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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2021

OR

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 001-37569

Strongbridge Biopharma plc

(Exact name of Registrant as specified in its charter)

Ireland

 

98-1275166

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

900 Northbrook Drive

Suite 200

Trevose, PA 19053

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code: +1 610-254-9200

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

Title of each class:

    

Trading Symbol(s)

    

Name of each exchange on which registered:

Ordinary shares, par value $0.01 per share

SBBP

The Nasdaq Global Select Market

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

 

 

 

Non-Accelerated Filer

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

As of August 2, 2021, there were 67,828,952 ordinary shares of the registrant issued and outstanding.  

Table of Contents

TABLE OF CONTENTS

 

 

Page

PART I.

Financial Information

1

 

 

Item 1.

Financial Statements

1

 

Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

1

 

Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2021 and 2020

2

 

Consolidated Statements of Shareholders’ Equity

3

 

Consolidated Statements of Cash Flow for the Six Months Ended June 30, 2021 and 2020

4

 

Notes to the Unaudited Consolidated Financial Statements

5

Item 2.

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

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

 

 

PART II.

Other Information

26

 

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 3.

Defaults Upon Senior Securities

27

Item 4.

Mine Safety Disclosures

27

Item 5.

Other Information

27

Item 6.

Exhibits

27

SIGNATURES

28

Solely for convenience, the trademarks and trade names in this Quarterly Report on Form 10-Q (this “Quarterly Report”) are referred to without the ® and symbols, but absence of such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. The trademarks, trade names and service marks appearing in this Quarterly Report are the property of their respective owners.

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STRONGBRIDGE BIOPHARMA plc

Consolidated Balance Sheets

(In thousands, except share and per share data)

(unaudited)

June 30, 

    

December 31, 

    

2021

2020

ASSETS

Current assets:

Cash and cash equivalents

$

63,774

$

87,522

Accounts receivable

3,581

2,801

Inventory

1,101

1,103

Prepaid expenses and other current assets

 

1,666

 

926

Total current assets

 

70,122

 

92,352

Property and equipment, net

 

183

 

216

Right-of-use asset, net

489

597

Intangible asset, net

 

17,577

 

20,088

Goodwill

 

7,256

 

7,256

Other assets

 

1,193

 

591

Total assets

$

96,820

$

121,100

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

635

$

1,483

Accrued and other current liabilities

 

22,039

 

19,648

Current portion of long-term debt, net

708

Total current liabilities

 

23,382

 

21,131

Long-term debt, net

17,002

17,114

Warrant liability

5,036

4,941

Supply agreement liability, noncurrent

6,471

11,556

Other long-term liabilities

538

753

Total liabilities

 

52,429

 

55,495

Commitments and contingencies (Note 8)

Shareholders’ equity:

Deferred shares, $1.098 par value, 40,000 shares authorized, issued and outstanding at June 30, 2021 and December 31, 2020

44

Ordinary shares, $0.01 par value, 600,000,000 shares authorized; 67,722,319 and 67,243,772 shares issued and outstanding at June 30, 2021 and December 31, 2020

 

677

 

672

Additional paid-in capital

 

374,327

 

370,447

Accumulated deficit

 

(330,613)

 

(305,558)

Total shareholders’ equity

 

44,391

 

65,605

Total liabilities and shareholders’ equity

$

96,820

$

121,100

The accompanying notes are an integral part of these unaudited consolidated financial statements.

1

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(unaudited)

Three Months Ended

Six Months Ended

June 30

June 30, 

    

2021

    

2020

    

2021

    

2020

 

Total revenues

$

10,042

$

7,760

$

18,424

$

14,434

Cost and expenses:

Cost of sales (excluding amortization of intangible asset)

467

393

878

1,362

Selling, general and administrative

15,988

9,638

26,934

20,041

Research and development

 

5,397

 

6,152

 

11,235

 

13,704

Amortization of intangible asset

1,255

1,255

2,511

2,511

Total cost and expenses

 

23,107

 

17,438

 

41,558

 

37,618

Operating loss

 

(13,065)

 

(9,678)

 

(23,134)

 

(23,184)

Other expense, net:

Interest expense

(810)

(253)

(1,592)

(253)

Unrealized gain (loss) on fair value of warrants

680

(7,367)

(95)

(6,787)

Other (expense) income, net

 

(45)

 

26

 

(233)

 

254

Total other expense, net

 

(175)

 

(7,594)

 

(1,920)

 

(6,786)

Loss before income taxes

 

(13,240)

 

(17,272)

 

(25,054)

 

(29,970)

Income tax expense

 

(1)

 

 

(1)

 

Net loss

$

(13,241)

$

(17,272)

(25,055)

(29,970)

Other comprehensive loss:

 

 

 

Unrealized loss on marketable securities

(6)

(3)

Comprehensive loss

$

(13,241)

$

(17,278)

$

(25,055)

$

(29,973)

Net loss attributable to ordinary shareholders:

Basic

$

(13,241)

$

(17,272)

$

(25,055)

$

(29,970)

Diluted

$

(13,921)

$

(17,272)

$

(25,055)

$

(29,970)

Net loss per share attributable to ordinary shareholders:

Basic

$

(0.20)

$

(0.32)

$

(0.37)

$

(0.55)

Diluted

$

(0.21)

$

(0.32)

$

(0.37)

$

(0.55)

Weighted-average shares used in computing net loss per share attributable to ordinary shareholders:

Basic

67,653,659

 

54,302,325

 

67,569,136

 

54,266,675

Diluted

67,921,260

54,302,325

 

67,569,136

 

54,266,675

The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statement of Shareholders’ Equity

(In thousands, except share amounts)

(unaudited)

 

    

Additional

    

    

Accumulated Other

    

Total

 

Deferred Shares

Ordinary Shares

Paid-In

Accumulated

Comprehensive

Shareholders’

 

Shares

    

Amount

    

Shares

    

Amount

    

Capital

Deficit

Income (Loss)

Equity

 

Balance—March 31, 2020

40,000

$

44

54,247,501

$

542

$

333,768

$

(273,181)

6

$

61,179

Net loss

(17,272)

(17,272)

Stock-based compensation

1,773

1,773

Issuance of warrants and beneficial conversion feature related to the Loan Agreement

2,457

2,457

Ordinary shares issued, net of shares withheld for employee taxes

108,456

2

(264)

(262)

Unrealized loss on marketable securities

(6)

(6)

Balance—June 30, 2020

40,000

$

44

54,355,957

$

544

$

337,734

$

(290,453)

$

47,869

Balance—December 31, 2019

40,000

$

44

54,205,852

$

542

$

332,085

$

(260,483)

3

$

72,191

Net loss

(29,970)

(29,970)

Stock-based compensation

3,524

3,524

Issuance of warrants and beneficial conversion feature related to the Loan Agreement

2,457

2,457

Ordinary shares issued, net of shares withheld for employee taxes

150,105

2

(332)

(330)

Unrealized loss on marketable securities

(3)

(3)

Balance—June 30, 2020

40,000

$

44

54,355,957

$

544

$

337,734

$

(290,453)

$

47,869

Balance—March 31, 2021

40,000

$

44

67,545,369

$

675

$

372,500

$

(317,372)

$

55,847

Net loss

(13,241)

(13,241)

Stock-based compensation

2,082

2,082

Ordinary shares issued, net of shares withheld for employee taxes

176,950

2

(299)

(297)

Cancellation of deferred shares

(40,000)

(44)

44

Balance—June 30, 2021

$

67,722,319

$

677

$

374,327

$

(330,613)

$

44,391

Balance—December 31, 2020

40,000

$

44

67,243,772

$

672

$

370,447

$

(305,558)

$

65,605

Net loss

(25,055)

(25,055)

Stock-based compensation

4,359

4,359

Ordinary shares issued, net of shares withheld for employee taxes

419,079

5

(699)

(694)

Exercise of stock options

48,157

*

138

138

Issuance of shares, net of expenses

11,311

*

38

38

Cancellation of deferred shares

(40,000)

(44)

44

Balance—June 30, 2021

$

67,722,319

$

677

$

374,327

$

(330,613)

$

44,391

* Represents an amount less than $1.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

Table of Contents

STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Cash Flow

(In thousands)

(unaudited)

Six Months Ended

June 30, 

2021

2020

Cash flows from operating activities:

Net loss

$

(25,055)

$

(29,970)

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

Stock-based compensation

 

4,359

 

3,524

Amortization of intangible asset

2,511

2,511

Change in fair value of warrant liability

95

6,787

Amortization of debt discounts and debt issuance costs

 

596

 

Accretion of discounts on marketable securities

(53)

Depreciation

 

43

 

43

Changes in operating assets and liabilities:

Accounts receivable

(780)

(596)

Inventory

(601)

294

Prepaid expenses and other current assets

 

(740)

 

(757)

Other assets

109

314

Accounts payable

 

(848)

 

(1,374)

Accrued and other liabilities

(2,909)

(8,098)

Net cash used in operating activities

 

(23,220)

 

(27,375)

Cash flows from investing activities:

Sales and maturities of marketable securities

21,122

Purchases of property and equipment

(10)

 

Net cash (used in) provided by investing activities

 

(10)

 

21,122

Cash flows from financing activities:

Payments related to tax withholding for net-share settled equity awards

(694)

(330)

Proceeds from long-term debt, net

9,460

Proceeds from exercise of stock options

138

Proceed from issuance of ordinary shares in connection with at-the-market offering, net

38

Net cash (used in) provided by financing activities

 

(518)

 

9,130

Net (decrease) increase in cash and cash equivalents

 

(23,748)

 

2,877

Cash and cash equivalents—beginning of period

 

87,522

 

57,032

Cash and cash equivalents—end of period

$

63,774

$

59,909

Supplemental disclosures of cash flow information:

Cash paid during the year for:

 

 

Interest

$

997

$

118

Income taxes other, net of refunds

$

1,301

$

531

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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STRONGBRIDGE BIOPHARMA plc

Notes to Unaudited Consolidated Financial Statements

1. Organization

We are a global, commercial-stage biopharmaceutical company focused on the development and commercialization of therapies for rare diseases with significant unmet needs.

Our first commercial product is Keveyis (dichlorphenamide), the first and only treatment approved by the U.S. Food and Drug Administration (the “FDA”) for hyperkalemic, hypokalemic, and related variants of primary periodic paralysis (“PPP”), a group of rare hereditary disorders that cause episodes of muscle weakness or paralysis.

We have two clinical-stage product candidates for rare endocrine diseases, Recorlev and veldoreotide. Recorlev (levoketoconazole), the pure 2S,4R enantiomer of the enantiomeric pair comprising ketoconazole, is a next-generation steroidogenesis inhibitor being investigated as a chronic therapy for adults with endogenous Cushing’s syndrome. Veldoreotide is a next-generation somatostatin analog being investigated for potential applications in conditions amenable to somatostatin receptor activation. Both levoketoconazole and veldoreotide have received orphan designation from the FDA and the European Medicines Agency (“EMA”)

Liquidity

We believe that our cash and cash equivalents of $63.8 million at June 30, 2021, will be sufficient to allow us to fund planned operations for at least 12 months beyond the issuance date of these unaudited consolidated financial statements.

We may never achieve profitability, and unless and until we do, we will continue to need to raise additional capital. We plan to continue to fund our operations and capital funding needs through equity or debt financing along with revenues from Keveyis. There can be no assurances, however, that additional funding will be available on terms acceptable to us.

Transaction Agreement with Xeris Pharmaceuticals, Inc.

On May 24, 2021, we announced that we had signed an agreement to be acquired by Xeris Pharmaceuticals, Inc. (“Xeris”). Upon close of the transaction, the businesses of Xeris and Strongbridge Biopharma plc (“Strongbridge”) will be combined under a new entity to be called Xeris Biopharma Holdings, Inc The agreement, including the maximum aggregate amount payable under the contingent value rights (the “CVRs”), values Strongbridge at approximately $267 million based on the closing price of Xeris common stock of $3.47 on May 21, 2021, and Strongbridge’s fully diluted share capital.

Under the terms of the agreement, at closing, Strongbridge shareholders will receive a fixed exchange ratio of 0.7840 shares of Xeris Biopharma Holdings common stock for each Strongbridge ordinary share they own. Based on the closing price of Xeris common stock on May 21, 2021, this represents approximately $2.72 per Strongbridge ordinary share and a 12.9% premium to the closing price of Strongbridge ordinary shares on May 21, 2021. Strongbridge shareholders will also receive 1 non-tradeable CVR for each Strongbridge ordinary share they own, worth up to an additional $1.00 payable in cash or Xeris Biopharma Holdings common stock, or a combination of cash and additional Xeris Biopharma Holdings common stock (at Xeris Biopharma Holdings’ sole election) upon achievement of the following milestones: (i) $0.25 per CVR upon the first listing of at least one issued patent for Keveyis in the U.S. Food and Drug Administration’s Orange Book by the end of 2023 or the first achievement of at least $40 million in Keveyis annual net sales in 2023, (ii) $0.25 per CVR upon the first achievement of at least $40 million in Recorlev annual net sales in 2023, and (iii) $0.50 per CVR upon the first achievement of at least $80 million in Recorlev annual net sales in 2024. The minimum payment on the CVR per Strongbridge ordinary share is zero and the maximum payment is $1.00 in cash or Xeris Biopharma Holdings common stock, or a combination of cash and

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additional Xeris Biopharma Holdings common stock at Xeris Biopharma Holdings’ sole election. The transaction is expected to close early in the fourth quarter of 2021, subject to the satisfaction of closing conditions.

The transaction, which has been unanimously approved by the boards of directors of both companies is expected to close early in the fourth quarter of 2021, subject to the satisfaction of closing conditions. Upon close of the transaction, the current Xeris stockholders are expected to own approximately 60% of the combined company, while current Strongbridge shareholders are expected to own approximately 40%.

On July 2, 2021, Xeris Biopharma Holdings filed with the SEC a registration statement on Form S-4, to register the Xeris Biopharma Holdings common stock to be issued in connection with the transaction, which also constitutes the joint proxy statement of Strongbridge and Xeris under Section 14(a) of the Securities Exchange Act of 1934. Upon the effectiveness of the Form S-4, we intend to solicit shareholders for their approval of the merger with Xeris.

In connection with this transaction, we have incurred, and will continue to incur, transaction-related costs. A portion of those costs are contingent on the transaction closing, such as investment banking fees, and employee related costs. For the six months ended June 30, 2021, we have incurred $5.8 million of expenses, which are recorded in our selling, general and administrative expense within the Consolidated Statements of Operations and Comprehensive Loss.

In addition, all of our outstanding restricted stock units will vest immediately prior to the closing of this transaction, and all of our outstanding stock options will vest immediately prior to the closing of this transaction and be converted into options to purchase Xeris Biopharma Holdings common stock.

2. Summary of significant accounting policies and basis of presentation

Basis of presentation

These unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The unaudited consolidated financial statements reflect all adjustments, which include only normal recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the operating results and financial position for the periods presented.

The preparation of the unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates. Results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

These unaudited consolidated financial statements should be read in conjunction with the accounting policies and notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission on March 3, 2021 (the “2020 Annual Report”). Our significant accounting policies are described in Note 2 of the notes to the audited consolidated financial statements included in our 2020 Annual Report. Since the date of those financial statements, there have been no changes to our significant accounting policies.

Leases

We account for leases in accordance with Accounting Standards Codification Topic 842, Leases (“ASC 842”). We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to us the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) we have the right to control the use of the identified asset.

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Operating leases where we are the lessee are included in Right of use (“ROU”) assets and Accrued and other current liabilities and Other long-term liabilities on our Consolidated Balance Sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

Key estimates and judgments include how we determined (1) the discount rate we use to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Because our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The lease term for all of our leases includes the noncancellable period of the lease. Lease payments included in the measurement of the lease asset or liability are comprised of our fixed payments.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date less any lease incentives received.

For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We monitor for events or changes in circumstances that require a reassessment of a lease. If a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.

We have elected not to recognize ROU assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. We recognize the lease payments associated with our short-term leases as an expense on a straight-line basis over the lease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for all of our other leases.

Cash, cash equivalents and marketable securities

We consider all short-term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of account balances at banks and money market accounts, respectively.

We occasionally invest our excess cash balances in marketable debt securities of highly rated financial institutions. We seek to diversify our investments and limit the amount of investment concentrations for individual institutions, maturities and investment types. We classify marketable debt securities as available-for-sale and, accordingly, record such securities at fair value. We classify these securities as current assets as these investments are available to us for use in funding current operations. There were no marketable securities as of June 30, 2021 or December 31, 2020.

Unrealized gains and losses on marketable debt securities are recorded as a separate component of Accumulated other comprehensive income (loss) included in shareholders’ equity.

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Segment information

Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions on how to allocate resources and assess performance. We view our operations and manage our business in one operating segment.

Net loss per share

Basic net loss per share is calculated by dividing the net loss attributable to shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net loss per share is calculated by dividing the net loss attributable to shareholders by the weighted-average number of ordinary shares outstanding for the period, including any dilutive effect from outstanding stock options or other equity-based instruments. Shares used in the diluted net loss per share calculations exclude anti-dilutive ordinary share equivalents, which currently consist of outstanding stock options, unvested restricted stock units (“RSUs”), equity-classified warrants and the conversion feature of our outstanding term loan agreement.

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding for the six months ending June 30, 2021 and 2020, as they would be anti-dilutive:

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding for the six months ending June 30, 2021 and 2020, as they would be anti-dilutive:

June 30, 

2021

2020

Warrants

7,368,033

7,100,643

Stock options issued and outstanding

    

8,260,473

10,499,222

Unvested RSUs

2,800,425

1,090,300

Conversion feature of our outstanding term loan agreement

1,339,285

1,339,285

Recent accounting pronouncements – not yet adopted

June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an entity to measure and recognize expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities with unrealized losses, the standard requires allowances to be recorded through net income instead of directly reducing the amortized cost of the investment under the current other-than-temporary impairment model. For smaller reporting companies, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

3. Revenue recognition

Product sales, net

We sell Keveyis to one specialty pharmacy provider (the “Customer”), who is the exclusive distributor of Keveyis in the United States. The Customer subsequently resells Keveyis to patients, most of whom are covered by payors that may provide for government-mandated or privately negotiated rebates with respect to the purchase of Keveyis.

Revenues from sales of Keveyis are recognized when we satisfy a performance obligation by transferring control of the product to the Customer. Transfer of control occurs upon receipt of the product by the Customer. We expense incremental costs related to the set-up of contracts with the Customer when incurred, as these costs do not meet the criteria for capitalization.

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Reserves for variable consideration

Revenues from sales of Keveyis are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and that result from rebates, co-pay assistance and other allowances that are offered between us and the patients’ payors. There is no variable consideration reserve for returns as we do not accept returns of Keveyis. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than the Customer). Where appropriate, these estimates may take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted buying and payment patterns of the Customer. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. We reassess our estimates on an ongoing basis. If actual results in the future vary from our estimates, we will adjust our estimates. Any such adjustments would affect net product revenue and earnings in the period such variances become known.

Trade Discount: We provide the Customer with a discount that is explicitly stated in our contract and is recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, we receive sales order management, data and distribution services from the Customer. To the extent the services received are distinct from our sale of Keveyis to the Customer, these payments are classified in selling, general and administrative expenses in our consolidated statement of operations and comprehensive loss.

Funded Co-pay Assistance Program: We contract with a third-party to manage the co-pay assistance program intended to provide financial assistance to qualified insured patients. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with Keveyis that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. These payments are consideration payable to the Customer and the related reserve is recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the consolidated balance sheet.

Government Rebates: We are subject to discount obligations under state Medicaid programs and Medicare. We estimate our Medicaid and Medicare rebates for the estimated patient mix. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses on the consolidated balance sheet. For Medicaid, accruals are based on estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. Manufacturers of pharmaceutical products are responsible for 70% of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this Medicare coverage gap responsibility, we estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. Our liability for these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for Keveyis transactions that have been recognized as revenue but remain in the Customer’s inventory at the end of each reporting period.

Temporary Supply and Patient Assistance Programs: We provide free Keveyis to uninsured patients who satisfy pre-established criteria for either the Temporary Supply Program or the Patient Assistance Program. Patients who meet the Temporary Supply Program eligibility criteria may receive a temporary supply of free Keveyis for no more than 60 days while there is a determination of the patient’s third-party insurance, prescription drug benefit or other third-party coverage for Keveyis. The Patient Assistance Program provides free Keveyis for up to 12 months to uninsured patients who satisfy pre-established criteria for financial need. We do not recognize any revenue related to these free products and the associated costs are classified in selling, general and administrative expenses in our consolidated statements of operations and comprehensive loss.

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4. Fair value measurements

We record financial assets and liabilities at fair value. Because of their short-term nature, the amounts reported in the balance sheet for cash, accounts receivable and accounts payable approximate fair value.

The guidance requires fair value measurements to maximize the use of “observable inputs.” The three-level hierarchy of inputs to measure fair value are as follows: 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Because of their short-term nature, the amounts reported in the balance sheet for cash and accounts payable approximate fair value.

Level 2: Significant observable inputs other than Level 1 prices such as quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The fair values of the outstanding warrants were measured using the Black-Scholes option-pricing model. Inputs used to determine estimated fair value of the warrant liabilities include the estimated term of the warrants, risk-free interest rates, and the expected volatility of the underlying stock. The significant unobservable inputs used in the fair value measurement of the warrant liabilities were the volatility rate and the estimated term of the warrants. Generally, increases and decreases in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.

We did not have any transfers between the different levels.

The following table presents our assets and liabilities that are measured at fair value on a recurring basis for the periods presented (in thousands):

As of June 30, 2021

 

Level I

Level II

Level III

Total

 

Cash equivalents

62,668

62,668

Total assets

$

62,668

$

$

$

62,668

Warrant liability

5,036

5,036

Total liabilities

$

$

$

5,036

$

5,036

As of December 31, 2020

 

Level I

Level II

Level III

Total

 

Cash equivalents

86,775

86,775

Total assets

$

86,775

$

$

$

86,775

Warrant liability

4,941

4,941

Total liabilities

$

$

$

4,941

$

4,941

The following table presents a reconciliation of our level 3 warrant liability (in thousands):

    

As of June 30, 2021

Balance as of December 31, 2020

$

4,941

Unrealized loss on fair value of warrants for six months ended June 30, 2021

95

Balance as of June 30,2021

$

5,036

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5. Intangible asset and goodwill

The following represents the balance of our intangible asset and goodwill as follows (in thousands):

As of June 30, 2021

 

Beginning of Period

Amortization

End of Period

 

Keveyis

$

20,088

$

(2,511)

$

17,577

Goodwill

 

7,256

 

7,256

Total

$

27,344

$

(2,511)

$

24,833

Our finite-lived intangible asset consists of acquired developed product rights obtained from our acquisition of Keveyis (dichlorphenamide) from a subsidiary of Taro Pharmaceutical Industries Ltd. (“Taro”).

Pursuant to the terms of the Asset Purchase Agreement and Supply Agreement that we entered into with Taro in December 2016, we paid Taro an upfront payment in two installments of $1 million in December 2016 and $7.5 million in March 2017, and will pay an aggregate of $7.5 million in potential milestone payments upon the achievement of certain product sales targets.  Taro has agreed to continue to manufacture Keveyis for us under an exclusive supply agreement through the orphan exclusivity period. We are obligated to purchase from Taro certain annual minimum amounts of product totaling approximately $29 million over a six-year period. We have concluded that the supply price payable by us exceeds fair value and, therefore, have used a discounted cash flow method with a probability assumption to value the payments in excess of fair value at $29.3 million, for which we have recorded an intangible asset and corresponding liability. This liability is being reduced as we purchase inventory over the term of the Supply Agreement that we entered into with Taro.  In addition, we incurred transaction costs of $2.4 million. The transaction resulted in the recording of an intangible asset of $40.2 million. This asset is being amortized over an eight-year period using the straight-line method.

We recorded amortization expense of $1.3 million and $2.5 million for the three and six months ended June 30, 2021, and 2020.

6. Long-term debt

On May 19, 2020, we entered into a $30 million Term Loan Agreement (the “Loan Agreement”) with Avenue Venture Opportunities Fund L.P. (“Avenue”), as administrative agent and collateral agent, and the lenders named therein and from time to time a party thereto (the “Lenders”). Pursuant to the terms of the Loan Agreement, our wholly-owned subsidiary, Strongbridge U.S. Inc. (the “Borrower”) borrowed $10 million (the “Initial Loan”) from the Lenders at closing.  As a result of achieving positive top-line data for Recorlev in our Phase 3 LOGICS clinical trial in September 2020, we borrowed an additional $10 million under the Loan Agreement (the “Second Loan”) on December 30, 2020. The remaining $10 million tranche (the “Third Loan”) will become available to us between October 1, 2021 and March 31, 2022 if we achieve FDA approval of Recorlev and subject to Avenue’s investment committee approval.  

The Loan Agreement has a four-year term, no minimum revenue or cash balance financial covenants and an interest-only period for 24 months that can increase to 36 months assuming we receive FDA approval of Recorlev. Amounts borrowed under the Loan Agreement accrue interest at a floating rate per annum (based on a year of 365 days) equal to the sum of (a) the greater of (x) the Prime Rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue, and (y) 3.25%, plus (b) 6.75%. The interest rate as of June 30, 2021 was 10%.

We paid a commitment fee of $200,000 (1% of the amounts of the Initial Loan and the Second Loan) at closing. We are also required to pay the Lenders a final payment fee upon repayment or prepayment of any loans made under the Loan Agreement in accordance with the terms and conditions of the Loan Agreement.

Under the terms of the Loan Agreement, we may prepay all or a portion of the outstanding principal amount of any loans outstanding under the Loan Agreement at any time upon prior notice to the Lenders subject to a prepayment

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premium (which reduces after the first year) and the payment of the pro rata portion of the final payment fee (to the extent not already paid) based on the amount of loans being prepaid. In certain circumstances, including a change of control and certain asset sales or licensing transactions, we may be required to prepay all or a portion of loans outstanding, and, to the extent required under the terms of the Loan Agreement, the applicable prepayment premium and final payment fee.

As security for our obligations under the Loan Agreement, we entered into a security agreement with Avenue, pursuant to which we granted a lien on substantially all of our assets, including intellectual property, to the Secured Parties (as such term is defined in the Loan Agreement).

Avenue has the right to convert up to $3 million of the aggregate principal amount of any loans outstanding under the Loan Agreement into ordinary shares at a price per share of $2.24. We have accounted for this term as a beneficial conversion feature, and the fair value is recorded in Additional paid-in capital. This amount is recorded as a debt discount and classified as a contra-liability on the consolidated balance sheet and amortized to interest expense over the term of the loan.

In connection with the execution of both the Loan Agreement and the Second Loan, we issued to Avenue warrants to purchase up to an aggregate of 267,390 ordinary shares at an exercise price (the “Exercise Price”) of $1.87 (which is equal to the five-day volume weighted average price as of the trading day immediately prior to execution of the financing agreement) for each of the tranches of debt, respectively. The warrants are exercisable, in full or in part, at any time prior to five years following the issue date for both tranches of the loan. We have accounted for these warrants as equity, and the fair value is recorded into Additional paid-in capital. This amount is recorded as a debt discount and classified as a contra-liability on the consolidated balance sheet and amortized to interest expense over the term of the loan. If we borrow the Third Loan, we will be required to issue to the Lenders or their designees additional warrants to purchase ordinary shares equal to an aggregate of 5% of the Third Loan divided by the Exercise Price, rounded down to the nearest whole share.

Loan Amendment

On July 23, 2021, Strongbridge, the Borrower and Avenue entered into an amendment (the “Loan Amendment”) to the Loan Agreement.

Under the Term Loan Agreement, Strongbridge granted to Avenue an option to convert up to $3 million of the aggregate principal amount of any loans outstanding under the Loan Agreement into Strongbridge ordinary shares (the “Conversion Option”). The Loan Amendment amends the Conversion Option such that $10 million of the aggregate principal amount of any loans outstanding under the Loan Agreement will automatically convert into Strongbridge ordinary shares immediately prior to the completion of the acquisition of Strongbridge by Xeris Pharmaceuticals, Inc. The conversion price remains unchanged at $2.24 per share.

Future principal payments due under the Loan Agreement, if the interest payment only period is not extended beyond the current 24-month period, are as follows (in thousands):

    

Principal

 

Payments

 

2021

$

2022

5,833

2023

10,000

2024

4,167

Total future payments

$

20,000

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7. Accrued and other current liabilities

Accrued and other current liabilities consist of the following (in thousands):

June 30, 

December 31, 

 

2021

2020

 

Consulting and professional fees

$

7,311

$

2,754

Accrued sales allowances

5,588

4,312

Supply agreement - current portion

5,085

4,391

Employee compensation

2,972

5,749

Accrued royalties

499

301

Lease liability - current portion

437

415

Other

 

139

 

72

Accrued taxes

8

1,161

Severance

493

Total accrued and other current liabilities

$

22,039

$

19,648

8. Commitments and contingencies

(a) Commitments to Taro Pharmaceuticals Industries Ltd.

As of June 30, 2021, our remaining obligation under the Supply Agreement (see Note 5) was $14.1 million. The agreement with Taro may extend beyond the orphan exclusivity period unless terminated by either party pursuant to the terms of the agreement. If terminated by Taro at the conclusion of the orphan exclusivity period, we have the right to manufacture the product on our own or have the product manufactured by a third party on our behalf. We are also required to reimburse Taro for its royalty obligation resulting from its sale of Keveyis to us.

(b) Indemnifications

In the ordinary course of business and in connection with the sale of assets and businesses and other transactions, we often agree to indemnify our counterparties against certain liabilities that may arise in connection with a transaction or that are related to events and activities prior to or following a transaction, such as breaches of contracts, unfavorable tax consequences and employee liabilities. If a counterparty were to make a successful indemnification claim against us, we may be required to reimburse the loss and such amount could be material to our consolidated financial statements. Where appropriate, the obligation for such indemnifications is recorded as a liability. Because these agreements generally do not specify the maximum amount of indemnification a counterparty may be entitled to, the overall maximum amount of our potential indemnification liability under these agreements cannot be reasonably estimated. However, we believe that the likelihood of a material liability being triggered under these indemnification obligations is not probable at this time.

9. Taxes

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts and tax bases of assets and liabilities and operating loss carryforwards and other attributes using enacted rates expected to be in effect when those differences reverse. Valuation allowances are provided against deferred tax assets that are not more likely than not to be realized.

We assess our ability to realize deferred tax assets. Changes in future earnings projections, among other factors, may cause us to adjust our valuation allowance on deferred tax assets. Any such adjustments would impact our income tax expense in the period in which it is determined that these factors have changed.

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We recorded income tax expense of $1,000 for the three and six months ended June 30, 2021 and did not record an expense for the three and six months ended June 30, 2020.

10. Ordinary Shares

Equity transactions

We entered into an equity distribution agreement with JMP Securities LLC (“JMP”) on April 28, 2017, pursuant to which we could sell, at our option, from time to time, up to an aggregate of $40 million of our ordinary shares through JMP, as sales agent. The agreement provided for a commission to JMP equal to 3% of the gross proceeds from the sale of our ordinary shares under this at-the-market (“ATM”) facility. Pursuant to the terms of the equity distribution agreement, we reimbursed JMP for certain out-of-pocket expenses, including the fees and disbursements of counsel to JMP, incurred in connection with establishing the ATM facility and provided JMP with customary indemnification rights. During the three months ended March 31, 2021, we sold an aggregate of 11,311 ordinary shares under the ATM facility at an average selling price of $3.36 per share, resulting in net proceeds of approximately $38,000 after payment of fees to JMP of $1,100. This equity distribution agreement was terminated on March 24, 2021.

We entered into an equity distribution agreement with Jefferies LLC (“Jefferies”) on March 25, 2021, pursuant to which we may sell, at our option, from time to time, up to an aggregate of $50 million of our ordinary shares through Jefferies, as sales agent. We will pay Jefferies a commission equal to 3% of the gross proceeds from the sale of our ordinary shares under the ATM facility. Pursuant to the terms of the equity distribution agreement, we reimbursed Jefferies for certain out-of-pocket expenses, including the fees and disbursements of counsel to Jefferies, incurred in connection with establishing the ATM facility and have provided Jefferies with customary indemnification rights. For the period ended June 30, 2021, we did not sell any shares under this agreement.

Warrants

Our outstanding warrants as of June 30, 2021, are as follows:

    

    

    

Warrants