15.

Subsequent Event

Talon Therapeutics Acquisition

On July 16, 2013, the Company entered into a Securities Purchase Agreement with Eagle Acquisition Merger Sub, Inc., a wholly-owned subsidiary of our company which we refer to herein as Acquisition Sub, and certain stockholders of Talon Therapeutics, Inc., or Talon, whereby, on July 17, 2013, Acquisition Sub purchased all of the shares of common stock of Talon owned by such stockholders, which represented approximately 89% of the outstanding shares of common stock of Talon. On July 16, 2013, we also entered into a Stock Purchase Agreement with Acquisition Sub and Talon, whereby, on July 17, 2013, Acquisition Sub purchased additional shares of common stock from Talon, resulting in Acquisition Sub’s ownership of over 90% of the then outstanding shares of Talon’s common stock. On July 17, 2013, Acquisition Sub consummated a “short form” merger with Talon in accordance with Delaware law in which Acquisition Sub merged with and into Talon, with Talon remaining as the surviving corporation and a wholly-owned subsidiary of the Company. Through the acquisition of Talon, we will gain worldwide rights to Marqibo, an FDA-approved drug that we believe complements our other hematology and oncology products.

In connection with the closing of the acquisition, Spectrum will pay Talon stockholders purchase consideration comprising of an aggregate upfront cash consideration of approximately $11.3 million and issued 3 million shares of its common stock (valued at $8.77 on NASDAQ on July 16, 2013 or approximately $26.3 million) in exchange for the cancellation of all of the outstanding indebtedness under Talon’s credit facility. Talon stockholders will also receive contingent value rights (CVRs) in an aggregate of up to $195.0 million in future cash payments from Spectrum upon the achievement of certain one-time sales-based milestones for Marqibo^® and an approval-based milestone for Menadione Topical Lotion upon satisfaction of the following specific milestones, of which there is no assurance that any may be achieved:

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$5,000,000 upon the achievement of net sales of Marqibo (vincristine sulfate liposome injection) in excess of $30,000,000 in any calendar year;

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$10,000,000 upon the achievement of net sales of Marqibo in excess of $60,000,000 in any calendar year

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$25,000,000 upon the achievement of net sales of Marqibo in excess of $100,000,000 in any calendar year

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$50,000,000 upon the achievement of net sales of Marqibo in excess of $200,000,000 in any calendar year

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$100,000,000 upon the achievement of net sales of Marqibo in excess of $400,000,000 in any calendar year

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$5,000,000 upon receipt of marketing authorization from the FDA regarding Menadione Topical Lotion

The CVRs have an estimated fair value of $6.5 million on the date of the acquisition and will not be publicly traded. The Company also entered into a Registration Rights Agreement pursuant to which we filed a registration statement for purpose of registering for resale under the Securities Act of all the shares of our common stock issued in connection with the cancellation of the indebtedness.

Consideration Transferred

The Talon acquisition purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair value at the acquisition date. The following table summarizes the purchase price ($ in 000’s):


Cash consideration	$	11.3
Contingent value right		6.5
Spectrum shares of common stock		26.3

Total purchase consideration	$	44.1

Fair Value Estimate of Assets Acquired and Liabilities Assumed

Under the purchase method of accounting, the total purchase consideration is allocated to Talon net tangible and intangible assets based on the preliminary estimated fair values as of the closing date. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was allocated to goodwill. The goodwill acquired is not deductible for tax purposes. The following table summarizes the fair value of the net assets acquired as of July 17, 2013 ($ in 000’s):


Cash and equivalents	$	131
Inventory		611
Prepaid expenses and other current assets		602
Property and equipment		30
Identifiable intangible assets		46,300
Goodwill		20,606

Total assets acquired		68,280
Accounts payable & accrued liabilities		6,870
Contingent value rights		6,500
Deferred tax liability		17,300

Total liabilities assumed		30,670
Net assets acquired	$	37,610

The acquired Marqibo intangible assets consisted of developed technology and in-process research and development for the treatment of acute lymphoblastic leukemia (“ALL”) and non-Hodgkin’s lymphoma (“NHL”) as follows in the table below ($ in 000’s):


	Value of Intangible Assets Acquired		Weighted-Average Amortization Period
Developed technology—Marqibo for ALL	$	27,800		(1)
In-process research and development—Marqibo for NHL		18,500		(1)

Total identifiable intangible assets	$	46,300

(1)

Acquired in-process research and development (“IPR&D”) is an intangible asset classified as an indefinite-lived until the completion or abandonment of the associated R&D effort, and will be amortized over an estimated useful life to be determined at the date the project is completed. Intangible IPR&D is not amortized during the period that it is considered indefinite-lived but rather tested for impairment.

Purchase price adjustments recorded subsequent to the closing date of July 17, 2013 will affect the recorded amount of goodwill.

The fair value of the acquired in-process research and development intangible assets was estimated using the income approach. The income approach uses valuation techniques to convert future amounts to a single present amount (discounted). Our measurement is based on the value indicated by current market expectations about those future amounts. The fair value considered our estimates of future incremental earnings that may be achieved by the intangible assets.

Goodwill is calculated as the excess of the purchase consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of Talon includes benefits that the Company believes will result from combining the operations of Talon with the operations of Spectrum and any intangible assets that do not qualify for separate recognition. The Talon acquisition will also allow us to gain additional expertise and intellectual property for the next generation of anti-cancer therapeutics, an expanded and complimentary product mix, and an assembled sales force, which we believe supports the amount of goodwill recognized. Goodwill is not amortized and is not deductible for tax purposes.

Deferred tax liability reflects taxes associated with the acquired in-process research and development assets recognized as part of the acquisition.

With respect to the acquisition discussed above, we believe the preliminary fair values assigned to the assets acquired and liabilities assumed were based upon reasonable assumptions. Actual adjustments will be based on analyses of fair values of identifiable intangible assets, which will be completed after Spectrum obtains a final third-party valuation, performs its own assessments and reviews all available data. The fair value estimates for the purchase price allocation may change if additional information becomes available and could have a material impact.

Proforma information for March 31, 2013 (the last period Talon reported earnings on Form 10-Q) and December 31, 2012 was filed on Form 8K-A on August 6, 2013. There are no Talon revenues and earnings included in the results of the Company for the three and six month period ending June 30, 2013.