights to Captisol-enabled®, propylene glycol-free MELPHALAN (which we market as “EVOMELA”) for use as a conditioning treatment prior to autologous stem cell transplant for patients with MM. We acquired these rights from CyDex, a wholly-owned subsidiary of Ligand, for an initial license fee of $3 million, and assumed responsibility for EVOMELA's then-ongoing clinical and regulatory development program. We accounted for this transaction as a business combination, which required that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the transaction date.
We are required to pay Ligand additional amounts up to an aggregate $60 million upon the achievement of annual net sales thresholds (exclusive of the $6 million milestone payment triggered in March 2016, as discussed below), however, we do not expect to achieve these sales thresholds based on our estimated market size for this product and our projected market share at the time of the acquisition and to date. We also must pay Ligand royalties of 20% on our net sales of EVOMELA in all territories.
Our EVOMELA royalty obligation and sales-based milestones are jointly treated as part of an "executory contract" (as defined under GAAP) that is connected with an at-market supply agreement for Captisol that was executed concurrently with this acquisition (requiring the continuing involvement of CyDex). As a result, our royalty and sales-based milestone arrangements are treated as separate transactions, distinct from the consideration paid for the EVOMELA rights. Our royalty expenses are reported through “cost of sales” in our Condensed Consolidated Statements of Operations in the same period of our recognized revenue for the product sale.
Consideration Transferred
The acquisition-date fair value of the consideration transferred consisted of the following:
 
 
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 transaction date. The allocation of the total purchase price to the net assets acquired is as follows:
EVOMELA distribution rights
$
7,700

We estimated the fair value of the in-process research and development using the income approach. The income approach uses valuation techniques to convert future net cash flows to a single present value (discounted) amount. We applied our net cash flow projections for EVOMELA over 10 years and a discount rate of 25%, taking into account our estimates of future incremental earnings that may be achieved upon regulatory approval and commercialization of the product(s). The fair value of the Ligand Contingent Consideration liability was determined using the probability of success and the discounted cash flow method of the income approach (representing unobservable "Level 3" inputs - see Note 2(xiii) for regulatory and sales-based milestones due to Ligand upon achievement.
In March 2016, the FDA approved EVOMELA, triggering a $6 million milestone payment to Ligand that was paid in April 2016. "EVOMELA IPR&D" of $7.7 million was reclassified in April 2016 to "EVOMELA distribution rights" that is

24

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


reported within "Intangible assets, net of accumulated amortization and impairment charges" (see Note 3(f)). Amortization related to this intangible asset commenced on April 1, 2016.
Ligand Contingent Consideration Fair Value as of December 31, 2016
The fair value of the Ligand Contingent Consideration immediately prior to its payment was the full $6 million payment due upon EVOMELA's FDA approval. Accordingly, in the first quarter of 2016, we recorded a $0.8 million adjustment to the “change in fair value of contingent consideration related to acquisitions” in the accompanying Condensed Consolidated Statements of Operations. We have no further contingent consideration obligations as part of this transaction.
 
Fair Value of
Ligand
Contingent
Consideration
December 31, 2015
$
5,227

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

Payment to Ligand in April 2016 for FDA approval milestone achievement
(6,000
)
December 31, 2016
$
—

 
(c) Allos Acquisition
We acquired Allos Therapeutics, Inc. (“Allos”) on September 5, 2012 for cash consideration of $205.2 million and assumed FOLOTYN distribution rights (see Note 15). We accounted for this transaction as a business combination, which required that assets acquired and liabilities assumed be recognized on the balance sheet at their fair values as of the transaction date. We have no ongoing contingent consideration obligations from this transaction.
10. OUT-LICENSE OF MARQIBO, ZEVALIN, AND EVOMELA IN CHINA TERRITORY
Overview of CASI Out-License
On September 17, 2014, we executed three product out-license agreements with a perpetual term (collectively, the “CASI Out-License”) with CASI Pharmaceuticals, Inc. (“CASI”), a publicly-traded biopharmaceutical company (NASDAQ: CASI) with a primary focus on the China market. Under the CASI Out-License, we granted CASI the exclusive rights to distribute two of our commercialized oncology drugs, ZEVALIN and MARQIBO, and our Phase 3 drug candidate, EVOMELA (“CASI Out-Licensed Products”) in greater China (which includes Taiwan, Hong Kong and Macau). In return, we received CASI equity for the rights related to ZEVALIN and EVOMELA and a secured promissory note for the rights related to MARQIBO. Additionally, under certain conditions which generally expire on September 17, 2019, we have a right to receive additional CASI common stock in order to maintain our post-investment ownership percentage if CASI issues additional securities. In 2016, we acquired an additional 4.6 million common shares of CASI at par value, resulting in our total holding of 10.0 million common shares as of September 30, 2017.
CASI will be responsible for the development and commercialization of these three drugs, including the submission of import drug registration applications to regulatory authorities and conducting any confirmatory clinical studies in greater China. We will provide CASI with future commercial supply of the CASI Out-Licensed Products under typical market terms.
Proceeds Received in the Third Quarter of 2014
The proceeds we received, and its fair value on the CASI Out-License execution date, consisted of the following:
CASI common stock (5.4 million shares)
$
8,649

(a)
CASI secured promissory note due March 17, 2018, net of fair value discount ($1.5 million face value and 0.5% annual coupon)
1,310

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

(c)


25

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


(a)
Value determined based on the September 17, 2014 closing price of 5.4 million shares of CASI common stock on the NASDAQ Capital Market of $1.60 per share. Our current intention is to hold these securities on a long-term basis. Accordingly, we have presented its value of $17.8 million as of September 30, 2017 within "other assets" (rather than "marketable securities") on our accompanying Condensed Consolidated Balance Sheets. The change in fair value of these securities is reported within "other assets" and "accumulated deficit" (as a component of "other comprehensive income (loss)") within the accompanying Condensed Consolidated Balance Sheets (see Note 3(g)).

(b)
Value estimated using the terms of the $1.5 million promissory note, the application of a synthetic debt rating based on CASI’s publicly-available financial information, and the prevailing interest yields on similar public debt securities as of September 17, 2014. This full balance was prospectively reclassified beginning March 31, 2017 to "other receivables" (presented within current assets on the accompanying Condensed Consolidated Balance Sheets) from "other assets" (presented within non-current assets) due to this note's maturity date of March 17, 2018 (i.e., within 12 months of March 31, 2017).
(c)
Presented within “license fees and service revenue” in the Consolidated Statements of Operations for the year ended December 31, 2015 (see below).
In addition, CASI will be responsible for paying any royalties or milestones that we are obligated to pay to our third-party licensors resulting from the achievement of certain milestones and/or sales of CASI Out-Licensed Products, but only to the extent of the greater China portion of such royalties or milestones.

License Fee Revenue Recognized in the Second Quarter of 2015

The $9.7 million value of the upfront proceeds (undiscounted, and net of certain foreign exchange adjustments) from CASI were recognized in 2015 within “license fees and service revenue” on our Consolidated Statements of Operations. The timing of this revenue recognition corresponds with the execution of supply agreements with CASI for ZEVALIN, MARQIBO, and EVOMELA. These agreements allow CASI to procure CASI Out-Licensed Products directly from approved third parties, and in such case, do not require our future involvement for their commercial supply.
11. OUT-LICENSE OF ZEVALIN IN CERTAIN EX-U.S. TERRITORIES

On November 16, 2015, we entered into an out-license agreement with Mundipharma for their commercialization of ZEVALIN in Asia (excluding India and Greater China), Australia, New Zealand, Africa, the Middle East, and Latin America (including the Caribbean islands). In return, we received $18 million (comprised of $15 million received in December 2015 and $3 million received in January 2016). Of these proceeds, $15 million was recognized within "license fees and service revenue" in the fourth quarter of 2015. Of the $3 million received in January 2016, $0.5 million was recognized for the three months ended September 30, 2016, and $1.2 million and $1.3 million was recognized in the same caption for the nine months ended September 30, 2017 and 2016, respectively (this $3 million was recognized in full by June 30, 2017).

Mundipharma is required to reimburse us for our payment of royalties due to Bayer Pharma AG ("Bayer") from their ZEVALIN sales (see Note 16(b)(ii)). We are also eligible to receive an additional $2 million upon Mundipharma's achievement of a specified sales milestone, that if/when achieved, will also be reported within "license fees and service revenue".
 
12. OUT-LICENSE OF ZEVALIN, FOLOTYN, BELEODAQ, AND MARQIBO IN CANADA TERRITORY
On January 8, 2016, we entered into a strategic partnership with Servier Canada, Inc. ("Servier") for the out-licenses of ZEVALIN, FOLOTYN, BELEODAQ, and MARQIBO. We received $6 million in upfront payments in the first quarter of 2016 which was recognized within "license fees and service revenue" in the accompanying Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016. We will also receive development milestone payments if/when achieved, and a high single-digit royalty on their sales of these products.

13. CO-PROMOTION ARRANGEMENT WITH EAGLE PHARMACEUTICALS
On November 4, 2015, we executed an agreement with Eagle Pharmaceuticals, Inc. ("Eagle") whereby designated members of our sales force concurrently marketed up to six of Eagle's products along with our products in return for fixed

26

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


monthly payments (aggregating $12.8 million), as well as variable sales-based milestones, over an 18 month contract term of January 1, 2016 through June 30, 2017 (the "Eagle Agreement"). As of July 1, 2017, our sales force is no longer marketing Eagle products, as the Eagle Agreement expired under its terms.
The fixed receipts from Eagle for our sales activities, as well as reimbursements of third-party marketing services, are recognized within "license fees and service revenue" on our accompanying Condensed Consolidated Statements of Operations. This amount was $0, $2.4 million, $4.7 million, and $6.7 million for the three and nine months ended September 30, 2017 and 2016, respectively. No sales-based milestones were achieved in the current or prior periods.
An allocation of our sales personnel costs that were dedicated to Eagle are reported within "cost of service revenue" on our accompanying Condensed Consolidated Statements of Operations, as are the reimbursable costs for third-party marketing services. These were an aggregate $0, $2.2 million, $4.2 million, and $5.7 million for the three and nine months ended September 30, 2017 and 2016, respectively.

14. CONVERTIBLE SENIOR NOTES

Overview
On December 17, 2013, we entered into an agreement for the sale of $120 million aggregate principal amount of 2.75% Convertible Senior Notes (equaling 120,000 notes, denominated in $1,000 principal units) 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 units, then equating to 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. 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 has not been (and is not expected to be) marked-to-market through earnings or comprehensive income.
Open Market Purchases of 2018 Convertible Notes and Conversion Hedge Unwind in December 2016
In December 2016, we completed two open market purchases of our 2018 Convertible Notes, aggregating 9,963 note units (equivalent to $10 million principal value) for $9.0 million. We recognized an aggregate loss of $25,000 on the retirement of these 2018 Convertible Notes (based on its carrying value under GAAP), which is included in "other income (expense), net" on the Consolidated Statements of Operations for the year ended December 31, 2016. Accordingly, as of September 30, 2017, $110 million in principal of our 2018 Convertible Notes remained outstanding.
With these two open market purchases in December 2016, we concurrently unwound a portion of our previously sold warrants and previously purchased call options (that were part of our "conversion hedge" - see below) for aggregate net proceeds of $21,000. We recorded a corresponding net increase to "additional paid-in capital" in the Condensed Consolidated Balance Sheets as of December 31, 2016.
Conversion Hedge
We entered into the Note Hedge in December 2013 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 (then 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 (reduced by the partial unwinding of these instruments, as discussed above).

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


Conversion Events
On and after June 15, 2018, and 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. Prior to June 15, 2018, holders may convert all or a portion of their 2018 Convertible Notes only under any of 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 Notes' 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.
As of September 30, 2017, the 2018 Convertible Notes are not eligible to be converted into our common stock as none of the above elements (1) through (4) were met. Our stockholders’ approval of "flexible settlement" occurred at our Annual Meeting of Stockholders on June 29, 2015. As a result, we may (at our election) settle any future conversions of the 2018 Convertible Notes by paying or delivering cash, shares of our common stock, or a combination of cash and shares of our common stock. However, if the holders of the Convertible Notes do not elect any conversion into our common stock, our December 2018 obligation to repay the then-outstanding amount in cash, plus any accrued and unpaid interest, is unchanged.
Carrying Value and Fair Value
The carrying value of the 2018 Convertible Notes as of September 30, 2017 and December 31, 2016, is summarized as follows: 
 
September 30, 2017
 
December 31, 2016
Principal amount
$
110,037

 
$
110,037

(Less): Unamortized debt discount (amortized through December 2018)
(7,410
)
 
(11,646
)
(Less): Debt issuance costs
(857
)
 
(1,348
)
Carrying value
$
101,770

 
$
97,043


As of September 30, 2017 and December 31, 2016, the estimated aggregate fair value of the 2018 Notes is $156.4 million and $101.8 million, respectively. These estimated fair values represent a Level 2 measurement (see Note 2(xiii)), based upon the 2018 Convertible Notes' quoted bid price at each date in a thinly-traded market.
Components of Interest Expense on 2018 Convertible Notes
The following table sets forth the components of interest expense recognized in the accompanying Condensed Consolidated Statements of Operations for the 2018 Convertible Notes for the nine months ended September 30, 2017 and 2016: 

Nine Months Ended
September 30,

2017
 
2016
Contractual coupon interest expense
$
2,270

 
$
2,475

Amortization of debt issuance costs
491

 
521

Accretion of debt discount
4,236

 
4,246

Total
$
6,997

 
$
7,242

Effective interest rate
8.65
%
 
8.66
%
 


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


15. FOLOTYN LICENSE AGREEMENT AND DEVELOPMENT LIABILITY
As a result of our acquisition of Allos on September 5, 2012 (see Note 9(c)), we assumed a strategic collaboration agreement with Mundipharma (the “Mundipharma Collaboration Agreement”), as well as certain FOLOTYN clinical development obligations (the "FOLOTYN Development Liability").
Mundipharma Collaboration Agreement Summary
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 Mundipharma Collaboration Agreement”), in order to modify: (i) the scope of the licensed territory, (ii) milestone payments, (iii) royalty rates, and (iv) drug development obligations. In connection with the Amended Mundipharma Collaboration Agreement, we received a one-time $7 million payment from Mundipharma for our future research and development activities related to FOLOTYN.
As a result of the Amended Mundipharma Collaboration Agreement, (a) Europe and Turkey were excluded from Mundipharma’s commercialization territory, (b) we are entitled to regulatory and sales-dependent milestone receipts of up to $16 million and $107 million, respectively (see Note 16(b)(vii) for July 2017 achievement), (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 each bear our own FOLOTYN development costs. Effective as of May 1, 2015, we modified the Amended Mundipharma Collaboration Agreement to revise the conditions for our exercise of the option to gain commercialization rights in Switzerland from Mundipharma, as well as royalties payable to us (in the tiered double-digits) on Mundipharma's net sales in Switzerland.
FOLOTYN Development Liability
The fair value of the FOLOTYN 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 - see Note 2(xiii)) 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 contractually required, (ii) estimates of expected cash outflows to third parties for these clinical services and supplies during the expected period of performance through 2031, and (iii) an appropriate discount rate for these expenditures. These inputs are reviewed by management on a quarterly basis for continued applicability.
We adjust this liability during each quarterly period, with corresponding adjustments for incurred costs recorded as credits to “research and development” expense in our accompanying Condensed Consolidated Statements of Operations. 

FOLOTYN
Development
Liability,
Current
 
FOLOTYN
Development
Liability,
Long Term