zgnx-20200630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________

FORM 10-Q

___________________________________________

(Mark One)


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

For the quarterly period ended June 30, 2020


☐			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: 001-34962

___________________________________________

ZOGENIX, INC.

(Exact Name of Registrant as Specified in its Charter)

____________________________________________


Delaware			20-5300780
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)

5959 Horton Street, Suite 500 Emeryville, California 94608
(Address of Principal Executive Offices and Zip Code)

510-550-8300

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ZGNX

The Nasdaq Global 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 (§232.405 of this chapter) 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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of July 31, 2020 was 55,447,840.

ZOGENIX, INC.

Form 10-Q

For the Quarterly Period Ended June 30, 2020

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019

Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2020 and 2019

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

Notes to the Condensed Consolidated Financial Statements

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II. OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Zogenix, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except par value)


	June 30, 2020		December 31, 2019
Assets:
Current assets:
Cash and cash equivalents	$	136,871	$	62,070
Marketable securities	253,378		189,085

Inventory, net	475		—
Prepaid expenses and other current assets	10,833		11,084
Acquisition holdback placed in escrow	25,000		25,000

Total current assets	426,557		287,239
Property and equipment, net	9,300		9,424
Operating lease right-of-use assets	8,266		7,774
Intangible assets	102,500		102,500
Goodwill	6,234		6,234
Other noncurrent assets	2,250		1,079
Total assets	$	555,107	$	414,250
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	8,518	$	7,979
Accrued and other current liabilities	40,176		30,117
Acquisition holdback liability	24,444		24,444
Deferred revenue, current	5,303		5,927
Current portion of operating lease liabilities	1,633		1,322
Current portion of contingent consideration	13,000		25,600


Total current liabilities	93,074		95,389

Deferred revenue, noncurrent	5,768		7,425
Operating lease liabilities, net of current portion	11,022		10,752
Contingent consideration, net of current portion	40,100		38,200
Deferred tax liability	—		17,425

Total liabilities	149,964		169,191
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding	—		—
Common stock, $0.001 par value; 100,000 shares authorized; and 55,445 and 45,272 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	55		45
Additional paid-in capital	1,599,047		1,360,092
Accumulated deficit	(1,194,581)		(1,115,457)
Accumulated other comprehensive income	622		379
Total stockholders’ equity	405,143		245,059
Total liabilities and stockholders’ equity	$	555,107	$	414,250

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc. | Q2 2020 Form 10-Q | 1

Zogenix, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Collaboration revenue	$	1,032	$	1,069	$	2,281	$	1,069
Operating expenses:
Research and development	34,373		27,096		67,613		51,448
Selling, general and administrative	24,431		15,459		45,749		26,377
Acquired in-process research and development expense	1,500		—		3,000		—
Change in fair value of contingent consideration	12,200		(700)		4,300		2,300
Total operating expenses	72,504		41,855		120,662		80,125
Loss from operations	(71,472)		(40,786)		(118,381)		(79,056)
Other (expense) income, net	(157)		40		19,864		(48)
Interest income	880		2,983		1,968		6,139
Loss before income taxes	(70,749)		(37,763)		(96,549)		(72,965)
Income tax benefit	(17,425)		—		(17,425)		—
Net loss	$	(53,324)	$	(37,763)	$	(79,124)	$	(72,965)

Net loss per share, basic and diluted	$	(0.96)	$	(0.89)	$	(1.53)	$	(1.72)

Weighted average number of shares used in the calculation of basic and diluted net loss per common share	55,355		42,458		51,770		42,348

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc. | Q2 2020 Form 10-Q | 2

Zogenix, Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net loss	$	(53,324)	$	(37,763)	$	(79,124)	$	(72,965)
Other comprehensive (loss) income, net of tax:

Change in unrealized gains related to marketable securities	444		353		272		723
Foreign currency translation adjustments	(34)		—		(29)		—
Total other comprehensive income	410		353		243		723
Comprehensive loss	$	(52,914)	$	(37,410)	$	(78,881)	$	(72,242)

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc. | Q2 2020 Form 10-Q | 3

Zogenix, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(in thousands)


	Six Months Ended June 30, 2020
	Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2019	45,272	$	45	$	1,360,092	$	379	$	(1,115,457)	$	245,059
Net loss	—	—		—		—		(25,800)		(25,800)
Other comprehensive loss	—	—		—		(167)		—		(167)
Issuance of common stock, net of offering costs	9,798	10		221,698		—		—		221,708
Issuance of common stock under employee equity plans	297	—		3,882		—		—		3,882
Shares repurchased for tax withholdings related to net share settlement of employee equity awards	(26)	—		(569)		—		—		(569)
Stock-based compensation	—	—		6,394		—		—		6,394
Balance at March 31, 2020	55,341	$	55	$	1,591,497	$	212	$	(1,141,257)	$	450,507
Net loss	—	—		—		—		(53,324)		(53,324)
Other comprehensive income	—	—		—		410		—		410
Issuance of common stock under employee equity plans	153	—		616		—		—		616
Shares repurchased for tax withholdings related to net share settlement of employee equity awards	(49)	—		(1,369)		—		—		(1,369)
Stock-based compensation	—	—		8,303		—		—		8,303
Balance at June 30, 2020	55,445	$	55	$	1,599,047	$	622	$	(1,194,581)	$	405,143


	Six Months Ended June 30, 2019
	Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2018	42,078	$	42	$	1,218,710	$	3	$	(695,954)	$	522,801
Net loss	—	—		—		—		(35,202)		(35,202)
Other comprehensive income	—	—		—		370		—		370
Issuance of common stock under employee equity plans	380	—		5,293		—		—		5,293
Shares repurchased for tax withholdings related to net share settlement of employee equity awards	(12)	—		(606)		—		—		(606)
Stock-based compensation	—	—		4,223		—		—		4,223
Balance at March 31, 2019	42,446	$	42	$	1,227,620	$	373	$	(731,156)	$	496,879
Net loss	—	—		—		—		(37,763)		(37,763)
Other comprehensive income	—	—		—		353		—		353
Issuance of common stock under employee equity plans	52	—		888		—		—		888
Stock-based compensation	—	—		5,358		—		—		5,358
Balance at June 30, 2019	42,498	$	42	$	1,233,866	$	726	$	(768,919)	$	465,715

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc. | Q2 2020 Form 10-Q | 4

Zogenix, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Six Months Ended June 30,
	2020		2019
Cash flow from operating activities:
Net loss	$	(79,124)	$	(72,965)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation	14,697		9,581
Depreciation and amortization	740		552
Deferred income taxes	(17,425)		—
Noncash lease expense	619		—
Net accretion and amortization of investments in marketable securities	(380)		(3,299)
Change in fair value of warrant liabilities	(162)		158
Acquired in-process research and development expense	3,000		—
Change in fair value of contingent consideration	4,300		2,300
Changes in operating assets and liabilities:
Inventory, net	(475)		—
Prepaid expenses and other current assets	251		6,071
Other assets	(1,171)		(5,963)
Accounts payable, accrued and other liabilities	(5,737)		(5,193)
Operating lease liability	(634)		12,588
Deferred revenue	(2,281)		14,431
Net cash used in operating activities	(83,782)		(41,739)
Cash flow from investing activities:
Cash paid for in-process research and development asset	(3,000)		—
Purchases of marketable securities	(180,832)		(251,782)
Proceeds from maturities of marketable securities	114,205		289,357
Proceeds from sales of marketable securities	2,988		—
Purchases of property and equipment	(415)		(8,922)
Net cash (used in) provided by investing activities	(67,054)		28,653
Cash flow from financing activities:
Payment of contingent consideration	—		(10,000)
Proceeds from issuance of common stock under equity incentive plans	4,498		6,026
Taxes paid related to net share settlement of equity awards	(569)		(606)
Proceeds from issuance of common stock, net of issuance costs	221,708		—
Net cash provided by (used in) financing activities	225,637		(4,580)
Net increase (decrease) in cash and cash equivalents	74,801		(17,666)
Cash and cash equivalents, beginning of the period	62,070		68,454
Cash and cash equivalents, end of the period	136,871		50,788

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc. | Q2 2020 Form 10-Q | 5

Zogenix, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 – Organization, Basis of Presentation and Liquidity

Zogenix, Inc. and subsidiaries (the Company, we, us or our) is a global biopharmaceutical company committed to developing and commercializing therapies with the potential to transform the lives of patients and their families living with rare diseases. Our first rare disease therapy, Fintepla (fenfluramine) oral solution, C-IV has been approved by the U.S. Food and Drug Administration (FDA) and is under review in Europe for the treatment of seizures associated with Dravet syndrome, a rare, severe childhood onset epilepsy. In addition, the company has two late-stage development programs underway: one for Fintepla for the treatment of seizures associated with Lennox-Gastaut syndrome, a rare childhood-onset epilepsy and another for MT1621, an investigational novel substrate enhancement therapy for the treatment of TK2 deficiency, a rare genetic disorder.

We operate in one business segment—the research, development and commercialization of pharmaceutical products and our headquarters are located in Emeryville, California.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Zogenix, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The results of operations for any interim period are not necessarily indicative of results of operations for any future period. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and related notes included in our 2019 Annual Report on Form 10-K (2019 Form 10-K), which was filed with the SEC on March 2, 2020.

Future Funding Requirements

As of June 30, 2020, our cash, cash equivalents and marketable securities totaled $390.2 million. Excluding gains from two discrete business divestitures, we have incurred significant net losses and negative cash flows from operating activities since inception resulting in an accumulated deficit of $1.2 billion as of June 30, 2020. We expect to continue to incur significant operating losses and negative cash flows from operations to support the marketing and commercialization of Fintepla for Dravet syndrome as well as continuing to advance our clinical programs. Additionally, we are obligated to make future milestone payments that are contingent upon the successful achievement of certain development, regulatory and sales-based milestone events related to Fintepla and MT1621. Historically, we have relied primarily on the proceeds from equity offerings to finance our operations. Until such time, if ever, we can generate a sufficient amount of revenue to finance our cash requirements, we may need to continue to rely on additional financing to achieve our business objectives.

On June 12, 2020, we filed a universal shelf registration statement on Form S-3 with the SEC, which became effective upon filing. The shelf registration statement permits us to offer and sell, from time to time over the next three years, in one or more offerings, an unlimited amount of any combination of our common stock, preferred stock, debt securities, warrants or units consisting of any of the foregoing. The specific terms of any offering, if any, under the shelf registration statement would be established at the time of such offering. The shelf registration statement also includes a sales agreement prospectus covering the offering, issuance and sale of up to $200.0 million of our common stock, through Cantor Fitzgerald & Co. (Cantor), acting as our sales agent, pursuant to a sales agreement with Cantor dated May 10, 2016 for our “at-the-market” equity program. During the quarter ended June 30, 2020, we did not issue any shares of our common stock through this program.

We believe maintaining an active shelf registration provides additional financial flexibility to access the capital markets and allow us to act opportunistically in support of our growth objectives. However, there is no assurance that such financings could be consummated on acceptable terms or at all. Failure to raise sufficient capital when needed could require us to significantly delay, scale back or discontinue one or more of our product development programs or commercialization efforts or other aspects of our business plans, and our operating results and financial condition would be adversely affected.

Zogenix, Inc. | Q2 2020 Form 10-Q | 6

Note 2 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of our condensed consolidated financial statements requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from those estimates.

Significant Accounting Policies

The significant accounting policies and estimates used in the preparation of the accompanying condensed consolidated financial statements are described in Note 2, Summary of Significant Accounting Policies to the consolidated financial statements in our 2019 Form 10-K. There have been no material changes in our significant accounting policies during the six months ended June 30, 2020 other than as set forth below.

Inventory

Inventory is recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. We periodically review our inventories to identify obsolete, slow moving, excess or otherwise unsaleable items. If obsolete, slow moving, excess or unsaleable items are observed and there are no alternate uses for the inventory, we record a write-down to net realizable value. The determination of net realizable value requires judgment including consideration of many factors, such as estimates of future product demand, product net selling prices, current and future market conditions and potential product obsolescence, among others.

Prior to regulatory approval, we expense costs associated with the manufacture of our product candidates to research and development expense unless we are reasonably certain such costs have future commercial use and net realizable value. Since we consider attaining regulatory approval of a product candidate to be highly uncertain and difficult to predict, we expect only in rare instances will pre-launch inventory be capitalized, if at all. As of June 30, 2020, our inventory of $0.5 million consisted of raw materials received subsequent to regulatory approval and was purchased for use in commercial production.

Finite-Lived Intangible Assets

Purchased finite-lived intangible assets are initially recognized at fair value and subject to amortization over its estimated useful life. Our finite-lived intangible assets are amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used. If that pattern cannot be reliably determined, the intangible assets are amortized using the straight-line method over their estimated useful lives and are tested for impairment along with other long-lived assets. At June 30, 2020, our finite-lived intangible assets consisted of Fintepla product rights (see Note 7).

Long-Lived Assets

Long-lived assets, including right-of-use operating lease assets and our finite-lived intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. If the carrying value of the assets (asset group) exceeds its undiscounted cash flows, we then compare the fair value of the assets (asset group) to their carrying value to determine the impairment loss. The impairment loss will be allocated to the carrying values of the long-lived assets (asset group), but not below their individual fair values.

If we determine that events and circumstances warrant a revision to the remaining period of amortization, a long-lived asset’s remaining useful life shall be changed, and the remaining carrying amount of the long-lived asset shall be depreciated or amortized prospectively over that revised remaining useful life.

Zogenix, Inc. | Q2 2020 Form 10-Q | 7

Impact of COVID-19 Pandemic

In March 2020, the World Health Organization declared the global novel coronavirus disease (COVID-19) outbreak a pandemic. To date, our operations have not been significantly impacted by the COVID-19 pandemic. However, we cannot predict the specific extent, duration, or full impact that the COVID-19 pandemic will have on our financial condition and operations, including ongoing and planned clinical trials, the timelines for receiving feedback or approvals from regulatory authorities, and product launch in the midst of a pandemic.

Management is monitoring the potential impact of the COVID-19 pandemic, if any, on the carrying value of our finite-lived intangible asset, goodwill, long-lived assets and right-of-use assets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets. If the financial markets and/or the overall economy are impacted for an extended period, our business, results of operations and financial condition may be adversely affected.

Income Taxes

On March 18, 2020, the Families First Coronavirus Response Act (FFCR Act) and On March 27, 2020, The Coronavirus Aid, Relief and Economic Security Act (CARES Act) were signed into law in response to the COVID-10 pandemic. The FFCR Act and CARES Act, includes provisions related to refundable payroll tax credits, deferment of employer side social security payments, retroactively and temporarily (for taxable years beginning before January 1, 2021) suspending the application of the 80%-of-income limitation on the use of net operating losses, which was enacted as part of the Tax Cuts and Jobs Act of 2017. The CARES Act also provides that net operating losses arising in any taxable year beginning after December 31, 2017, and before January 1, 2021 are generally eligible to be carried back up to five years.

On June 29, 2020, Assembly Bill 85 (A.B. 85) was signed into California law. A.B. 85 provides for a three-year suspension of the use of net operating losses for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5.0 million of tax per year. A.B. 85 suspends the use of net operating losses for taxable years 2020, 2021 and 2022 for certain taxpayers with taxable income of $1.0 million or more. The carryover period for any net operating losses that are suspended under this provision will be extended. A.B. 85 also requires that business incentive tax credits including carryovers may not reduce the applicable tax by more than $5.0 million for taxable years 2020, 2021 and 2022.

The enactment of the FFCR Act, CARES Act and A.B. 85 did not result in any material adjustments to our income tax provision for the three and six months ended June 30, 2020 or to our net deferred tax assets as of June 30, 2020. Given our history of losses, we do not expect the provisions of the FFCR Act, CARES Act and A.B. 85 to have a material impact on our annual effective tax rate or condensed consolidated financial statements in 2020; however, we will continue to evaluate the impact of tax legislation and will update our disclosures as additional information and interpretive guidance becomes available.

Recently Adopted Accounting Pronouncements

Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments revises the measurement of credit losses for most financial instruments measured at amortized cost, including trade receivables, from an incurred loss methodology to an expected loss methodology which results in earlier recognition of credit losses. Under the incurred loss model, a loss is not recognized until it is probable that the loss-causing event has already occurred. The standard introduces a forward-looking expected credit loss model that requires an estimate of the expected credit losses over the life of the instrument by considering all relevant information including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. In addition, the standard also modifies the impairment model for available-for-sale debt securities, which are measured at fair value, by eliminating the consideration for the length of time fair value has been less than amortized cost when assessing credit loss for a debt security and provides for reversals of credit losses through income upon credit improvement. The standard became effective for us beginning January 1, 2020. Based on the composition of our investment portfolio, which reflects our primary investment objective of capital preservation, the adoption of this standard did not have a material impact on our condensed consolidated financial statements or related disclosures.

ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value for a reporting unit is determined in the same manner as the amount of goodwill

Zogenix, Inc. | Q2 2020 Form 10-Q | 8

recognized in a business acquisition of the reporting unit. Under the standard, an entity shall recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The standard became effective for us beginning January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements or related disclosures; however, any prospective goodwill impairment losses recognized will be measured in accordance with the updated guidance.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement modifies the disclosure requirements in Topic 820 by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This standard became effective for us beginning January 1, 2020 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements. For the new disclosures regarding our Level 3 fair value measurements, see Note 5, Fair Value Measurements to these condensed consolidated financial statements.

ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) removes certain exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU is effective for us for all interim and annual periods beginning January 1, 2021, with early adoption permitted. We early adopted ASU 2019-12 beginning January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.

The only aspect of ASU 2019-12 that is currently applicable to us is the removal of the exception related to intraperiod tax allocation. Beginning January 1, 2020, we have applied the general methodology regarding the intraperiod allocation of tax expense for reporting periods where we have a loss from continuing operations by determining the amount of taxes attributable to continuing operations without regard to the tax effect of other items, including changes in unrealized gains related to marketable securities.

Recent Accounting Pronouncements

We have reviewed recently issued accounting pronouncements and concluded they are either not applicable to our business or no material effect is expected on our condensed consolidated financial statements as a result of future adoption.

Note 3 – Collaborative Arrangement

In March 2019, we entered into an agreement (Shinyaku Agreement) with Nippon Shinyaku Co., Ltd. (Shinyaku) for the exclusive distribution of Fintepla in Japan for the treatment of Dravet syndrome and LGS. As part of the Shinyaku Agreement, we are responsible for completing the global clinical development and all regulatory approval activities for Fintepla to support the submission of new drug applications in Japan for Dravet syndrome and LGS. Upon regulatory approval of Fintepla in Japan, Shinyaku will act as our exclusive distributor for Fintepla and will be responsible for the commercialization activities including the promotion, marketing, sale and distribution of Fintepla in Japan. Upon regulatory approval of Fintepla in Japan, Shinyaku will also act as our exclusive distributor for commercial shipment and distribution of Fintepla in Japan. If we pursue global development of Fintepla for indications other than Dravet syndrome or LGS, Shinyaku has the option to participate in the development for such indications in Japan, subject to cost sharing requirements pursuant to the agreement. Activities under the Shinyaku Agreement will be governed by a joint steering committee (JSC) consisting of three representatives from each party to the agreement. All decisions of the JSC are to be made by a unanimous vote with tie-breaking rights provided to each party for certain matters related to development, regulatory approval and commercialization select distribution activities of Fintepla in that territory.

Shinyaku has agreed to support development and regulatory approval of Fintepla in Japan by actively participating in the design of non-clinical, clinical and manufacturing requirements needed for regulatory submission, actively planning and participating in product labeling decisions and discussions with the Japanese Ministry of Health, Labor and Welfare (MHLW) and obtained distribution exclusivity through the payment of an initial fixed consideration. Pursuant to the terms of the agreement, Shinyaku agreed to make aggregate fixed payments of $20.0 million to us in scheduled installments. As of June 30, 2020, we have received $17.0 million with the remaining balance due within the next year. We will be actively running the clinical trials, performing manufacturing validation activities, preparing regulatory filings and holding discussions with MHLW, and negotiating pricing. We and Shinyaku have agreed to proportionally share the Japan specific development costs that may arise outside of the initial development plan and any post-approval clinical study costs in Japan. In addition, we can earn up to $66.0 million from Shinyaku for the achievement of certain regulatory milestones for the treatment of Dravet

Zogenix, Inc. | Q2 2020 Form 10-Q | 9

syndrome and LGS. If regulatory approval of Fintepla is received in Japan, we have agreed to supply Shinyaku with Fintepla upon receipt of purchase orders at our actual manufacturing cost plus a fixed transfer price mark-up, a fixed percentage of Shinyaku's net sales of Fintepla in Japan for such fiscal year, and a net price mark-up based on a percent of the applicable aggregate sales of Fintepla by Shinyaku for such fiscal year. The net price mark-up percentage increases with Shinyaku’s sales of Fintepla annual net sales in Japan and ranges between mid-twenties and is capped at a low thirties of the aggregate annual net sales for an applicable fiscal year. In addition, we can earn up to an additional $42.5 million tied to the achievement of certain net sales milestones by Shinyaku through the term of the agreement, which generally expires in 2045.

The collaborative activities under the Shinyaku Agreement prior to regulatory approval are within the scope of the accounting guidance related to collaborative arrangements as both parties are active participants and are exposed to significant risks and rewards dependent on the success of commercializing Fintepla in Japan. Since Shinyaku is not a customer as it does not obtain an output of our development and regulatory approval activities for Fintepla as they were not provided a license to our intellectual property or the ability to manufacture the product, and we do not consider performing development and regulatory approval services to be a part of our ongoing activities. Shinyaku will only become a customer and subject to revenue from contracts from customers accounting guidance after regulatory approval of Fintepla in Japan occurs and Shinyaku places purchase orders with us. To date, Shinyaku has not provided us with any purchase orders and thus no revenue has been recognized for the supply of Fintepla.

We considered the revenue from contracts with customers guidance by analogy in determining the unit of account, and the recognition and measurement of such unit of account for collaborative activities under the Shinyaku Agreement and concluded that there are two development programs akin to performance obligations related to collaborative activities for development and regulatory approval efforts for Dravet and LGS. We are the principal as it relates to the collaborative development and regulatory approval activities primarily because we are responsible for the acceptability of the results of the work of the third-party vendors that are used to assist us in performing such activities. Therefore, such collaboration revenue is presented on a gross basis in our condensed consolidated statements of operations apart from research and development expenses incurred.

Since Shinyaku was not provided a license to our intellectual property or the ability to manufacture Fintepla, Shinyaku will only become a customer, and payments made under the Shinyaku Agreement will only be subject to the accounting guidance related to revenue from contracts from customers, after regulatory approval of Fintepla in Japan occurs and Shinyaku places purchase orders with us.

The initial collaboration consideration consisted solely of the fixed consideration payments of $20.0 million and was allocated on a relative standalone selling price basis to the two identified development programs akin to performance obligations related to collaborative activities for development and regulatory approval efforts for Dravet syndrome and LGS. Analogizing to the revenue from contracts with customers variable consideration guidance, all potential regulatory milestone payment consideration will be included in the collaboration consideration if and when it is probable that a significant reversal in the amount of cumulative collaboration consideration recognized will not occur when the uncertainty associated with the variable collaboration consideration is subsequently resolved. At contract inception and through June 30, 2020, this consideration was fully constrained as the achievement of the events tied to these regulatory milestone payments was highly dependent on factors outside our control.

Collaboration revenue is being recognized over time as the collaborative activities related to each development program are rendered. We determined an input method is a reasonable representative depiction of the performance of the collaborative activities under the Shinyaku Agreement. The method of measuring progress towards completion incorporates actual internal and external costs incurred, relative to total internal and external costs expected to be incurred over an estimated period to satisfy the collaborative activities. The period over which total costs are estimated reflects our estimate of the period over which it will perform the collaborative activities for each development program. Changes in estimates of total internal and external costs expected to be incurred are recognized in the period of change as a cumulative catch-up adjustment to collaboration revenue.

For the three and six months ended June 30, 2020, we recognized collaboration revenue of $1.0 million and $2.3 million, respectively. As of June 30, 2020, the deferred revenue balance of $11.1 million related to this agreement was recorded as deferred revenue, which is classified as either current or net of current portion in the accompanying condensed consolidated balance sheets based on the period over which the collaboration revenue is expected to be recognized. We expect to recognize collaboration revenue related to these collaborative activities through the end of 2023.

Note 4 – Cash, Cash Equivalents and Marketable Securities

The following tables summarize the amortized cost and the estimated fair value of our cash, cash equivalents and marketable securities as of June 30, 2020 and December 31, 2019 (in thousands):

Zogenix, Inc. | Q2 2020 Form 10-Q | 10


	June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Current assets:
Cash	$	23,688	$	—	$	—	$	23,688
Cash equivalents:
U.S. Treasuries	11,300		—		—		11,300
Money market funds	61,840		—		—		61,840
Certificate of deposits	10,900		—		—		10,900
Commercial paper	29,143		—		—		29,143
Total cash and cash equivalents	136,871		—		—		136,871
Marketable securities:
U.S. Treasuries	55,677		3		—		55,680
Commercial paper	94,567		—		—		94,567
U.S. Government-sponsored enterprises debt securities	6,200		13		—		6,213
Corporate debt securities	53,537		637		—		54,174
Certificate of deposits	42,744		—		—		42,744

Total marketable securities	252,725		653		—		253,378
Total cash, cash equivalents and marketable securities	$	389,596	$	653	$	—	$	390,249



	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Current assets:
Cash	$	43,058	$	—	$	—	$	43,058


Cash equivalents:
Money market funds	11,527		—		—		11,527
Commercial paper	7,485		—		—		7,485
Total cash and cash equivalents	62,070		—		—		62,070
Marketable securities:
Commercial paper	73,366		—		—		73,366
Corporate debt securities	74,038		381		(2)		74,417
Certificate of deposits	41,302		—		—		41,302

Total marketable securities	188,706		381		(2)		189,085
Total cash, cash equivalents and marketable securities	$	250,776	$	381	$	(2)	$	251,155

The following table summarizes the cost and fair value of marketable securities based on stated effective maturities as of June 30, 2020 (in thousands):


	Amortized Cost		Fair Value
Due within one year	$	245,025	$	245,635
Due between one and two years	7,700		7,743
Total	$	252,725	$	253,378

We regularly review our available-for-sale marketable securities in an unrealized loss position and evaluate the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. As of June 30, 2020, no assessment of expected credit losses was necessary as we did not have any individual security in an unrealized loss position.

Zogenix, Inc. | Q2 2020 Form 10-Q | 11

Accrued interest receivable on available-for-sale marketable securities are recorded within “Prepaid expenses and other current assets” on our condensed consolidated balance sheets and was $0.4 million and $0.6 million at June 30, 2020 and December 31, 2019, respectively.

See Note 5 for further information regarding the fair value of our financial instruments.

Note 5 – Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy has been established under GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1:Observable inputs such as quoted prices in active markets;

Level 2:Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Our financial instruments consist primarily of cash and cash equivalents, marketable securities, other current assets, accounts payable and accrued liabilities, contingent consideration liabilities and our outstanding common stock warrant liabilities. Certain cash equivalents, marketable securities, contingent consideration liabilities and common stock warrant liabilities are reported at their respective fair values on our condensed consolidated balance sheets. The remaining financial instruments are carried at cost which approximates their respective fair values because of the short-term nature of these financial instruments. See Note 4 for further information regarding the amortized cost of our financial assets.

The following tables summarize assets and liabilities recognized or disclosed at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):


	June 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
U.S. Treasuries	$	—	$	11,300	$	—	$	11,300
Money market funds	61,840		—		—		61,840
Certificate of deposits	—		10,900		—		10,900
Commercial paper	—		29,143		—		29,143
Marketable securities:
U.S. Treasuries	—		55,680		—		55,680
Commercial paper	—		94,567		—		94,567
U.S. Government-sponsored enterprises debt securities	—		6,213		—		6,213
Corporate debt securities	—		54,174		—		54,174
Certificate of deposits	—		42,744		—		42,744
Total assets⁽¹⁾	$	61,840	$	304,721	$	—	$	366,561
Liabilities:
Common stock warrant liabilities	$	—	$	—	$	36	$	36
Contingent consideration liabilities	—		—		53,100		53,100
Total liabilities	$	—	$	—	$	53,136	$	53,136

Zogenix, Inc. | Q2 2020 Form 10-Q | 12


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	11,527	$	—	$	—	$	11,527
Commercial paper	—		7,485		—		$	7,485
Marketable securities:
Commercial paper	—		73,366		—		73,366
Corporate debt securities	—		74,417		—		74,417
Certificate of deposits	—		41,302		—		41,302

Total assets⁽¹⁾	$	11,527	$	196,570	$	—	$	208,097
Liabilities:
Common stock warrant liabilities	$	—	$	—	$	198	$	198
Contingent consideration liabilities	—		—		63,800		63,800
Total liabilities	$	—	$	—	$	63,998	$	63,998

————————————

(1)Fair value is determined by taking into consideration valuations obtained from third-party pricing services. The third-party pricing services utilize industry standard valuation models, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.

Contingent Consideration Liability

Pursuant to the terms of the Brabant purchase agreement in 2014 in which we acquired worldwide development and commercialization rights to Fintepla, we are obligated to make future milestone payments that are contingent upon the successful achievement of certain regulatory and sales-based milestone events related to Fintepla. As of June 30, 2020, the potential amount of future payments that we may be required to make is between zero, if none of the remaining milestones are achieved, to a maximum of $60.0 million.

The following table provides a reconciliation of our contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2020 and 2019 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Balance at beginning of period	$	55,900	$	71,200	$	63,800	$	78,200
Change in fair value	12,200		(700)		4,300		2,300
Transfers out of Level 3 fair value hierarchy⁽¹⁾	(15,000)		—		(15,000)		—
Settlements	—		—		—		(10,000)
Balance at end of period	$	53,100	$	70,500	$	53,100	$	70,500

————————————

(1)For the three and six months ended June 30, 2020, a $15.0 million regulatory milestone payment associated with the FDA’s approval of Fintepla was achieved and such consideration payable was no longer contingent. As of June 30, 2020, the amount has been reclassified from contingent consideration liability to accrued and other current liabilities which was subsequently paid in July 2020.

For the three months ended June 30, 2020, the $12.2 million increase to the estimated fair value of our contingent consideration liability consisted of updated assumptions used regarding the probability of success for achieving certain regulatory and sales-based milestone events in light of FDA approval of Fintepla in June 2020, which accounted for approximately $10.0 million of the increase, with the remaining increase attributed to a market-driven decrease in discount rates. The change in fair value for the three and six months ended June 30, 2019 and the six months ended June 30, 2020 was attributable to immaterial adjustments to certain assumptions and estimates used in the remeasurement to fair value.

The following table summarizes the significant unobservable inputs used in the fair value measurement of our contingent consideration liabilities as of June 30, 2020.

Zogenix, Inc. | Q2 2020 Form 10-Q | 13


Fair Value as of June 30, 2020 (in thousands)	Valuation Technique	Unobservable Input	Range	Weighted Average⁽¹⁾
$53,100	Discounted cash flow	Discount rate	4.5% — 12.7%	6.8%
			Probability of payment	0% — 94.3%	94.3%
			Projected year of payment	2021 — 2030	2022

————————————

(1)Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.

The weighted average discount rate was calculated based on the relative fair value of our contingent consideration obligations. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of June 30, 2020.

Note 6 – Accrued and Other Current Liabilities

The following table provides details of accrued and other current liabilities (in thousands):


	June 30, 2020		December 31, 2019
Accrued clinical trial expenses	$	11,335	$	18,666
Accrued compensation	7,229		7,179
Accrued milestone payment	15,000		—
Other accrued liabilities	6,576		4,074
Common stock warrant liabilities	36		198
Total accrued and other current liabilities	$	40,176	$	30,117

Note 7 – Intangible Assets

The following table provides details of the carrying amount of our intangible assets (in thousands):


	June 30, 2020		December 31, 2019
Finite-lived intangible assets	$	102,500	$	—
Indefinite-lived in-process research and development (IPR&D) intangible assets	—		102,500
Total intangible assets	$	102,500	$	102,500

Our intangible assets consist of worldwide development, commercialization and related intellectual property rights including patents and licenses for our product, Fintepla (fenfluramine; formerly referred to as ZX008), which at the time of our acquisition in October 2014 and as of December 31, 2019, was classified as an indefinite-lived IPR&D asset. Upon FDA approval of Fintepla in June 2020, this indefinite-lived asset was reclassified to a finite-lived intangible asset subject to amortization.

In July 2020, we commercially launched Fintepla and commenced amortization of this asset on a straight-line basis over its estimated useful life. Due to the inherent subjectivity of forecasting the timing in which the cash flows may be generated from this intangible asset over a long-term time horizon, we concluded the pattern of economic benefit cannot be reliably determined. As such, we elected to use the straight-line method of amortization for this intangible asset.

In estimating the useful life of the finite-lived Fintepla intangible asset, we considered the estimated period over which the asset will contribute directly or indirectly to our future cash flows, the strength of issued or licensed patents and related period of intellectual property protection, the availability of competitor products treating similar indications and the impact of patent expiry on the sustainability of future operating cash flows of the asset. Based on these factors, we estimated the useful life of the finite-lived intangible asset to be 13 years.

As of June 30, 2020, the estimated intangible asset amortization expense for the next five years and thereafter is as follows (in thousands):

Zogenix, Inc. | Q2 2020 Form 10-Q | 14


	Estimated Amortization Expense
2020 (remaining 6 months)	$	3,942
2021	7,885
2022	7,885
2023	7,885
2024	7,885
Thereafter	67,018
Total	$	102,500

Note 8 – Leases

We have operating leases consisting of office space for our Emeryville, California headquarters and for our various subsidiaries. In March 2020, our operating lease for our former headquarters in San Diego, California and the co-terminus sublease arrangement with our sublessee expired in accordance with the terms of the leases. In February 2020, we entered into a lease for office space in Maidenhead, United Kingdom, for a five-year term with aggregate lease payments of approximately $1.5 million. Operating lease assets represent our right to use an underlying asset for the lease term. Operating lease liabilities represent the present value of lease payments over the lease term, discounted using an estimate of our secured incremental borrowing rate.

The components of lease cost included in our condensed consolidated statements of operations were as follows (in thousands):


	Six Months Ended June 30,
	2020		2019
Lease costs
Operating lease cost	$	1,045	$	995
Short-term lease cost	259		548
Sublease income	(115)		(290)
Total	$	1,189	$	1,253

Cash paid for amounts included in the measurement of lease liabilities for the six months ended June 30, 2020 and 2019 was $1.0 million and $0.6 million, respectively. The amounts were included in net cash used in operating activities in our condensed consolidated statements of cash flows. Right-of-use assets obtained in exchange for new operating lease liabilities were $1.2 million for the six months ended June 30, 2020.

Zogenix, Inc. | Q2 2020 Form 10-Q | 15

Maturities of operating lease liabilities as of June 30, 2020 and December 31, 2019 were as follows (in thousands):


	June 30, 2020		December 31, 2019
2020 (remaining 6 months and 12 months, respectively)	$	1,152	$	1,986
2021	2,292		1,957
2022	2,230		1,894
2023	2,287		1,951
2024	2,300		2,010
Thereafter	5,103		5,101
Total lease payments	15,364		14,899
Less imputed interest	(2,709)		(2,825)
Total operating lease liabilities	$	12,655	$	12,074


	June 30, 2020		December 31, 2019
Current portion of operating lease liabilities	$	1,633	$	1,322
Operating lease liabilities, net of current portion	11,022		10,752
Total lease liabilities	$	12,655	$	12,074

As of June 30, 2020, the weighted-average remaining lease term was 6.5 years and the weighted-average discount rate, weighted based on the remaining balance of lease payments, was 6.2%.

Note 9 – Stockholders’ Equity and Stock-Based Compensation

Sale of Common Stock

In March 2020, we completed an underwritten public offering of 9,798,000 shares of our common stock at an offering price of $23.50 per share, including 1,278,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares. Net proceeds realized from the offering amounted to approximately $221.7 million, after deducting commissions and other offering expenses.

Equity Incentive Plans

We have issued stock-based awards from various equity incentive and stock purchase plans, as more fully described in Note 12, Stock-Based Compensation to the consolidated financial statements in our 2019 Form 10-K. In June 2020, our shareholders approved an amendment and restatement of our 2010 Employee Stock Purchase Plan (the “Restated ESPP”). Effective May 29, 2020, the plan was amended to increase the aggregate number of shares authorized for issuance from 375,000 to 875,000 shares and to eliminate the annual evergreen feature, which automatically added 31,250 shares to the aggregate shares authorized for issuance on each January 1st. In addition, the expiration date of the Restated ESPP was modified from October 2020 to the date that all shares authorized have been issued. As of June 30, 2020, there were 524,962 shares of common stock available for future purchases under the Restated ESPP.

Stock Options

The following is a summary of stock option activity for the six months ended June 30, 2020 (in thousands, except per share data):


	Shares	Weighted- Average Exercise Price per Share
Outstanding at December 31, 2019	4,253	$	29.59
Granted	1,185	29.36
Exercised	(231)	16.85
Canceled	(145)	39.56
Outstanding at June 30, 2020	5,062	$	29.83

Zogenix, Inc. | Q2 2020 Form 10-Q | 16

Restricted Stock Units

The following is a summary of restricted stock unit activity for the six months ended June 30, 2020 (in thousands, except per share data):


	Shares	Weighted- Average Fair Value per Share at Grant Date
Outstanding at December 31, 2019	439	$	36.97
Granted	218	27.34
Vested	(194)	23.95
Canceled	(28)	38.74
Outstanding at June 30, 2020	435	$	38.09

In June 2020, approximately 128,000 shares of performance-based restricted stock units (PSU’s) granted in March 2017 vested upon satisfaction of both a service-period condition and a performance condition, the latter of which was satisfied following the FDA’s approval of Fintepla in June 2020. As of June 30, 2020, all outstanding restricted stock units were subject to time-based vesting.

Stock-Based Compensation Expense Allocation

The following table summarizes the components of total stock-based compensation expense included in the condensed consolidated statements of operations (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Research and development	$	3,488	$	2,074	$	6,217	$	3,509
Selling, general and administrative	4,815		3,284		8,480		6,072

Total	$	8,303	$	5,358	$	14,697	$	9,581

Stock-based compensation expense for the three and six months ended June 30, 2020 included $1.4 million of compensation expense related to the vesting of PSUs.

Note 10 – Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period if the effect is dilutive. Our potentially dilutive shares of common stock include outstanding stock options, restricted stock units and warrants to purchase common stock.

A reconciliation of the numerators and denominators used in computing net loss per share is as follows (in thousands, except per share amounts):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Numerator:
Net loss	$	(53,324)	$	(37,763)	$	(79,124)	$	(72,965)

Denominator:
Shares used in per share calculation	55,355		42,458		51,770		42,348

Net loss per share, basic and diluted	$	(0.96)	$	(0.89)	$	(1.53)	$	(1.72)

Zogenix, Inc. | Q2 2020 Form 10-Q | 17

The following table presents the potential shares of common stock outstanding that were excluded from the calculation of diluted net loss per share for the periods presented because including them would have been anti-dilutive (in thousands):


	Three Months Ended June 30,			Six Months Ended June 30,
	2020	2019	2020	2019
Shares subject to outstanding stock options	4,942	4,227	4,696	3,973
Shares subject to outstanding restricted stock units	555	415	520	355
Shares subject to outstanding warrants to purchase common stock	28	28	28	28
Total	5,525	4,670	5,244	4,356

Note 11 - Income Taxes

Income tax benefit during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items, which are recorded in the interim period. The income tax benefit for the three and six months ended June 30, 2020 differs from the U.S. federal statutory rate of 21.0% primarily due to effect of change in the valuation allowance against our deferred tax assets, which resulted in an income tax benefit.

As of December 31, 2019, our net deferred tax liability was related to book and tax basis differences for our indefinite-lived Fintepla IPR&D intangible asset that was acquired through the October 2014 acquisition of Brabant Pharma Limited. Previously, this deferred tax liability was not considered to be a source of income for purposes of establishing our deferred tax asset valuation allowance due to the uncertainty associated with the timing of the reversal of this temporary tax difference. Upon FDA approval of Fintepla in June 2020, the indefinite-lived asset was reclassified to a finite-lived intangible asset and was subject to amortization over its estimated useful life. Because the detail scheduling of the timing of reversal of this temporary tax difference became available, the deferred tax liability associated with this finite-lived intangible asset was considered to be a source of income when assessing the realizability of our deferred tax assets as of June 30, 2020. We therefore recorded a $17.4 million income tax benefit for the three and six months ended June 30, 2020 with a corresponding reduction to our valuation allowance on deferred tax assets. The income tax benefit recognized for the three and six months ended June 30, 2020 included the effects of foreign exchange differences on remeasurement of the deferred tax liability. An immaterial portion of the adjustment for foreign exchange differences was related to prior periods. As of June 30, 2020, given our recurring net operating losses, we maintained a full valuation allowance against our net deferred tax assets.

Note 12 – United Kingdom (U.K.) Research and Development (R&D) Tax Relief Scheme

We conduct extensive research and development activities that benefit from U.K.’s small and medium-sized enterprises (SMEs) R&D tax relief scheme. Under this tax relief scheme, a SME can make an election (i) to receive an enhanced U.K. tax deduction on its eligible R&D activities or, when an SME entity is in a net operating loss position, or (ii) to surrender net operating losses that arise from its eligible R&D activities in exchange for a cash payment from the U.K. tax authorities. As the tax incentives may be received without regard to an entity’s actual tax liability, they are not subject to accounting for income taxes. Amounts recognized by us for cash payment claims under the SME R&D tax relief scheme are recorded as a component of other income after an election for tax relief has been made by submitting a claim for a discrete tax year and collectability is deemed probable and reasonably assured.

In December 2019, we elected to surrender net operating losses by submitting claims to receive cash payments of $9.9 million and $9.8 million related to our 2017 and 2018 tax years, respectively. Upon approval of our submitted claims by the U.K. tax authorities in the first quarter of 2020, we recorded income of $19.7 million as a component of other income on the condensed consolidated statement of operations. In May 2020, we received the cash payment for our submitted claims. For our 2019 tax year, we have not yet decided whether to seek tax relief by surrendering some of our losses for a tax credit cash rebate claim or electing to receive enhanced U.K. tax deductions on our eligible research and development activities. Under the U.K.’s tax legislation, there is a two-year window after the end of a tax year to seek relief under this tax relief scheme.

Zogenix, Inc. | Q2 2020 Form 10-Q | 18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements include, but are not limited to, statements about:

•our ability to commercialize Fintepla for the treatment of seizures associated with Dravet syndrome;

•the progress and timing of clinical trials of our product candidates Fintepla outside the United States and to treat patients with Lennox-Gastaut Syndrome and MT1621;

•the safety and efficacy of our product candidates;

•the impact of COVID-19 pandemic;

•the timing of submissions to, and decisions made by the U.S. Food and Drug Administration (FDA), the European Medicines Agency (EMA) and other regulatory agencies, including foreign regulatory agencies, with regards to the demonstration of the safety and efficacy of our product candidates and adequacy of the manufacturing processes related to our product candidates to the satisfaction of the FDA and such other regulatory agencies;

•our ability to obtain, maintain and successfully enforce adequate patent and other intellectual property or regulatory exclusivity protection of our product candidates and the ability to operate our business without infringing the intellectual property rights of others;

•the goals of our development activities and estimates of the potential markets for our product candidates, and our ability to compete within those markets;

•our ability to obtain and maintain adequate levels of coverage and reimbursement from third-party payors for any of our product candidates that may be approved for sale, the extent of such coverage and reimbursement and the willingness of third-party payors to pay for our products versus less expensive therapies;

•the impact of healthcare reform laws; and

•projected cash needs and our expected future revenues, operations and expenditures.

The forward-looking statements are contained principally in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Item 1A – Risk Factors.”

Given these risks, uncertainties and other factors, we urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Fintepla^® and Zogenix™ are our trademarks. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owner.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Zogenix,” “we,” “us” and “our” refer to Zogenix, Inc., a Delaware corporation, and its consolidated subsidiaries.

The condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our 2019 Annual Report on Form 10-K, which was filed with the SEC on March 2, 2020 (2019 Form 10-K).

Zogenix, Inc. | Q2 2020 Form 10-Q | 19

Overview

We are a global biopharmaceutical company committed to developing and commercializing therapies with the potential to transform the lives of patients and their families living with rare diseases. Our first rare disease therapy, Fintepla (fenfluramine) oral solution, C-IV has been approved by the FDA and is under review in Europe for the treatment of seizures associated with Dravet syndrome, a rare, severe childhood onset epilepsy. In addition, the company has two late-stage development programs underway: one for Fintepla for the treatment of seizures associated with Lennox-Gastaut syndrome, a rare childhood-onset epilepsy and another for MT1621, an investigational novel substrate enhancement therapy for the treatment of TK2 deficiency, a rare genetic disorder.

Fintepla for Patients with Rare Epilepsy Disorders

Dravet Syndrome

In June 2020, we received FDA approval of Fintepla (fenfluramine) oral solution, CIV for the treatment of seizures associated with Dravet syndrome in patients two years of age and older. In July 2020, we launched Fintepla in the U.S. market through a restricted distribution program, called the Fintepla Risk Evaluation and Mitigation Strategy (REMS) Program, and is available through our specialty pharmacy partner. The FDA’s approval of Fintepla in Dravet syndrome was based on data from two randomized, double-blinded, placebo-controlled Phase 3 clinical trials, published in The Lancet (Volume 394, Issue 10216, P2243-2254, December 21, 2019) and JAMA Neurology (2020 Mar; 77(3): 300–308), and safety data from an open-label extension trial in which many patients received Fintepla for up to three years. When added to existing treatment regimens, Fintepla significantly reduced the monthly convulsive seizure frequency compared to placebo in study patients whose seizures were not adequately controlled on one or more antiepileptic drugs. In addition, most study patients responded to treatment with Fintepla within three to four weeks and effects remained consistent over the treatment period.

In addition, our Marketing Authorization Application (MAA) for Fintepla in Dravet syndrome submitted to the EMA has been under review since its acceptance in March 2019, and we anticipate a decision on the MAA from the EMA in the fourth quarter of 2020.

In Japan, we have enrolled our last patient in a pivotal Phase 3 study, with top-line data expected in late 2020/early 2021 and anticipate submission of a J-NDA to Japan’s Pharmaceutical and Medical Devices Agency in 2021.

Lennox-Gastaut Syndrome

Fintepla is also under late-stage development for the treatment of seizures associated with LGS, another rare and devastating form of childhood-onset epilepsy. In November 2017, we announced the initiation of Study 1601, our double-blind, placebo-controlled, multicenter global Phase 3 clinical trial of Fintepla as an adjunctive treatment for seizures in patients with LGS. In February 2020, we announced positive top-line results from Study 1601, which met its primary objective of demonstrating that Fintepla at a dose of 0.7 mg/kg/day was superior to placebo in reducing the frequency of drop seizures, based on the change between baseline and the titration and maintenance treatment period (p=0.0012). The same dose of Fintepla (0.7 mg/kg/day) also demonstrated improvements versus placebo in key secondary efficacy measures, including a significant reduction in the proportion of patients with a clinically meaningful reduction (≥50%) in drop seizure frequency (p=0.0150). A decrease in the frequency of drop seizures between baseline and the treatment period was observed for a lower dose of Fintepla (0.2 mg/kg/day) compared to placebo, but this change did not reach statistical significance (p=0.0915). In Study 1601, Fintepla was generally well-tolerated, with the adverse events consistent with those observed in our two prior Phase 3 studies in Dravet syndrome. The most common adverse events (≥10%) in the Fintepla-treated groups were decreased appetite, somnolence, fatigue, vomiting, diarrhea, seizure and pyrexia. The incidence of serious treatment emergent adverse events was 11.5% (n=10) in the 0.7 mg/kg/day group, 4.5% (n=4) in the 0.2 mg/kg/day group, and 4.6% (n=4) in the placebo group. Patients who completed the double-blind phase of Study 1601 and were eligible could enter a 12-month open label extension study to evaluate the long-term safety, tolerability and effectiveness of Fintepla. We are now focused on finalizing the studies and data required to support a supplemental New Drug Application (sNDA) and are scheduled to meet with the FDA in September 2020 to discuss requirements for an sNDA submission.

Other Potential Indications

In addition to Dravet syndrome and LGS, we are evaluating Fintepla in other rare epileptic syndromes and diseases. We believe that the unique mechanism of action of Fintepla has the potential to other epileptic encephalopathies where there is a significant unmet medical need. After the COVID-19 pandemic subsides, we plan to initiate an exploratory Phase 2 study (the “basket study”), which is a study designed to understand the characteristics of rare epilepsy disorders other than Dravet syndrome and LGS in separate cohorts and evaluate whether Fintepla is safe and effective versus placebo in these patient populations.

Zogenix, Inc. | Q2 2020 Form 10-Q | 20

MT1621 for Patients with TK2 Deficiency

In September 2019, we acquired all the outstanding equity interests of Modis Therapeutics, Inc. (Modis), a privately-held biopharmaceutical company based in Oakland, California. Modis holds an exclusive worldwide license from Columbia University in New York City to certain intellectual property rights owned or controlled by Columbia University to develop and commercialize MT1621. MT1621 is an investigational deoxynucleoside-combination substrate enhancement therapy in development for the treatment of TK2d, a rare, debilitating, and often fatal genetic mitochondrial DNA depletion disorder that primarily affects infants and children and for which there are currently no approved therapies. Modis previously completed the RETRO study, a potentially pivotal Phase 2 global retrospective study of MT1621 in 38 pediatric and adult patients with TK2d (median age of disease onset, 2.5 years) treated at eight clinical sites in the United States, Spain and Israel. Subjects received MT1621 for a median of 71 weeks (range 92 days – 7 years). In October 2019, we announced positive top-line results from the RETRO study in which 94.7% of treated patients had either improved (68%) or stabilized (26%) overall responses in major functional domains. A survival analysis using a time-dependent Cox regression model showed that the difference in probability of survival between treated patients and untreated natural history control patients was statistically significant (p<0.0006). Among clinical responders, a subset demonstrated profound responses, in some cases reacquiring previously lost capabilities such as ambulation, respiratory function allowing discontinuation from ventilatory support and independent feeding allowing removal of a feeding tube. Safety data from RETRO indicated that MT1621 was generally well-tolerated. Most reported adverse events were considered not related to study drug (199 of 292), with mild or moderate diarrhea being the most common treatment-related adverse event (AE), occurring in 63% of patients. Serious AEs (SAEs) were reported in 14 subjects (37%). The majority of SAEs were deemed related to TK2d; two patients experienced three adverse events related to study drug alone (kidney stone, kidney stone removal, diarrhea). Two adult-onset patients stopped treatment due to asymptomatic increases in aminotransferase liver enzymes (no increase in bilirubin levels), which resolved upon discontinuation of treatment.

In April 2020, we held an End-of-Phase 2 meeting with the FDA and in June 2020, we met with the FDA to discuss chemistry, manufacturing, and controls (CMC) for MT1621. In the meetings, the FDA outlined the additional clinical and non-clinical information needed for an NDA submission. Based on the feedback, we expect availability of all required data by end of 2021 to support an NDA submission, which we are targeting for first half of 2022. Also, in the meeting, the FDA requested we include additional information on treated patients who did not participate in the Modis-sponsored portion of the RETRO study in order to have a complete survival analysis for the NDA. This additional information will be collected in a non-interventional medical chart-review study. The FDA also recommended we conduct a Phase 1 pharmacokinetic (PK) studies in renal impairment to provide dosing recommendations in the setting of impaired renal function and include in the NDA submission. The FDA also concurred with our proposed CMC plan for the prospective NDA submission.

Business Update Regarding the COVID-19 Pandemic

The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees, patients and their families and caregivers, communities and business operations, as well as the U.S. and global economies and financial markets. International and U.S. governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we closed our offices for all but the most essential activities and have implemented a policy allowing all employees to work from across all locations, following the guidelines or directives issued by federal, state and local government agencies in the U.S. as well as the U.K. government. We only recently reopened the UK site for use by employees on a volunteer basis under strict guidelines and using government recommended health protocols.

In July 2020, we commenced the commercial launch of Fintepla in the United States. Our commercialization efforts will need to navigate through the operational restrictions imposed on our sales force from quarantines, travel restrictions and bans and other governmental restrictions related to COVID-19. As a result of these restrictions, our sales force may not be able to conduct in-person interactions with physicians and customers and may be restricted to conducting educational and promotional activities for Fintepla virtually, which may impact our ability to market Fintepla. In addition, Fintepla is being launched through a Risk Evaluation and Mitigation Strategy (REMS) Program requiring patients to visit sites of care for an echocardiogram during this pandemic. To date, we have been able to continue to supply Fintepla and MT1621 to our patients currently enrolled in our clinical trials and do not currently anticipate any interruptions in supply. While we are currently continuing the clinical trials we have underway in sites across the globe, we expect that COVID-19 precautions may directly or indirectly impact the timeline for some of our clinical trials. For example, due to the challenges of enrolling new patients posed by the COVID-19 pandemic, we have paused the initiation of our basket study until there is more clarity on the extent of the impact of the COVID-19 pandemic on our business. Any delays in the completion of our clinical trials and any disruption in our supply chain could have a material adverse effect on our business, results of operations and financial condition. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning

Zogenix, Inc. | Q2 2020 Form 10-Q | 21

COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in conformity with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Our critical accounting policies and estimates are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2019 Form 10-K. There were no material changes to our critical accounting policies during the six months ended June 30, 2020, as compared to the critical accounting policies and estimates disclosed in our 2019 Form 10-K, excepted as described below.

Finite-Lived Intangible Assets

Purchased finite-lived intangible assets are initially recognized at fair value and subject to amortization over its estimated useful life. Finite-lived intangible assets are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Due to the inherent subjectivity of forecasting the timing in which the cash flows may be generated from our Fintepla intangible asset over a long-term time horizon, we concluded the pattern of economic benefit could not be reliably determined. We have therefore elected to use the straight-line method of amortization for this intangible asset.

The estimate of the useful life of our Fintepla intangible asset involves management judgment. In determining the estimated useful life, we considered the estimated period over which the asset will contribute directly or indirectly to our future cash flows, the strength of issued patents and related period of intellectual property protection, the availability of competitor products treating similar indications and the impact of patent expiry on the sustainability of future operating cash flows of the asset.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements that are of significance or potential significance to us, see Note 2, Summary of Significant Accounting Policies to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of Three and Six Months Ended June 30, 2020 and 2019

Collaboration Revenue


	Three Months Ended June 30,										Six Months Ended June 30,
(in thousands)	2020		2019		Change		2020		2019		Change
Collaboration revenue	$	1,032	$	1,069	$	(37)	$	2,281	$	1,069	$	1,212

For the periods presented, all revenue was derived from a collaboration agreement with Nippon Shinyaku Co., Ltd. entered into in March 2019. We may also be entitled to receive additional payments under the collaboration agreement upon achievement of certain regulatory milestones and the occurrence of specific events. As the recognition of this collaboration revenue is based on costs incurred to date relative to total estimated costs at completion when measuring progress and the uncertainty of when the events underlying various milestones are resolved, we expect our collaboration revenue will fluctuate from period to period.

We commercially launched Fintepla in the U.S. market in July 2020, after receiving FDA approval for the treatment of seizures associated with Dravet syndrome in patients two years of age and older and expect to report revenue from product sales beginning with the third quarter of 2020.

Zogenix, Inc. | Q2 2020 Form 10-Q | 22

Research and Development Expenses


	Three Months Ended June 30,										Six Months Ended June 30,
(in thousands)	2020		2019		Change		2020		2019		Change
Research and development	$	34,373	$	27,096	$	7,277	$	67,613	$	51,448	$	16,165

Research and development expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including: payments made to third-party clinical research organizations (CROs) and investigational sites, which conduct our clinical trials on our behalf, and consultants; expenses associated with regulatory submissions, pre-clinical development and clinical trials; payments to third-party manufacturers, which produce our active pharmaceutical ingredient and finished product; pre-launch inventory, personnel related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation; and facility, maintenance, depreciation and other related expenses.

For each of our research and development programs, we incur both external and internal costs. External costs include clinical and non-clinical activities performed by CROs, lab services, purchases of product candidate materials and manufacturing development costs. We track external research and development expenses for each of our key development programs. We have not tracked internal costs on a program-by-program basis because our research and development employees and infrastructure resources are utilized across our product candidate development programs.

The table below sets forth components of our research and development expenses for the periods presented.


	Three Months Ended June 30,										Six Months Ended June 30,
(in thousands)	2020		2019		Change		2020		2019		Change
Fintepla for Dravet syndrome	$	7,643	$	11,047	$	(3,404)	$	14,954	$	20,666	$	(5,712)
Fintepla for LGS	7,759		6,668		1,091		15,702		12,671		3,031
MT1621	4,432		—		4,432		6,084		—		6,084
Other⁽¹⁾	646		27		619		1,443		725		718
Total external costs	20,480		17,742		2,738		38,183		34,062		4,121
Internal costs	13,893		9,354		4,539		29,430		17,386		12,044
Total	$	34,373	$	27,096	$	7,277	$	67,613	$	51,448	$	16,165

————————————

(1)Other external costs include early-phase exploratory research programs.

In October 2014, we acquired worldwide development and commercialization rights to Fintepla from the acquisition of Brabant and have since incurred significant expenditures related to conducting clinical trials of Fintepla. Research and development expenses related to Fintepla for Dravet syndrome decreased by $3.4 million and $5.7 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 primarily due to wind-down of clinical activities related to our Phase 3 trials Study 1501 and Study 1504. Research and development spend related to Fintepla for LGS increased by $1.1 million and $3.0 million in the same year-over-year periods reflecting the progression and expansion of our clinical trial activities within Study 1601. External costs of $4.4 million and $6.1 million incurred during the three and six months ended June 30, 2020, respectively, reflect our continuation of the MT1621 development program, which we acquired through our acquisition of Modis in September 2019. Internal costs for research and development activities increased by $4.5 million and $12.0 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 primarily driven by additions to headcount, including, in part, former Modis employees who continued their employment with us and additional hires to support the development of MT1621.

Selling, General and Administrative Expenses


	Three Months Ended June 30,										Six Months Ended June 30,
(in thousands)	2020		2019		Change		2020		2019		Change
Selling	$	10,352	$	2,266	$	8,086	$	21,784	$	11,432	$	10,352
General and administrative	14,079		6,311		7,768		23,965		14,945		9,020
Total selling, general and administrative	$	24,431	$	15,459	$	15,854	$	45,749	$	26,377	$	19,372

Selling expense consists primarily of salaries and benefits of sales and marketing personnel and market research expenses for our product and product candidates that are in development and marketing expenses to support our commercial launch efforts. General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting, business development and internal support functions. In addition, general and administrative expenses include professional fees for legal, consulting and accounting services.

Zogenix, Inc. | Q2 2020 Form 10-Q | 23

Selling expense increased by $8.1 million and $10.4 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 and was primarily attributable to increased personnel-related costs as a result of headcount additions in preparation for commercialization and launch of Fintepla for Dravet syndrome, which occurred in July 2020.

General and administrative expense increased by $7.8 million and $9.0 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 and was primarily attributable to increased personnel-related costs, including stock-based compensation related to the vesting of performance-based awards upon FDA approval of Fintepla for Dravet syndrome and an increase in professional services.

Acquired In-Process Research and Development Expense

Acquired in-process research and development (IPR&D) expense consists of a transaction accounted for as an asset acquisition. For the three and six months ended June 30, 2020, we incurred $1.5 million and $3.0 million, respectively, in aggregate monthly option maintenance fees for the right to license an IPR&D asset. The underlying program subject to our option maintenance fees had not yet reached technological feasibility and had no alternative future use which resulted in a write-off to acquired IPR&D expense.

Change in Fair Value of Contingent Consideration


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2020		2019		2020		2019
Change in fair value of contingent consideration	$	12,200	$	(700)	$	4,300	$	2,300

The contingent consideration liability relates to milestone payments under an existing agreement in connection with our prior acquisition of Fintepla. At each reporting period, the estimated fair value of the liability is determined by applying the income approach which utilizes variable inputs, such as the probability of success for achieving regulatory and sales-based milestones, anticipated future cash flows, risk-free adjusted discount rates, and nonperformance risk. Any change in the fair value is recorded as contingent consideration (income) expense.

For the three months ended June 30, 2020, the $12.2 million increase to the estimated fair value of our contingent consideration consisted of updated assumptions used regarding the probability of success for achieving certain regulatory and sales-based milestone events in light of FDA approval of Fintepla in June 2020, which accounted for approximately $10.0 million of the increase, with the remaining increase attributed to a market-driven decrease in discount rates.

Other Income (Expense)


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2020		2019		2020		2019
Other income (expense):
Interest income	$	880	$	2,983	$	1,968	$	6,139
Other income, net	(157)		40		19,864		(48)
Total other income	$	723	$	3,023	$	21,832	$	6,091

The decrease in interest income for the three and six months ended June 30, 2020 compared to the same periods in 2019 was attributable to lower average cash and investment balances as we funded our acquisition of Modis in September 2019 with cash on hand.

The increase in other income, net for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to amounts recorded to other income of $19.7 million for a cash rebate claim submitted under the U.K.’s small and medium-sized enterprise and research and development tax relief scheme for qualifying expenditures incurred in tax years 2017 and 2018. For our 2019 tax year, we have not yet decided whether to seek tax relief by surrendering some of our losses for a tax credit cash rebate claim or electing to receive enhanced U.K. tax deductions on our eligible research and development activities. Under the U.K.’s tax legislation, there is a two-year window after the end of a tax year to seek relief under this tax relief scheme.

Income Tax Benefit

For the three and six months ended June 30, 2020, we recorded a tax benefit of $17.4 million resulting from our determination that we are now able to consider the deferred tax liability associated with the IPR&D intangible acquired in connection with our acquisition of Brabant in 2014 as a source of income in assessing the realizability of our deferred tax assets as of June 30, 2020. This change in estimate was based on the approval of Fintepla by the FDA in June 2020.

Zogenix, Inc. | Q2 2020 Form 10-Q | 24

Liquidity and Capital Resources

Excluding gains from two discrete business divestitures, we have incurred significant net losses and negative cash flows from operating activities since inception. As of June 30, 2020, our accumulated deficit was $1.2 billion. We expect to continue to incur significant operating losses and negative cash flows from operations to support the marketing and commercialization of Fintepla for Dravet syndrome as well as continuing to advance our clinical programs. Additionally, we are obligated to make future milestone payments that are contingent upon the successful achievement of certain substantive development, regulatory and sales-based milestone events related to Fintepla and MT1621. As of June 30, 2020, we derive collaboration revenue from our Shinyaku Agreement related to development and commercialization activities for Fintepla in Japan. To date, we have relied primarily on the proceeds from equity offerings to finance our operations.

As of June 30, 2020, our cash, cash equivalents and marketable securities totaled $390.2 million. We believe our existing capital resources are sufficient to meet our projected operating requirements for at least the next 12 months. On June 12, 2020, we filed a universal shelf registration statement on Form S-3 with the SEC, which became effective upon filing. The shelf registration statement permits us to offer and sell, from time to time over the next three years, in one or more offerings, an unlimited amount of any combination of our common stock, preferred stock, debt securities, warrants or units consisting of any of the foregoing. The specific terms of any offering, if any, under the shelf registration statement would be established at the time of such offering. The shelf registration statement also includes a sales agreement prospectus covering the offering, issuance and sale of up to $200.0 million of our common stock, through Cantor Fitzgerald & Co. (Cantor), acting as our sales agent, pursuant to a sales agreement with Cantor dated May 10, 2016 for our “at-the-market” equity program. During the quarter ended June 30, 2020, we did not issue any shares of our common stock through this program. We believe maintaining an active shelf registration provides additional financial flexibility to access the capital markets and allow us to act opportunistically in support of our growth objectives.

Our principal uses of cash are research and development expenses, selling, general and administrative expenses and other working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

•our ability to generate sales of Fintepla for the treatment of seizures associated with Dravet syndrome;

•the costs of establishing or outsourcing sales, marketing and distribution capabilities for Fintepla for the treatment of Dravet syndrome and, should we elect to do so, for any of our other product candidates;

•the rate of progress and cost of our clinical trials and other product development programs for Fintepla, MT1621 and our other product candidates and any other product candidates that we may develop, in-license or acquire;

•the timing of regulatory approval of our product candidates and the commercial success of Fintepla and any other approved products;

•the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with Fintepla, MT1621 and any of our other product candidates;

•the timing and amounts of the milestone or other payments we must make related to Fintepla and MT1621;

•the costs, terms and timing of completion of outsourced commercial manufacturing supply arrangements for any product candidate;

•the effect of competing technological and market developments; and

•any delays and cost increases that result from the COVID-19 pandemic.

Until we can generate a sufficient amount of revenue to finance our cash requirements, if ever, we may need to continue to rely on additional financing to achieve our business objectives. However, we may not be able to secure such financing in a timely manner or on favorable terms, if at all, and this risk could be exacerbated by the impact of COVID-19 on global economic conditions. If future funds are raised through issuance of equity or debt securities, these securities may have rights, preferences and privileges senior to those of our existing stockholders. If we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. Without additional funds at the time we need such funding, we may be forced to delay, scale back or eliminate some of our research and development activities, our commercialization efforts, or other operations and potentially delay product development in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve the development and commercialization goals could be adversely affected.

Zogenix, Inc. | Q2 2020 Form 10-Q | 25

The following table presents selected information from our statements of cash flows (in thousands):


	Six Months Ended June 30,
	2020		2019
Cash and cash equivalents, beginning of the period	$	62,070	$	68,454
Net cash used in operating activities	(83,782)		(41,739)
Net cash (used in) provided by investing activities	(67,054)		28,653
Net cash provided by (used in) financing activities	225,637		(4,580)
Net increase (decrease) in cash and cash equivalents	74,801		(17,666)
Cash and cash equivalents, end of the period	$	136,871	$	50,788

Operating Activities

For the six months ended June 30, 2020, net cash used in operating activities of $83.8 million was primarily attributable to a net loss of $79.1 million and net changes in operating assets and liabilities of $10.0 million, offset by an aggregate of $5.4 million of non-cash charges, net. Non-cash items included stock-based compensation expense of $14.7 million, fair value adjustments related to contingent consideration liability of $4.3 million, an IPR&D charge of $3.0 million and an income tax benefit of $17.4 million. Cash used in operating activities included research and development spend related to ongoing open-label clinical trials for Fintepla and manufacturing process development for Fintepla and MT1621, commercial preparedness and planning expenses including additions in headcount to build out our sales force of key account managers and general and administrative costs to support our business objectives. This cash outflow was partially offset by cash received of $19.7 million for a cash rebate claim submitted under U.K.’s small and medium-sized enterprise and research and development tax relief scheme for qualifying expenditures incurred in tax years 2017 and 2018.

For the six months ended June 30, 2019, net cash used in operating activities of $41.7 million was primarily attributable to a net loss of $73.0 million, plus the net effect of non-cash items of $9.3 million, primarily from stock-based compensation, and a net cash inflow from changes in operating assets and liabilities of $21.9 million. Cash inflows from changes in operating assets and liabilities included the receipt of a $15.5 million upfront payment in connection with the Shinyaku Agreement entered into in March 2019. Changes in other operating assets and liabilities were primarily attributable to the timing of payments for prepaid and accrued clinical trial costs and accrued expenses in the normal course of business.

Investing Activities

For the six months ended June 30, 2020, net cash used in investing activities of $67.1 million was primarily attributable to net purchases of available-for-sale marketable securities.

For the six months ended June 30, 2019, net cash provided by investing activities of $28.7 million was attributable to $289.4 million related to maturities of marketable securities, offset by cash outflows of $251.8 million for purchases of marketable securities and $8.9 million in capital spend primarily related to the build-out of our new headquarters, which we began to occupy in early March 2019.

Financing Activities

For the six months ended June 30, 2020, net cash provided by financing activities of $225.6 million primarily consisted of net proceeds realized from the issuance of 9,798,000 million shares of our common stock in a public offering and $3.9 million in net proceeds received from the issuance of common stock pursuant to our equity incentive plans.

For the six months ended June 30, 2019, net cash used in financing activities of $4.6 million consisted of a $10.0 million payment of contingent consideration related to a prior acquisition and cash used to remit withholding taxes of $0.6 million related to the vesting of restricted stock units that were net share-settled by us to cover the required withholding tax. These cash outflows were offset by $6.0 million of proceeds from common stock issuances pursuant to our equity incentive plans.

Contractual Obligations

There were no material changes outside the ordinary course of our business during the six months ended June 30, 2020 to the information regarding our contractual obligations that was disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K.

Zogenix, Inc. | Q2 2020 Form 10-Q | 26

Off-Balance Sheet Arrangements

As of June 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Zogenix, Inc. | Q2 2020 Form 10-Q | 27

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our 2019 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2019.

Item 4. Controls and Procedures

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020 at the reasonable assurance level.

Changes in Disclosure Controls and Procedures

There were no changes in our internal control over financial reporting during the six months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Zogenix, Inc. | Q2 2020 Form 10-Q | 28

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

See discussion of legal proceedings set forth under Part II, Item 1. Legal Proceedings in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 6, 2020, which is incorporated by reference into this Part II. Item 1, as well as the discussion in Part I, Item 3. Legal Proceedings in our 2019 Form 10-K.

We may become involved in various legal proceedings and claims that arise in the ordinary course of business. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverse effect on our business, results of operations, financial position or cash flows.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our 2019 Form 10-K, other than as set forth below.

Our business is subject to risks arising from epidemic diseases, such as the recent COVID-19 pandemic.

The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees, patients, communities and business operations, as well as the U.S. and global economy and financial markets. International and U.S. governmental authorities in impacted regions are taking actions to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we closed our offices for all but the most essential activities and have implemented a policy allowing all employees to work from across all locations, following the guidelines or directives issued by federal, state and local government agencies in the U.S. as well as the U.K. government. We only recently reopened the UK site for use by employees on a volunteer basis under strict guidelines and using government recommended health protocols.. To date, we have been able to continue to supply Fintepla and MT1621 to our patients currently enrolled in our clinical trials and do not currently anticipate any interruptions in clinical or commercial supply. In addition, while we are continuing the clinical trials we have underway in sites across the globe, we expect that COVID-19 precautions may directly or indirectly impact the timeline for some of our clinical trials. For example, due to the challenges of enrolling new patients posed by the COVID-19 pandemic, we have paused the initiation of our exploratory Phase 2 basket study, which is designed to understand the characteristics of rare epilepsy disorders other than Dravet syndrome and LGS in separate cohorts and evaluate whether Fintepla is safe and effective versus placebo in these patient populations. As the COVID-19 pandemic continues to spread around the globe, we may experience disruptions that could severely impact our business, clinical trials and manufacturing and supply chains, including:

•interruption or delays in the operations of the FDA, EMA or other regulatory authorities, which may impact review and approval timelines of our NDA and MAA for Fintepla for the treatment of seizures associated with Dravet syndrome;

•further delays or difficulties in enrolling patients in our clinical trials;

•delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

•diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

•interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;

•interruption of, or delays in receiving, supplies of our product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems, including interruption of commercial supply;

•delays or inability of us or our independent registered public accounting firm to count and/or observe the counts of our physical inventories;

•delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials and interruption in global shipping that may affect the transport of clinical trial materials;

•limitations on employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

Zogenix, Inc. | Q2 2020 Form 10-Q | 29

•delays in receiving feedback or approvals from the FDA, EMA or other regulatory authorities with respect to future clinical trials or regulatory submissions, including for MT1621;

•changes in local regulations as part of a response to COVID-19 which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue such clinical trials altogether;

•delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees;

•refusal of the FDA or EMA to accept data from clinical trials in affected geographies; and

•difficulties launching or commercializing products, including due to reduced access to doctors as a result of social distancing protocols.

In addition, the spread of COVID-19 has had and may continue to severely impact the trading price of shares of our common stock and could further severely impact our ability to raise additional capital on a timely basis or at all.

The COVID-19 pandemic continues to rapidly evolve. The extent to which the COVID-19 may impact our business, including our clinical trials, manufacturing and supply chains and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this section and in the “Risk Factors” section of our 2019 Form 10-K.

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved or commercialized in a timely manner or at all, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for new drugs or modifications to approved drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

Separately, in response to the COVID-19 pandemic, on March 10, 2020 the FDA announced its intention to postpone most foreign inspections of manufacturing facilities, and subsequently, on March 18, 2020, the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020 the FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

Not applicable.

Zogenix, Inc. | Q2 2020 Form 10-Q | 30

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Zogenix, Inc. | Q2 2020 Form 10-Q | 31

[Item 6. Exhibits]

EXHIBIT INDEX


Exhibit Number						Exhibit Description

3.1⁽¹⁾						Fifth Amended and Restated Certificate of Incorporation of the Registrant

3.2⁽²⁾						Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Registrant

3.3⁽³⁾						Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Registrant

3.4⁽⁴⁾						Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Registrant

3.5⁽¹⁾						Fifth Amended and Restated Certificate of Incorporation of the Registrant

4.1⁽⁵⁾						Form of the Registrant’s Common Stock Certificate

4.2⁽⁶⁾						Warrant dated July 18, 2011 issued by the Registrant to Healthcare Royalty Partners (formerly Cowen Healthcare Royalty Partners II, L.P.)

10.1*†						Employment Agreement dated April 20, 2020, by and between the Registrant and Shawnte M. Mitchell

10.2⁽⁷⁾†						Zogenix, Inc. Employee Stock Purchase Plan Stock Purchase Plan

31.1*						Certification of Chief Executive Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)

31.2*						Certification of Chief Financial Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)

32.1**						Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)

32.2**						Certification of Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)

101*						Inline XBRL Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.

104*						Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set.

____________________

(1)Incorporated by reference to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 filed on October 27, 2010.

(2)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 8, 2012.

(3)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on August 10, 2015.

(4)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on August 6, 2019.

(5)Incorporated by reference to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 filed on November 4, 2010.

(6)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on August 12, 2011.

†Indicates management contract or compensatory plan.

*Filed herewith.

**These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not subject to the liability of that section. These certifications are not to be incorporated by reference into any filing of Zogenix, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing herewith.

Zogenix, Inc. | Q2 2020 Form 10-Q | 32

SIGNATURES

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



			ZOGENIX, INC.

Date:	August 6, 2020	By:	/s/ Stephen J. Farr
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	August 6, 2020	By:	/s/ Michael P. Smith
			Executive Vice President, Chief Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)