UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 20182020

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)

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:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]☒ No [  ]☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]☒ No [  ]☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):

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. [X]☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]☐ No [X]☒

As of May 4, 2018,1, 2020, there were 45,534,66554,247,501 ordinaryshares of the registrant issued and outstanding.

outstanding. 

TABLE OF CONTENTS

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 AnnualQuarterly Report are the property of their respective owners.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STRONGBRIDGE BIOPHARMA plc

Consolidated Balance Sheets

(In thousands, except share and per share data)

(unaudited)

STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(unaudited)

STRONGBRIDGE BIOPHARMA plc

Consolidated Statement of Stockholders’ (Deficit) Equity

(In thousands, except share amounts)

(unaudited)

* Represents an amount less than $1.

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

STRONGBRIDGE BIOPHARMA plc

Consolidated Statements of Cash Flow

(In thousands)

(unaudited)

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.

Our second commercial product, Macrilen (macimorelin) is an oral growth hormone secretagogue receptor agonist, and is the first and only oral drug approved by the FDA for the diagnosis of patients with adult growth hormone deficiency (“AGHD”). In January 2018, we acquired the U.S. and Canadian rights to Macrilen and we expect to launch Macrilen in the United States in mid-2018.

In addition to our two commercial products, weWe have two clinical-stage product candidates for rare endocrine diseases, Recorlev and veldoreotide. Recorlev (levoketoconazole) is a cortisol synthesis inhibitor currently being studied for the treatment of endogenous Cushing's syndrome. Veldoreotide is a next-generation somatostatin analog being investigated for the treatment of acromegaly and potential additional applications in other conditions amenable to somatostatin receptor activation.activation, such as acromegaly. Both Recorlevlevoketoconazole and veldoreotide have received orphan designation from the FDA and the European Medicines Agency (“EMA”).

GivenIn January 2018, Strongbridge Ireland Limited, one of our wholly-owned subsidiaries, acquired the well-identifiedU.S. and concentrated prescriber base addressing our target markets, we intendCanadian rights to continue to use a small, focused sales force to market Keveyis, Macrilen (macimorelin), the first and any future products,only oral drug approved by the FDA for the diagnosis of patients with adult growth hormone deficiency. We launched Macrilen in the United States in July 2018. In December 2018, we sold Strongbridge Ireland Limited to Novo Nordisk Healthcare AG (“Novo”) for $145 million plus the European Union and other key global markets. We believe that our abilityright to executereceive tiered royalties on our strategy is enhanced by the significant commercial and clinical development experiencenet sales of key membersMacrilen through 2027. In addition, Strongbridge U.S. Inc., another of our management team. 

Sincewholly-owned subsidiaries, entered into an agreement with Novo Nordisk Inc. (“NNI”), a subsidiary of Novo, pursuant to which NNI funded the introductioncosts of 23 of our new management teamfield-based employees to provide full-time ongoing services to NNI, including the promotion of Macrilen in August 2014, we have been buildingthe United States, for a rare disease, franchise-based business model focused on expansion through a disciplined in-licensing and acquisition strategy. In pursuitperiod of three years. Novo also purchased 5.2 million of our growth strategy,ordinary shares at a purchase price of $7.00 per share. In December 2019, we have raised over $275reached an agreement with Novo to terminate the services agreement. We received a $6 million payment in equityconnection with such termination and debt financings since December 2014. We will continuewe no longer provide services to identify and evaluate the acquisition of products and product candidates for licensing or acquisition that would be complementary to our existing rare neuromuscular and endocrine franchises or that would form the basis for new rare disease franchises. We believe this approach will enable us to maximize our commercial potential by further leveraging our existing resources and expertise.Novo.

Liquidity

We believe that our cash, resourcescash equivalents and marketable securities of $92.4$62.8 million at March 31, 20182020 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, which is after the expected receipt of data from the Recorlev SONICS and LOGICS Phase 3 clinical trials.  We expect our funding requirements for operating activities to increase in 2018 and possibly beyond due to expenses associated with the commercialization of Keveyis and Macrilen, the execution of the Phase 3 SONICS and LOGICS clinical trials for Recorlev, and selling, general and administrative expenses.  We also expect our cash needs to increase to fund potential in‑licenses, acquisitions or similar transactions as we pursue our strategy.  These expenses may be offset only in part by sales of Keveyis and Macrilen.  In addition, beginning in March 2021, we may be required to make quarterly principal payments to repay amounts borrowed under our credit facility.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 and Macrilen.Keveyis. There can be no assurances, however, that additional funding will be available on terms acceptable to us.

financial statements.  Actual results could differ from those estimates. Results for the three months ended March 31, 20182020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.2020.

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 reportAnnual Report on Form 10-K for the fiscal year ended December 31, 20172019 filed with the U.S. Securities and Exchange Commission on March 12, 2018February 28, 2020 (the “2017“2019 Annual Report”). Our significant accounting policies are described in Note 2 of the notes to the audited consolidated financial statements included in our 20172019 Annual Report. Since the date of those financial statements, there have been no changes to our significant accounting policies.

Revenue recognitionLeases

We followaccount for leases in accordance with Accounting Standards Codification (“ASC”) Topic 606,842, Revenue from Contracts with Customers, Leaseseffective April 1, 2017.  Topic 606 applies, (“ASC 842”). We determine if an arrangement is a lease at contract inception. A lease exists when a contract conveys to all contracts with customers, exceptus the right to control the use of identified property, plant, or equipment for contracts that are within the scopea period of other standards, such as leases, insurance, collaboration arrangements and financial instruments.  Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration the entity expects to receivetime in exchange for those goods or services.  To determine revenue recognition for arrangements thatconsideration. The definition of a lease embodies two conditions: (1) there is an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligationsidentified asset in the contract; (iii) determinecontract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) we have the transaction price; (iv) allocateright to control the transaction priceuse of the identified asset.

Operating leases where we are the lessee are included in Right of use (“ROU”) assets 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 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 performance obligationslease payments under similar terms.

The lease term for all of our leases includes the noncancellable period of the lease. Lease payments included in the contract; and (v) recognize revenue when (or as)measurement of the entity satisfieslease 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 performance obligation. straight-line basis over the lease term.

We applymonitor for events or changes in circumstances that require a reassessment of a lease. If a reassessment results in the five-step model to contracts only when itremeasurement of a lease liability, a corresponding adjustment is probable that we will collect the consideration we are entitled to receive in exchange for the goods or services we transfermade to the customer. At contract inception, oncecarrying amount of the contract is determinedcorresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine thosean amount less than zero. In that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenuecase, the amount of the transaction priceadjustment that would result in a negative ROU asset balance is allocatedrecorded 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 respective performance obligation when (or as)lease payments associated with our short-term leases as an expense on a straight-line basis over the performance obligation is satisfied. For a complete discussion of accountinglease term. Variable lease payments associated with these leases are recognized and presented in the same manner as for net product revenue, see Note 3, "Revenue recognition".

Inventoryand cost of sales

Inventory is stated at the lower of cost or market where cost is determined using the first-in, first-out method. Our inventory consists of only finished goods. Cost of sales includes the cost of inventory sold, which includes third-party acquisition costs, third-party warehousing and product distribution charges.all our other leases.

Foreign currency translation

The consolidatedWe adopted ASC 842 using a modified retrospective transition approach as of the effective date, as permitted by the amendments in ASU 2018-11. As a result, we were not required to adjust our comparative period financial statements are reported in United States dollars, which is our functional currency, including eachinformation for effects of our consolidated subsidiaries. Transactions in foreign currencies are remeasured into our functional currencythe standard or make the new required lease disclosures for periods before the date of adoption (i.e., January 1, 2019). We have elected to adopt the package of transition practical expedients and, therefore, have not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. We did not elect the practical expedient to use hindsight for leases existing at the rate of exchange prevailingadoption date. Further, we do not expect the amendments in ASU 2018-01: Land Easement Practical Expedient to have an effect on us because we do not enter into land easement arrangements.

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 invest our excess cash balances in marketable securities of highly rated financial institutions.  We seek to diversify our investments and limit the transaction. Any monetaryamount 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 and liabilities arising fromas these transactionsinvestments are remeasured into our functional currency at exchange rates prevailing at the balance sheet date or on settlement. Resultingintended to be available to us for use in funding current operations. There were no marketable securities with a maturity of greater than one year as of March 31, 2020.

Unrealized gains and losses on marketable debt securities are recorded as a separate component of accumulated other comprehensive income (loss) included in foreign exchange loss in our consolidated statements of operations.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. We must apply significant judgment in this process. Actual results could materially differ from those estimates.stockholders’ equity.

Segment information

Operating segments are identified as components of an enterprise aboutfor which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. We view our operations and manage our business in one operating segment. Prior to March 31, 2018, our material long‑lived assets reside in Ireland, Sweden and the Cayman Islands. Effective March 31, 2018 all of our material long-lived assets reside in Ireland. For the three months ended March 31, 2018, revenues from product sales were derived entirely from theUnited States.

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 awards. 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”) and equity-classified warrants.

The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of March 31, 20182020 and 2017,2019, as they would be anti-dilutive:

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments,  which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows in order to reduce diversity in practice. The guidance is effective for us beginning in the first quarter of fiscal year 2018. Early adoption is permitted. We haveRecent accounting pronouncements – not yet adopted this effective January 1, 2018.

In FebruaryJune 2016, the FASB issued ASU No. 2016-02, 2016-13,LeasesFinancial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments., that discusses howASU 2016-13 requires an entity should accountto measure and recognize expected credit losses for lease assets and lease liabilities. The guidance specifiescertain financial instruments, including trade receivables, as an allowance that an entity who is a lessee under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases under previous FASB guidance. Accounting for leases by lessors is largely unchangedreflects 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 new guidance.current other-than-temporary impairment model. The guidancestandard is effective for usfiscal years, and interim periods within those fiscal years, beginning inafter December 15, 2019 for SEC filers, excluding smaller reporting companies, who have until fiscal years beginning after December 15, 2022. We do not expect the first quarteradoption of fiscal year 2019. Early adoption is permitted. In transition, lessees and lessors are requiredthis standard to recognize and measure leases at the beginning of the earliest period presented usinghave a modified retrospective approach. We are currently evaluating thesignificant impact this new accounting guidance will have on our consolidated financial statements.statements or internal controls.

3. Revenue recognition

Product Revenue, Net

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, whichmost 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 Keveyisthe product to the Customer. Transfer of control occurs upon receipt of Keveyisthe product by the Customer.  We expense incremental costs related to the set-up of the contractcontracts with the Customer when incurred, as these costs diddo not meet the criteria for capitalization.

Reserves for Variable Considerationvariable 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 whichthat 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 customer buying and payment patterns. 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 customerCustomer 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 based upon a range of possible outcomes that are probability-weighted 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. Effective January 1, 2011,2019, manufacturers of pharmaceutical products are responsible for 50%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 that hashave been recognized as revenue, but remains in the distribution channel inventories 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 sixty days while we are determiningthere 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 twelve months to uninsured patients thatwho 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.

4. Fair value measurement

We follow FASB accounting guidance on fair value measurements for financial assets and liabilities measured on a recurring basis. Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, 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 cash equivalents, 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.(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 fair value of the underlying stock at the valuation date, the estimated term of the warrants, risk-free interest rates, expected dividends 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 (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):

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.  We concluded that the supply price payable by us exceeds fair value and, therefore, 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 will beis being reduced as we purchase inventory over the term of the Supply Agreement.Agreement that we entered into with Taro.  In addition, we incurred transaction costs of $2.4 million. The overall recording of 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 entered into a License and Assignment Agreement in 2018 with Aeterna Zentaris GmbH, pursuant to which we acquired the U.S. and Canadian rights to manufacture and commercialize Macrilen (macimorelin) for $24 million and incurred transaction costs of $0.7 million, resulting in an intangible of $24.7. This asset is being amortized over a ten-year period using the straight-line method.

We recorded amortization expense of $1.8$1.3 million and $1.3 for the three months ended March 31, 20182020 and 2017,three months ended March 31, 2019, respectively.

amount of the costobligation under such indemnifications cannot be reasonably estimated. However, we believe that the likelihood of the program, or approximately $4 million over a three-year period as well as $5 million upon the regulatory approval for use in pediatric patients in the U.S. and Canada. We are obligated to purchase certain amounts of product totaling $1.3 million over the next nine months.material liability being triggered under these indemnification obligations is not probable at this time.

9. 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.

ForWe did not incur income any tax expense for the three months ended March 31, 2018, we recorded full valuation allowances against our deferred tax asset and deferred tax liability, resulting in no income tax expense.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the top U.S. federal corporate tax rate from 35 percent to 21 percent; requiring