UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of November 3, 2014May 4, 2015 was 153,040,066.153,363,743.

ZOGENIX, INC.

See accompanying notes.

Zogenix, Inc. (the Company) is a pharmaceutical company committed to developing and commercializing therapies that address specific clinical needs for people living with pain-related conditions and central nervous system disorders who need innovative treatment alternatives to help them return to normal daily functioning. On October 25, 2013, the Company received marketing approval from the U.S. Food and Drug Administration (FDA) for Zohydro® ER (hydrocodone bitartrate) extended-release capsules, CII, an opioid agonist, extended-release oral formulation of hydrocodone without acetaminophen, for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Zohydro ER is the first extended-release oral formulation of hydrocodone without acetaminophen. The Company launched Zohydro ER in March 2014. On September 30, 2014, the Company submitted a supplemental New Drug Application (sNDA) for a modified formulation of Zohydro ER which was has been designed to have abuse deterrent properties. The new capsule formulation contains additional inactive ingredients that are intended to make the product more difficult to abuse by injection and nasal insufflation. The The FDA assigned a Prescription Drug User Free Act, or PDUFA, target action date on the sNDA of January 30, 2015, and, if approved, we anticipate a transition from the currently marketed product to this new capsule formulation of Zohydro ER in the second quarter of 2015.

The Company has incurred significant net losses since inception and has relied on its ability to fund its operations through equity financings, debt financings, revenues from the sale of productproducts and proceeds from business collaborations.collaborations and divestitures. As the Company continues to incur losses, successful transition to profitability is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. This may not occur and, unless and until it does, the Company will continue to need to raise additional cash. These conditions raiseraised substantial doubt about the Company’s ability to continue as a going concern.concern as noted in our consolidated financial statements for the year ended December 31, 2014. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

Management expects operating lossesSubsequent to the issuance of the Company's annual report for the year ended December 31, 2014 dated March 11, 2015, and negative cash flows to continuethe reporting period included in these consolidated financial statements for at least the next year asthree months ended March 31, 2015, the Company continues to incur costs related to the commercialization ofsold its Zohydro ER the introductionbusiness to Ferrimill Limited (Ferrimill) and received cash proceeds, net of Zohydro ER with abuse deterrent properties to the market, if approved, the clinical development$10,000,000 placed in escrow, of Relday and Brabafen, required post-market testingapproximately $70,000,000, plus approximately $900,000 for Zohydro ER safe use initiatives for Zohydro ERfinished goods inventory acquired by the purchaser. Also, approximately 100 sales and additional development activitiesmarketing employees transitioned to the purchaser in conjunction with respect to Zohydro ER, including the development of multiple formulations of extended-release hydrocodone with abuse deterrent properties. Management may pursue additional opportunities to raise further capital, if required, through public or private equity offerings, including through a controlled equity offering program, debt financings, receivables financings or through collaborations or partnerships with other companies to further support its planned operations. There can be no assurance thatdivestiture.

The unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q have been prepared by Zogenix, Inc. according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments, which are normal and recurring, necessary to fairly state the financial position, results of operations and cash flows. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in ourthe Company's Annual Report on Form 10-K and Form 10-K/A for the fiscal year ended December 31, 20132014, each as filed with the SEC on March 7, 2014.SEC.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

The unaudited interim consolidated financial statements include the accounts of Zogenix, Inc. and its wholly owned subsidiary Zogenix Europe Limited, which was incorporated under the laws of England and Wales in June 2010. All intercompany transactions and investments have been eliminated in consolidation. Zogenix Europe Limited’s functional currency is the U.S. dollar, the reporting currency of its parent.

Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

The Company classifies its cash equivalents within Level 1 of the fair value hierarchy because it values its cash equivalents using quoted market prices. The Company classifies its common stock warrant liabilities and embedded derivative liabilitiescontingent purchase consideration within Level 3 of the fair value hierarchy because they are valued using valuation models with significant unobservable inputs. Assets and liabilities measured at fair value on a recurring basis at September 30, 2014March 31, 2015 and December 31, 20132014 are as follows (in thousands):

Changes in fair value of the liabilities shown in the table above are recorded through change in fair value of warrant liabilitiescontingent consideration in operating expenses and change in fair value of embedded derivativeswarrant liabilities in other income (expense) in the consolidated statements of

Basic net income (loss)loss per share is calculated by dividing the net income (loss)loss by the weighted average number of common shares outstanding for the period, reduced by weighted average shares subject to repurchase, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net income (loss)loss by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and as-if converted method, as applicable. For purposes of this calculation, stock options, restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The following table presents the computation of basic and diluted net income (loss)loss per share for continuing and discontinued operations (in thousands, except per share amounts):  

There were 58,000730,000 and 9,909,000 dilutive securities (in common stock equivalent shares), from common stock options, excluded from the calculation of diluted net loss during the three and nine months ended September 30, 2014, respectively, because to include them would be anti-dilutive. There were 1,776,00011,246,000 dilutive securities (in common stock equivalent shares), from common stock options and restricted stock units excluded from the calculation of diluted net loss during the three and nine months ended September 30, 2013March 31, 2015 and 2014, respectively, because to include them would be anti-dilutive. All commonCommon stock warrants disclosed in Note 6of 15,724,000 and 508,000 were excluded from the calculation of diluted net loss during the three months ended September 30,March 31, 2015 and 2014, and 2013, and during the nine months ended September 30, 2013,respectively, as the exercise price of the warrants was greater than the Company's average stock price during these periods.

The Company recognized revenue from contract manufacturing, service fees earned on collaborative arrangements and the sale of its Sumavel DosePro businessprior to its sale in May 2014,2014. The company also recognized revenue from the Company recorded an impairment chargesale of $838,000Zohydro ER prior to its sale to Ferrimill in April 2015, which is included in net loss from discontinued operations in the consolidated statement of operations and comprehensive income (loss) during the nine months ended September 30, 2014 related to the disposal of construction in progress that will no longer be placed into service.

only if (a) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (b) the buyer has paid the Company, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (c) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (d) the buyer acquiring the product for resale has economic substance apart from that provided by the Company, (e) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (f) the amount of future returns can be reasonably estimated. ThePrior to the divestiture of the Zohydro ER business, the Company currently defersdeferred recognition of revenue on product shipments of Zohydro ER until the right of return no longer exists,existed, as the Company currently cannotwas not able to reliably estimate expected returns of the product at the time of shipment given the limited sales history of Zohydro ER.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. The application of the multiple element guidance requires subjective determinations, and requires the Company to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company's control. In determining the units of accounting, the Company evaluates certain criteria, including whether the deliverables have stand-alone value, based on the consideration of the relevant facts and circumstances for each arrangement. In addition, the Company considers whether the buyer can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s), and whether there are other vendors that can provide the undelivered element(s).

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria, as described above, are applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition. The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) of selling price if VSOE is not available, or management's best estimate of selling price (BESP) if neither VSOE nor TPE is available. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.

ProductContract Manufacturing Revenue Net

The Company sells Zohydro ER, and soldEndo entered into a supply agreement in connection with the sale of the Sumavel DosePro throughbusiness to Endo in May 2014, in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively the Company's customers, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. The Company recognized Sumavel DosePro product sales at the time title transferred to its customer, and reduced product sales for estimated future product returns and sales allowances in the same period the related revenue was recognized.

In addition, the Company follows the authoritative accounting guidance when reporting revenue as gross when the Company acts as a principal versus reporting revenue as net when the Company acts as an agent. For transactions in which the Company acts as a principal, has discretion to choose suppliers, bears credit risk and performs a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Management has determined that the Company operates in one business segment, which is the development and commercialization of pharmaceutical products for people living with pain-related conditions and central nervous system disorders.

In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting update that raises the threshold for disposals to qualify as discontinued operations and allows companies to have significant continuing involvement with and continuing cash flows from or to the discontinued operations. This accounting update also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This guidance will bewas effective for fiscal years beginning after December 15, 2014, with early adoption permitted. The Company does not expect that the adoption ofhas adopted the guidance will have a material impact onin the Company's financial statements.first quarter of 2015.

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration

In June 2014,April 2015, the FASB issued new accounting guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company's financial statements.

The Company uses the Black-Scholes option-pricing model for determining the estimated fair value of stock-based compensation for stock-based awards to employees and the board of directors. The assumptions used in the Black-Scholes option-pricing model for the three and nine months ended September 30,March 31, 2015 and 2014 and 2013 are as follows:

The risk-free interest rate assumption was based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The weighted average expected term of options was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility was calculated based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices are publicly available for a sufficient period of time.

As of September 30, 2014,March 31, 2015, there was approximately $15,079,000$10,447,000 of total unrecognized compensation costs related to outstanding employee and board of director stock options, and restricted stock units, which is expected to be recognized over a weighted average period of 2.63.0 years.

As of September 30, 2014,March 31, 2015, there were 181,000233,000 unvested stock options outstanding to consultants, with approximately $151,000$256,000 of related unrecognized compensation expense based on a September 30, 2014March 31, 2015 measurement date. These unvested stock options outstanding to consultants are expected to vest over a weighted average period of 2.22.9 years. In accordance with accounting guidance for stock-based compensation, the Company re-measuresremeasures the fair value of stock option grants to non-employees at each reporting date and recognizes the related income or expense during their vesting period. The income recognized from the valuation of stock options and restricted stock units to consultants was $80,000 and $230,000 for the three and nine months ended September 30, 2014, respectively, and was immaterial for the three and nine months ended September 30, 2013.March 31, 2015 and $174,000 for the three months ended March 31, 2014. Stock option expense for awards issued to consultants is included in the consolidated statement of operations and comprehensive income (loss)loss within selling, general and administrative expense.

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

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.

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

The interim 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, 20132014 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2013.2014.

Overview

Background

We are a pharmaceutical company committed to developing and commercializing therapies thatto address specific clinical needs for people living with pain-related conditions and central nervous system, or CNS, disorders who need innovative treatment alternatives to help them return to normal daily functioning. OnOur current areas of focus are epilepsy and schizophrenia.

In October 25, 2013,2014, Zogenix Europe Limited, our wholly-owned subsidiary, acquired Brabant Pharma Limited, or Brabant. With the acquisition, we received marketing approval from the U.S. Foodobtained worldwide development and Drug Administrations, or FDA, for Zohydro® ER (hydrocodone bitartrate) extended-release capsules, an opioid agonist, extended-release oral formulation of hydrocodone without acetaminophen,commercialization rights to a product candidate, ZX008, a low-dose fenfluramine for the managementtreatment of pain severe enough to require daily, around-the-clock, long-term opioid treatmentDravet syndrome. Dravet syndrome is a rare and catastrophic form of pediatric epilepsy with life threatening consequences for patients and for which alternativecurrent treatment options are inadequate. Zohydro ER isvery limited. ZX008 has received orphan drug designation in Europe and the first extended-release oral formulation of hydrocodone without acetaminophen. We launched Zohydro ER in March 2014. Zohydro ER has the potential to address significant unmet medical needs and become an important and widely-used addition toUnited States for the treatment options availableof Dravet syndrome. As of March 31, 2015, plans are underway to patientssupport the initiation of Phase 3 clinical trials of ZX008 in both Europe and physiciansthe United States in the United States’ multi-billion dollar chronic pain market.third quarter of 2015.

Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of September 30, 2014,March 31, 2015, along with the $8.5 million of the upfront cash payment receivedproceeds from the sale of our Sumavel DosePro business that is included in restricted cash, our projected product revenues from Zohydro ER the $10.0 millionbusiness in payments for the waiver granted to Purdue Pharma L.P., or Purdue, due by July 1,April 2015 and our projected manufacturing and other service revenues will be sufficient to fund our operations intofor at least the thrid quarter of 2015. Our cash and cash equivalents as of September 30, 2014 exclude the $20.0 million cash payment made to the Sellers in connection with our acquisition of Brabant.next twelve months. We may pursue additional opportunities to raise capital, if necessary, through public or private equity offerings, including through our controlled equity offering program, debt financings, receivables financings or through collaborations or partnerships with other companies. If we are unsuccessful in raising additional required funds, we may be required to significantly delay, reduce the scope of or eliminate one or more of our development programs or our commercialization efforts, or cease operating as a going concern.

We also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available. In its report on our consolidated financial statements for the year ended December 31, 2013, our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern.

Recent Developments

Daravita Ltd License Agreement

In 2007, we entered into a license agreement, or the License Agreement, with Daravita Limited formerly(formerly Alkermes Pharma Ireland Limited,Limited), which was amended in 2009 and then again on September 12, 2014. Under the terms of the License Agreement, Daravita granted us an exclusive license in the United States and its possessions and territories, with defined sub-license rights to third parties other than certain technological competitors of Daravita, to certain Daravita intellectual property rights related to Zohydro ER. The License Agreement grantsgranted us the exclusive right under certain Daravita patents and patent applications to import, use, offer for sale and sell oral controlled-release capsule or tablet formulations of hydrocodone, where hydrocodone is the sole active ingredient, for oral prescriptions in the treatment or relief of pain, pain syndromes or pain associated with medical conditions or procedures in the United States. This right enablesenabled us to exclusively develop and sell Zohydro ER in the United States.

Endo Ventures Bermuda Limited and Endo Ventures Limited Asset Purchase Agreement

Upon the Closing,In addition, we and Endo Ventures Bermuda Limited also entered into a license agreement, pursuant to which we granted Endo Ventures an exclusive, worldwide, royalty-free license to make and have made, use and research, develop and commercializefor Sumavel DosePro. Upon Closing weWe also entered into a supply agreement

with Endo Ventures, pursuant to which we will continue to manufacture Sumavel DosePro, and Endo Ventures will supportsupported our Sumavel DosePro manufacturing operations with a working capital advance of $7.0 million. Lastly upon Closing, we entered into other ancillary agreements with Endo Ventures associated with the APA, pursuant to which we will help facilitate the transfer of the Sumavel DosePro business to Endo Ventures, which Endo Ventures will assume responsibility for as of the Closing date.

In connection with the Closing,sale, we were required to extinguish all encumbrances on the assets to be sold to Endo, including those previously granted to Healthcare Royalty Partners, or Healthcare Royalty, pursuant to the financing agreement, dated June 30, 2011, with Healthcare Royalty, or the Healthcare Royalty financing agreement. We eliminated our existing debt obligation to Healthcare Royalty onin May 16, 2014 by paying $40.0 million to Healthcare Royalty which was consistent with the terms of the Healthcare Royalty financing agreement.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. The application of the multiple element guidance requires subjective determinations, and requires us to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. In determining the units of accounting, we evaluate certain criteria, including whether the deliverables have stand-alone value, based on the consideration of the relevant facts and circumstances for each arrangement, such as the commercialization capabilities of the buyer and the availability of the associated expertise in the general marketplace.arrangement. In addition, we consider whether the buyer can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s), and whether there are other vendors that can provide the undelivered element(s).

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria, as described above, are applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition. We determine the estimated selling price for deliverables within each agreement using vendor-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE is not available, or management's best estimate of selling price, or BESP, if neither VSOE nor TPE is available. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.

In connection with the Closing of the APA in May 2014, weWe and Endo Ventures entered into a supply agreement, or the Supply Agreement, pursuantin connection with the sale of the Sumavel DosePro business to whichEndo in May 2014. Under terms of the supply agreement, we retainedretain the sole and exclusive right and the obligation to manufacture have manufactured,or supply or have supplied Sumavel DosePro to Endo Ventures.Endo. We recognize deferred revenue related to our supply of Sumavel DosePro as contract manufacturing revenue when earned on a "proportional performance" basis as product is delivered. We recognize revenue related to ourits sale of Sumavel DosePro product, equal to the cost of contract manufacturing plus a 2.5% mark-up, upon the transfer of title to Endo. We supply Sumavel DosePro product based on non-cancellable purchase orders. We initially defer revenue for any consideration received in advance of services being performed and product being delivered, and recognize revenue pursuant to the related pattern of performance, based on total product delivered relative

to the total estimated product delivery over the minimum eight year term of the Supply Agreement. We continually evaluate the performance period and will adjust the period of revenue recognition if circumstances change.

In addition, we follow the authoritative accounting guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when the we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Results of Operations

Comparison of the three and nine months ended September 30,March 31, 2015 and 2014

The 100% increase in contract manufacturing revenue and 2013

Contract manufacturing revenue for the three and nine months ended September 30, 2014 was $4.2 million and $6.5 million, respectively. Contract manufacturing revenue is recognized for Sumavel DosePro finished goods inventory that has been delivered to Endo Ventures Bermuda under the May 2014 Supply Agreement, and includes a portion of deferred revenue recognized on a proportional performance method. Endo Ventures Bermuda pays us the cost to produce Sumavel DosePro plus a 2.5% mark-up for Sumavel DosePro product delivered.

Service and other revenue for the three months ended September 30,March 31, 2015 and 2014 and 2013 was $0.4 million and $0.3$0.9 million, respectively. Service and other revenue for the nine months ended September 30, 2014 and 2013 was $2.5 million and $0.4 million, respectively. Service and otherproduct revenue is primarily comprised of the co-promotion fee that is earned for our Migranal sales efforts under our agreement with Valeant Pharmaceuticals. The decrease of $0.5 million or 52.1% for the Valeant Agreement.three months ended March 31, 2015 from the same period in 2014 primarily resulted from lower volume of co-promotion activity.

We have experienced net losses and negative cash flow from operations since inception, and as of September 30, 2014,March 31, 2015, had an accumulated deficit of $381.1$424.5 million. We expect to continue to incur net losses and negative cash flow from operating activities for at least the next year as we continue to incur costs related to the commercialization of Zohydro ER, including introduction of Zohydro ER with abuse deterrent properties to the market, if approved, the clinical development for ReldayZX008 and Brabafen, required post-market testing for Zohydro ER, safe use initiatives for Zohydro ER and additional development activities with respect to Zohydro ER, including the development of multiple formulations of extended-release hydrocodone with abuse deterrent properties.Relday. As of September 30, 2014,March 31, 2015, we had cash and cash equivalents of $50.5$21.3 million.

Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of September 30, 2014,March 31, 2015, along with the $8.5 million of the upfront cash payment receivedproceeds from the sale of our Sumavel DosePro business that is included in restricted cash, our projected product revenues from Zohydro ER the $10.0 million in payments for the waiver granted to Purdue due by July 1, 2015,business and our projected contract manufacturing and other service revenues will be sufficient to fund our operations intofor at least the third quarter of 2015. Our cash and cash equivalents as of September 30, 2014 exclude the $20.0 million cash payment made to the Sellers in connection with our acquisition of Brabant.next twelve months. We may also pursue additional opportunities to raise capital, if necessary, through public or private equity offerings, including through a controlled equity offering program, debt financings, receivables financings or through collaborations or partnerships with other companies. If we are unsuccessful in raising additional required funds, we may be required to significantly delay, reduce the scope of or eliminate one or more of our development programs or our commercialization efforts, or cease operating as a going concern. We also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available.

The following table summarizes our cash flows used inprovided by (used in) continuing operating, investing and financing activities for the ninethree months ended September 30, 2014March 31, 2015 and 2013:2014:

Off-Balance Sheet Arrangements

Interest Rate Risk

Our cash and cash equivalents as of September 30, 2014March 31, 2015 consisted of cash and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserve principal. Instruments that meet this objective include commercial paper, money market funds and government and non-government debt securities. Some of the investment securities available-for-sale that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment securities available-for-sale to fluctuate. To minimize this risk, we intend to continue to maintain our portfolio of cash and money market funds. Duefunds, and due to thetheir short-term nature of our investments and our ability to hold them to maturity, we believe that there is no material exposure to interest rate risk.

Foreign Exchange Risk

All of the revenues we have generated to date have been paid in U.S. dollars and we expect that our revenues will continue to be generated in U.S. dollars for at least the next several years. Payments to our material suppliers and contract manufacturers are denominated in the Euro and U.K. pounds sterling, thereby increasing our exposure to exchange rate gains and losses on non-U.S. currency transactions.sterling. Foreign currency gains and losses associated with these expenditures have not been significant to date. However, fluctuations in the rate of exchange between the U.S. dollar and these or other foreign currencies could adversely affect our financial results in the future, particularly to the extentCurrently, we increase production to support Sumavel DosePro order demands from Endo Ventures Bermuda Limited. For the nine months ended September 30, 2014, approximately $17.1 million (based on exchange rates as of September 30, 2014) of our materials purchased and contract manufacturing costs were denominated in foreign currencies. We do not currently hedge our foreign currency exchange rate risk.risk, however, substantially all of these purchases are made in connection with our supply agreement with Endo, which reimburses all associated costs, including foreign currency transaction costs, plus a 2.5% markup. As a result, we are exposed to gains and/or losses in our cash flows as the exchange rate of certain foreign currencies fluctuates. A 10% increase or decrease in the average rate of the Euro or the U.K. pound sterling during the nine months ended September 30, 2014 would have resulted in approximately $0.6 million or $1.1 million in gains or losses, respectively. We intend to evaluate various options to mitigatebelieve the risk of financial exposure from transacting in foreign currencies in the future.is adequately mitigated.

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 Securities and Exchange Commission 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 September 30, 2014March 31, 2015 at the reasonable assurance level.

There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2014March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

There have been no material updates to any materialthe legal proceedings.proceedings as set forth in “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2014.