Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172018 
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-34962

Zogenix, Inc.
(Exact Name of Registrant as Specified in its Charter)

____________________________________________
Delaware20-5300780
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
5858 Horton Street, Suite 455
Emeryville, California
94608
(Address of Principal Executive Offices)(Zip Code)
510-550-8300
(Registrant’s Telephone Number, Including Area Code)

____________________________________________
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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filerx
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
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    x  No
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of November 3, 2017October 31, 2018 was  34,252,502.41,968,019.



ZOGENIX, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 20172018 
Table of Contents
 
Page
Page
3
PART I. FINANCIAL INFORMATION
Item 1
Condensed Consolidated Balance Sheets as of September 30, 20172018 and December 31, 20162017
3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017
4
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 20172018 and 20162017
45
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172018 and 20162017
56
67
1518
2226
Item 4
2226
2327
2327
2427
2427
2427
2427
Exhibits6.
28
2629


2

PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Zogenix, Inc.


Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except par value)
 
September 30, 2018December 31, 2017
September 30,
2017		 December 31,
2016
Assets   
Assets: Assets:
Current assets:   Current assets:
Cash and cash equivalents$64,730
 $91,551
Cash and cash equivalents $163,038 $293,503 
Trade accounts receivable—
 12,577
Inventory—
 7,047
Prepaid expenses and other current assets6,000
 8,739
Marketable securities Marketable securities 376,087 — 
Prepaid expenses Prepaid expenses 6,861 5,994 
Other current assets Other current assets 1,286 5,206 
Total current assets70,730
 119,914
Total current assets 547,272 304,703 
Property and equipment, net221
 1,710
Property and equipment, net 244 245 
Intangible assets102,500
 102,500
Intangible assets 102,500 102,500 
Goodwill6,234
 6,234
Goodwill 6,234 6,234 
Other assets3,560
 1,147
Other assets 3,380 3,931 
Total assets$183,245
 $231,505
Total assets $659,630 $417,613 
Liabilities and stockholders’ equity   
Liabilities and stockholders’ equity: Liabilities and stockholders’ equity:
Current liabilities:   Current liabilities:
Accounts payable$2,040
 $4,549
Accounts payable $4,110 $3,356 
Accrued expenses13,289
 6,374
Accrued clinical trial expenses Accrued clinical trial expenses 10,674 8,657 
Accrued compensation4,792
 3,652
Accrued compensation 5,039 6,616 
Other accrued liabilities Other accrued liabilities 2,413 1,842 
Current portion of contingent consideration Current portion of contingent consideration 32,500 — 
Common stock warrant liabilities449
 809
Common stock warrant liabilities 607 512 
Working capital advance note payable, net of discount of $0 and $3,733 at September 30, 2017 and December 31, 2016, respectively—
 3,267
Current portion of long-term debt5,333
 —
Deferred revenue—
 1,245
Current liabilities of discontinued operations186
 414
Total current liabilities26,089
 20,310
Total current liabilities 55,343 20,983 
Long term debt13,890
 18,824
Contingent consideration64,400
 52,800
Contingent consideration, net of current portion Contingent consideration, net of current portion 47,600 76,900 
Deferred income taxes17,425
 17,425
Deferred income taxes 17,425 17,425 
Other long-term liabilities1,823
 1,390
Other long-term liabilities 482 784 
Total liabilities Total liabilities 120,850 116,092 
Commitments and contingencies Commitments and contingencies
Stockholders’ equity:   Stockholders’ equity:
Common stock, $0.001 par value; 50,000 shares authorized; 26,545 and 24,813 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively27
 25
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding — — 
Common stock, $0.001 par value; 50,000 shares authorized; 41,925 and 34,808 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively Common stock, $0.001 par value; 50,000 shares authorized; 41,925 and 34,808 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively 42 35 
Additional paid-in capital591,923
 565,954
Additional paid-in capital 1,212,305 873,526 
Accumulated deficit(532,332) (445,223)Accumulated deficit (673,521)(572,040)
Accumulated other comprehensive loss Accumulated other comprehensive loss (46)— 
Total stockholders’ equity59,618
 120,756
Total stockholders’ equity 538,780 301,521 
Total liabilities and stockholders’ equity$183,245
 $231,505
Total liabilities and stockholders’ equity $659,630 $417,613 
See accompanying notes to the unaudited condensed consolidated financial statements.

3

Zogenix, Inc.


Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(in thousands, except per share amounts)
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Revenue:       
Contract manufacturing revenue$—
 $6,345
 $9,821
 $17,537
Service and other product revenue—
 225
 —
 327
Total revenue—
 6,570
 9,821
 17,864
Costs and expenses:       
Cost of contract manufacturing—
 6,469
 10,729
 16,480
Research and development21,178
 10,076
 49,369
 28,447
Selling, general and administrative6,073
 6,538
 18,129
 19,506
Loss on contract termination478
 —
 478
 —
Asset impairment charges196
 —
 1,116
 —
Change in fair value of contingent consideration10,500
 200
 11,600
 2,800
Total costs and expenses38,425
 23,283
 91,421
 67,233
Loss from operations(38,425) (16,713) (81,600) (49,369)
Other income (expense):       
Interest expense, net(581) (567) (1,733) (1,788)
Loss on extinguishment of debt(3,378) —
 (3,378) —
Change in fair value of common stock warrant liabilities(380) (356) 360
 5,148
Other income62
 25
 71
 2
Total other (expense) income(4,277) (898) (4,680) 3,362
Loss from continuing operations before income taxes(42,702) (17,611) (86,280) (46,007)
Income tax benefit42
 993
 41
 922
Net loss from continuing operations(42,660) (16,618) (86,239) (45,085)
Net loss from discontinued operations(134) (379) (870) (1,130)
Net loss$(42,794) $(16,997) $(87,109) $(46,215)
Net loss per share, basic and diluted:       
Continuing operations$(1.68) $(0.67) $(3.45) $(1.82)
Discontinued operations$—
 $(0.02) $(0.03) $(0.05)
Total$(1.68) $(0.69) $(3.48) $(1.87)
        
Weighted average shares outstanding, basic and diluted25,431
 24,791
 25,024
 24,780
        
Comprehensive loss$(42,794) $(16,997) $(87,109) $(46,215)



Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
Contract manufacturing revenue $— $— $— $9,821 
Costs and expenses: 
Cost of contract manufacturing — — — 10,729 
Research and development 27,608 21,178 77,329 49,369 
Selling, general and administrative 11,016 6,073 27,663 18,129 
Loss on contract termination — 478 — 478 
Asset impairment charges — 196 — 1,116 
Change in fair value of contingent consideration 5,700 10,500 3,200 11,600 
Total costs and expenses 44,324 38,425 108,192 91,421 
Loss from operations (44,324)(38,425)(108,192)(81,600)
Other income (expense): 
Interest income 2,133 121 3,995 332 
Interest expense — (702)(6)(2,065)
Loss on extinguishment of debt — (3,378)— (3,378)
Change in fair value of common stock warrant liabilities (64)(380)(95)360 
Other (expense) income, net (9)62 3,015 71 
Total other income (expense) 2,060 (4,277)6,909 (4,680)
Loss from continuing operations before income taxes (42,264)(42,702)(101,283)(86,280)
Income tax benefit — 42 — 41 
Net loss from continuing operations (42,264)(42,660)(101,283)(86,239)
Loss from discontinued operations, net of taxes — (134)(198)(870)
Net loss $(42,264)$(42,794)$(101,481)$(87,109)
Net loss per share, basic and diluted: 
Continuing operations $(1.08)$(1.68)$(2.78)$(3.45)
Discontinued operations — — — (0.03)
Total $(1.08)$(1.68)$(2.78)$(3.48)
Weighted average common shares used in the calculation of basic and diluted net loss per common share 39,242 25,431 36,485 25,024 
See accompanying notes to the unaudited condensed consolidated financial statements.

4

Zogenix, Inc.


Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2018201720182017
Net loss $(42,264)$(42,794)$(101,481)$(87,109)
Other comprehensive income (loss): 
Change in unrealized losses on marketable securities, net of tax (46)— (46)— 
Comprehensive loss $(42,310)$(42,794)$(101,527)$(87,109)
See accompanying notes to the unaudited condensed consolidated financial statements.
5

Zogenix, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended September 30, 
Nine Months Ended September 30,20182017
2017 2016
Operating activities:   
Cash flow from operating activities: Cash flow from operating activities:
Net loss$(87,109) $(46,215)Net loss $(101,481)$(87,109)
Adjustments to reconcile net loss to net cash used in operating activities:   Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation4,066
 5,203
Stock-based compensation 11,952 4,066 
Depreciation and amortization408
 966
Depreciation and amortization 76 408 
Amortization of debt issuance costs and debt discount753
 954
Amortization of debt issuance costs and debt discount — 753 
Net accretion and amortization of investments in marketable securitiesNet accretion and amortization of investments in marketable securities(521)— 
Loss on extinguishment of debt3,378
 —
Loss on extinguishment of debt — 3,378 
Inventory write-down2,232
 —
Inventory write-down — 2,232 
Asset impairment charges1,116
 —
Asset impairment charges — 1,116 
Change in fair value of common stock warrant liabilities(360) (5,148)Change in fair value of common stock warrant liabilities 95 (360)
Change in fair value of contingent consideration11,600
 2,800
Change in fair value of contingent consideration 3,200 11,600 
Changes in operating assets and liabilities:   Changes in operating assets and liabilities:
Trade accounts receivable9,356
 (5,124)Trade accounts receivable — 9,356 
Inventory2,583
 2,633
Inventory — 2,583 
Prepaid expenses and other current assets4,996
 (3,863)Prepaid expenses and other current assets 1,429 4,996 
Other assets(2,413) (139)Other assets 551 (2,413)
Accounts payable, accrued expenses and other liabilities4,204
 (4,413)
Deferred income taxes—
 (1,025)
Accounts payable, accrued and other liabilities Accounts payable, accrued and other liabilities 1,463 4,204 
Deferred revenue(1,245) (1,012)Deferred revenue — (1,245)
Net cash used in operating activities(46,435) (54,383)Net cash used in operating activities (83,236)(46,435)
Investing activities:   
Cash flows from investing activities: Cash flows from investing activities:
Purchases of marketable securities Purchases of marketable securities (375,612)— 
Purchases of property and equipment(35) (103)Purchases of property and equipment (75)(35)
Change in restricted cash related to a previous divestiture—
 10,002
Net cash (used in) provided by investing activities(35) 9,899
Financing activities:   
Proceeds from term loan—
 2,167
Repayments of debt—
 (3,334)
Net cash used in investing activities Net cash used in investing activities (375,687)(35)
Cash flows from financing activities: Cash flows from financing activities:
Proceeds from issuance of common stock under equity incentive plans271
 168
Proceeds from issuance of common stock under equity incentive plans 6,749 271 
Proceeds from issuance of common stock under an at-the-market offering, net of issuance costs19,378
 —
Net cash provided by (used in) financing activities19,649
 (999)
Taxes paid related to net share settlement of equity awards Taxes paid related to net share settlement of equity awards (1,426)— 
Proceeds from issuance of common stock, net of issuance costs Proceeds from issuance of common stock, net of issuance costs 323,135 19,378 
Net cash provided by financing activities Net cash provided by financing activities 328,458 19,649 
Net decrease in cash and cash equivalents(26,821) (45,483)Net decrease in cash and cash equivalents (130,465)(26,821)
Cash and cash equivalents, beginning of the period91,551
 155,349
Cash and cash equivalents, beginning of the period 293,503 91,551 
Cash and cash equivalents, end of the period$64,730
 $109,866
Cash and cash equivalents, end of the period $163,038 $64,730 
   
Noncash financing activities:   Noncash financing activities:
Extinguishment of Endo working capital advance note payable through net settlement of balances owed to the Company.$7,000
 $—
Extinguishment of Endo working capital advance note payable through net settlement of balances owed to the Company Extinguishment of Endo working capital advance note payable through net settlement of balances owed to the Company $— $7,000 
See accompanying notes to the unaudited condensed consolidated financial statements.

6

Zogenix, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Note 1 – Organization and Basis of Presentation Liquidity and Going Concern
Organization
Zogenix, Inc. and, including its wholly-owned subsidiaries (the “Company”), is a pharmaceutical company committed to developing and commercializing innovative central nervous system (“CNS”) therapies.therapies for people living with serious and life-threatening rare CNS disorders and medical conditions. The Company’s current primary area of therapeutic focus is orphanrare, or rare“orphan” childhood-onset epilepsy disorders and its lead product candidate is ZX008. ZX008 is currently being developed for the treatment of seizures associated with Dravet syndrome and Lennox-Gastaut Syndrome (“LGS”). In addition, the Company performed contract manufacturing services under a supply agreement through April 2017 (see Note 5).Syndrome. The Company operates in one business segment—the research, development and commercialization of pharmaceutical products and its headquarters are located in Emeryville, California.
In April 2015, the Company divested its Zohydro ER® business. Zohydro ER activity has been excluded from continuing operations for all periods herein and reported as discontinued operations.
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 (the “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. Certain reclassifications have been made to the prior period amounts to conform to the current year presentation. “Accrued clinical trial expenses” and “Other accrued liabilities”, which previously were reported as “Accrued expenses” on the condensed consolidated balance sheet, are now reported as separate line items. Additionally, previously reported “Interest expense, net” has been reclassified to present interest income and interest expense separately in the accompanying condensed consolidated statements of operations. 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as2017, which was filed with the SEC on March 9, 2017.6, 2018.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.Future Funding Requirements
Excluding gains from two discrete business divestitures, the Company has incurred recurringsignificant net losses and continuing negative cash flows from its operationsoperating activities since inception resulting in an accumulated deficit of $532.3$673.5 million as ofat September 30, 2017. At September 30, 2017, the2018. The Company had cash and cash equivalents of $64.7 million. Management expects to continue to incur significant operating losses and negative cash flows from operations for the foreseeable future as the Company continues to incur costs related toadvance its ongoing Phase 3 clinical trials of ZX008 in North Americaproduct candidates through development and the European Union (“EU”) in Dravet syndrome as well as the planned commencement of a Phase 3 clinical trial in LGS by the end of 2017.commercialization. Additionally, upon acceptance of the Company’s regulatory submissions for ZX008 by the U.S. Food and Drug Administration (“FDA”) or the European Medicines Agency (“EMA”), and regulatory approval of ZX008 by the FDA or EMA, if at all, each a milestone event, the Company will owe milestone payments under an existing agreement in connection with the Company’s prior acquisition of ZX008.
On October 5, 2017, To date, the Company received aggregatehas relied primarily on the proceeds from equity offerings to finance its operations. See Note 6 for the Company's recent equity offerings.
Until the Company can generate a common stock offeringsufficient amount of approximately $271.3 million, net of underwriting discounts and commissions and other estimated offering expenses (see Note 11). This capital raise has resolvedrevenue to finance its cash requirements, if ever, the Company’s significant risks and uncertainties regarding sources of liquidity, which previously raised substantial doubt about the Company’s abilityCompany may need to continue as a going concern.to rely on additional financing to achieve its business objectives. However, if such financing is not available at adequate levels when needed, the Company may be required to significantly delay, scale back or discontinue one or more of the product development programs or commercialization efforts or other aspects of its business plans, and its operating results and financial condition would be adversely affected.

7

Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, other than as set forth below.
Cash Equivalents and Marketable Securities
The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and have an original maturity of three months or less at the date of purchase.
The Company invests its excess cash in marketable securities with high credit ratings that are classified as Level 1 and Level 2 within the fair value hierarchy. These marketable securities consists of money market funds and certificate of deposits, securities issued by the U.S. government and its agencies, corporate debt securities and commercial paper, which are all classified as “available-for-sale”. The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and, therefore, classifies all securities with maturity dates beyond three months at the date of purchase as current assets on the condensed consolidated balance sheets. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the condensed consolidated statements of operations and comprehensive loss. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on marketable securities are included in interest income (expense), net. The cost of securities sold is determined using the specific identification method.
The Company periodically evaluates whether declines in fair values of its marketable securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the marketable security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any marketable securities before recovery of its amortized cost basis. Factors considered include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, other publicly available information that may affect the value of the marketable security, duration and severity of the decline in value, and management’s strategy and intentions for holding the marketable security. To date, the Company has not recorded any impairment charges on its marketable securities related to other-than-temporary declines in market value.
Concentration of Credit Risk
Cash, cash equivalents and marketable securities are financial instruments that potentially subject the Company to concentration of credit risk. The Company invests its excess cash primarily in money market funds and certificate of deposits, securities issued by the U.S. government and its agencies, corporate debt securities and commercial paper. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity. The Company has not experienced any credit losses related to these financial instruments and does not believe it is exposed to any significant credit risk related to these instruments. 
Accounting Pronouncements Recently Adopted
Accounting Standards UpdatedUpdate (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting changes how companies account for certain aspects of stock-based awards to employees. Under the guidance, entities will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital. Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. In addition, entities will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Under current guidance, excess tax benefits are not recognized until the deduction reduces taxes payable. Further, the new guidance allows entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to retained earnings or accumulated deficit. 
The Company adopted ASU 2016-09 on January 1, 2017. Upon adoption, the Company recorded a deferred tax asset of $0.2 million for previously unrecognized excess tax benefits from stock-based compensation, which was fully offset by an equal increase to its valuation allowance resulting in no impact to opening accumulated deficit. In addition and as provided for under this guidance, the Company made an accounting policy election to recognize forfeitures as they occur. The adoption of this aspect of the guidance did not have a material impact on the Company’s condensed consolidated financial statements.
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory simplifies current accounting treatments by requiring entities to measure most inventories at “the lower of cost and net realizable value” rather than using lower of cost or market. This guidance does not apply to inventories measured using the last-in, first-out method or the retail inventory method. The Company adopted ASU 2015-11 on January 1, 2017. The adoption of this new guidance did not have any impact on the Company’s condensed consolidated financial statements.
Accounting Pronouncements Issued But Not Yet Effective
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequent amendments to the initial guidance (collectively, “Topic 606”) will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The newamended the existing accounting standards for revenue recognition standard provides a unified model to determine when and how revenue is recognized.recognition. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company adopted Topic 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others. This guidance will be effective for the Company beginning January 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company plans to adopt this guidance as of January 1, 2018 using the modified retrospective method. In 2017, the Company’s only contract with a customer was a manufacturing and supply agreement (the “Supply Agreement”) with Endo Ventures Limited (“Endo”), which was terminated in September 2017. While the Company has not completed its assessment of the impact of adoption, theapproach. The adoption of this guidance isTopic 606 did not expected to have a material impact on the Company’s condensed consolidated financial statements as the Company does not have any contracts with customers.
ASU 2016-15, Statement of Cash Flows (Topic 230) provides guidance on eight specific cash flow issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this ASU are applied using a retrospective transition method to each period presented. The Company adopted ASU 2016-15
8

effective January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business narrows the definition of a business and related disclosuresprovides additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This accounting standards update is required to be applied prospectively to transactions occurring after the date of adoption. The Company adopted ASU 2017-09 effective January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting provides guidance on determining changes to the terms and conditions of share-based payment awards and require an entity to apply modification accounting under Topic 718 unless all of the following conditions are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments should be applied prospectively to an award modified on or after the adoption date. The Company adopted ASU 2017-09 effective January 1, 2018. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“the Act”). The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21% for tax years beginning after December 31, 2017, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax. In December 2017, SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the accounting implications of recently enacted U.S. federal tax reform. SAB 118 allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date to address ongoing guidance and tax interpretations that are expected over the next 12 months. The Company has adopted SAB 118 and currently considers its accounting of the impact of U.S. federal tax reform to be incomplete but continues to make a reasonable estimate of the effects on our existing deferred tax assets. The Company expects to complete the remainder of the analysis within the measurement period in accordance with SAB 118. Adjustments, if any, are not expected to impact the condensed consolidated statement of operations and comprehensive loss due to the Company not anticipating having any contractsfull valuation allowance on the Company’s deferred tax assets.
ASU 2018-07, Compensation—Stock Compensation (Topic 718):Improvements to Nonemployee Share-Based Payment Accounting simplifies the accounting for share-based payment awards issued to nonemployees for goods and services, including fixing the estimated fair value of the stock award at the date of grant. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The adoption of ASU 2018-07 requires a modified retrospective transition approach, with customers in placea cumulative-effect adjustment to retained earnings as of the datebeginning of adoption of Topic 606. The Company will continue to monitor any new contracts it enters into with customersthe fiscal year. ASU 2018-07 is effective for evaluation under Topic 606.
ASU 2016-02, Leases (Topic 842) requires lessees to recognize the lease assets and lease liabilities that arise from both capital and operating leases with lease terms of more than 12 months and to disclose qualitative and quantitative information about lease transactions. The guidance is effectivepublic companies for fiscal years beginning after December 15, 2018, including interim periods within thosethat fiscal years.year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company early adopted ASU 2018-07 effective July 1, 2018. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in quarterly reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments became effective for all filings made on or after November 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, or CDI – Question 105.09, that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. Except for the requirement to provide the annual disclosure
9

changes in stockholders’ equity for interim periods, which will be included beginning with the Company's quarterly report on Form 10-Q ending March 31, 2019, the Company has adopted all relevant disclosure requirements.
Accounting Pronouncements Issued But Not Yet Effective
ASU 2016-02, Leases (Topic 842) establishes a right-of-use model (“ROU”) that requires all lessees to recognize ROU assets and liabilities for leases with a duration greater than one year on the balance sheet as well as provide disclosures with respect to certain qualitative and quantitative information regarding the amount, timing and uncertainty of cash flows arising from leases. Both a ROU asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. Originally, entities were required to adopt ASU 2016-02 using a modified retrospective approach, which required prior periods to be presented under this new standard with various practical expedients allowed. In July 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption (January 1, 2019) while continuing to present all prior periods under previous lease accounting guidance. The Company intends to adopt the standard on January 1, 2019 by recognizing a cumulative effect adjustment to the opening balance of retained earnings and utilizing the practical expedient that allows the Company to not reassess whether an expired or existing contract contains a lease, the classification of leases or initial direct costs. The Company is in the process of inventorying and scoping its existing lease contracts. While the Company is currently evaluating the timing and impact of adopting this new accounting standard update on its condensed consolidated financial statements and related disclosures, the Company anticipates that ROU assets and corresponding liabilities will be recognized in its condensed consolidated balance sheets related to its lease arrangements. The adoption of these standards are also expected to impact the Company’s condensed consolidated financial statement 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. Under the amendments in ASU 2017-04, an entity should 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 updated guidance requires a prospective adoption. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the timing and impact of adopting this new accounting standardASU on its condensed consolidated financial statements and related disclosures.
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, Fair Value Measurement, 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 changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted for any removed or modified disclosures. The Company is currently evaluating the timing and impact of adopting this ASU on its condensed consolidated financial statements and related disclosures.
Note 3 – InventoryCash, Cash Equivalents and Marketable Securities
Inventory consistsThe following table summarizes the amortized cost and fair value of the followingCompany's cash, cash equivalents and marketable securities as of September 30, 2018 (in thousands):

10

 September 30, 2017 December 31, 2016
Raw materials$—
 $4,397
Work in process—
 2,650
Total$—
 $7,047
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value 
(in thousands)
Current assets: 
Cash $4,747 $— $— $4,747 
Cash equivalents: 
Commercial paper 58,127 — — 58,127 
Corporate debt securities 1,624 — — 1,624 
Money market funds 97,686 — — 97,686 
Certificate of deposits 854 — — 854 
Total cash equivalents 158,291 — — 158,291 
Total cash and cash equivalents 163,038 — — 163,038 
Marketable securities: 
Commercial paper 174,769 1 (1)174,769 
Corporate debt securities 47,416 — (30)47,386 
Certificate of deposits 118,775 — — 118,775 
U.S. Treasuries 35,173 — (16)35,157 
Total marketable securities 376,133 1 (47)376,087 
Total cash, cash equivalents and marketable securities $539,171 $1 $(47)$539,125 
PriorThe following table summarizes the cost and fair value of marketable securities based on stated effective maturities as of September 30, 2018 (in thousands):
Amortized Cost Fair Value 
Due within one year $345,678 $345,644 
Due between one and two years 30,455 30,443 
Total $376,133 $376,087 
The Company did not hold any marketable securities as of December 31, 2017.
There have been no significant realized gains or losses on available-for-sale securities for the periods presented. Available-for-sale debt securities that were in a continuous loss position but were not deemed to be other than temporarily impaired were immaterial at September 30, 2018.
See Note 4 for further information regarding the terminationfair value of the Supply Agreement with Endo, the Company maintained inventory to fulfill its obligations to manufacture and supply Endo with Sumavel DosePro. Upon the termination of the supply agreement with Endo in September 2017, the Company no longer engages in contract manufacturing and therefore no longer carries inventory.Company's financial instruments.
Note 4 – Fair Value Measurements
The carrying amount of the Company’s financial instruments, including cash and cash equivalents, trade accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, accrued compensation and theother current liabilities of the Company’s discontinued operations approximate their fair value due to their short maturities. The carrying amount of the Company’s Term Loan approximates fair value, considering Level 2 inputs, because it has a variable interest rate.
Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value 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.
The fair value of cash equivalents was determined based on Level 1 inputs utilizing quoted prices in active markets. The fair value of the Company’s common stock warrant liabilities and contingent consideration liabilities were determined based on Level 3 inputs using valuation models with significant unobservable inputs. Assetsfollowing tables summarize assets and liabilities measuredrecognized or disclosed at fair value on a recurring basis atas of September 30, 20172018 and December 31, 2016 were as follows2017 (in thousands):


11

 Fair Value Measurements at Reporting Date Using
 
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 Total
September 30, 2017       
Assets       
Cash equivalents(1)
$50,025
 $—
 $—
 $50,025
Liabilities       
Common stock warrant liabilities(2)
$—
 $—
 $449
 $449
Contingent consideration liabilities(3)
$—
 $—
 $64,400
 $64,400
December 31, 2016       
Assets       
Cash equivalents(1)
$87,792
 $—
 $—
 $87,792
Liabilities       
Common stock warrant liabilities(2)
$—
 $—
 $809
 $809
Contingent consideration liabilities(3)
$—
 $—
 $52,800
 $52,800
Level 1 Level 2 Level 3 Total 
September 30, 2018
Assets: 
Cash equivalents: 
Commercial paper $— $58,127 $— $58,127 
Corporate debt securities — 1,624 — 1,624 
Money market funds 97,686 — — 97,686 
Certificate of deposits — 854 — 854 
Marketable securities 
Commercial paper — 174,769 — 174,769 
Corporate debt securities — 47,386 — 47,386 
Certificate of deposits — 118,775 — 118,775 
U.S. Treasuries — 35,157 — 35,157 
Total assets(1) $97,686 $436,692 $— $534,378 
Liabilities: 
Common stock warrant liabilities(2) $— $— $607 $607 
Contingent consideration liabilities(3) — — 80,100 80,100 
Total liabilities $— $— $80,707 $80,707 
(1)Cash equivalents are comprised of money market fund shares and are included as a component of cash and cash equivalents

Level 1 Level 2 Level 3 Total 
December 31, 2017
Assets: 
Cash equivalents consisting of money market funds(1) $289,782 $— $— $289,782 
Total assets $289,782 $— $— $289,782 
Liabilities: 
Common stock warrant liabilities(2) $— $— $512 $512 
Contingent consideration liabilities(3) — — 76,900 76,900 
Total liabilities $— $— $77,412 $77,412 

(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 condensed consolidated balance sheets.
(2)Represents the fair value of common stock warrants outstanding that may require cash settlement under certain circumstances. The Company estimated the fair value of the warrant liabilities using the Black-Scholes valuation model. As of December 31, 2016, common stock warrant liabilities were primarily attributable to warrants sold as part of the Company’s July 2012 public offering. The warrants were exercisable into 1,901,918 shares of the Company’s common stock at an exercise price of $20.00 per share and had a contractual term of 5 years from the issuance date. In July 2017, these warrants expired unexercised. As of September 30, 2017, common stock warrant liabilities relate to warrants issued in July 2011 in connection with a debt financing arrangement. The warrants entitle the holder to purchase up to 28,125 shares of common stock at an exercise price of $72.00 per share. The warrants will expire in July 2021.
(3)In connection with a prior acquisition, the Company may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. The Company estimated the fair value of the contingent consideration liabilities on the acquisition date using a probability-weighted income approach, which reflects the probability and timing of future payments. This fair value measurement is based on significant Level 3 inputs such as the anticipated timelines and probability of achieving development, regulatory approval or sales-based milestone events and projected revenues. The resulting probability-weighted cash flows are discounted at risk-adjusted rates. Subsequent to the acquisition date, at each reporting period prior to settlement, the Company revalues these liabilities by performing a review of the assumptions listed above and record increases or decreases in the fair value of these contingent consideration liabilities. In the absence of any significant changes in key assumptions, the quarterly determination of fair values of these contingent consideration liabilities would primarily reflect the passage of time. Significant judgment is used in determining Level 3 inputs and fair value measurements as of the acquisition date and for each subsequent reporting period. Updates to assumptions could have a significant impact on the Company’s results of operations in any given period and actual results may differ from estimates. For example, significant increases in the probability of achieving a milestone or projected revenues would result in a significantly higher fair value measurement while significant decreases in the estimated probability of achieving a milestone or projected revenues would result in a significantly lower fair value measurement. Significant increases in the discount rate or in the anticipated timelines would result in a significantly lower fair value measurement while significant decreases in the discount rate or anticipated timelines would result in a significantly higher fair value measurement. The potential contingent consideration payments required upon achievement of development, regulatory approval and sales-based milestones related to the Company’s acquisition of ZX008 range from zero if none of the milestones are achieved to a maximum of $95.0 million (undiscounted).
There were no transfers between levels during the periods presented.same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.

(2) Represents the fair value of common stock warrants outstanding that may require cash settlement under certain circumstances. The Company estimated the fair value of the warrant liabilities using the Black-Scholes valuation model. As of December 31, 2017 and September 30, 2018, common stock warrant liabilities relate to warrants issued in July 2011 in connection with a debt financing arrangement. The warrants entitle the holder to purchase up to 28,125 shares of common stock at an exercise price of $72.00 per share. The warrants will expire in July 2021.
(3) In connection with a prior acquisition, the Company may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. The Company estimated the fair value of the contingent consideration liabilities on the acquisition date using a probability-weighted income approach, which reflects the probability and timing of future payments. This fair value measurement is based on significant Level 3 inputs such as the anticipated timelines and probability of achieving development, regulatory approval or sales-based milestone events and projected revenues. The resulting probability-weighted cash flows are discounted at risk-adjusted rates. Subsequent to the acquisition date, at each reporting period prior to settlement, the Company revalues these liabilities by performing a review of the assumptions listed above and record increases or decreases in the fair value of these contingent consideration liabilities. In the absence of any significant changes in key assumptions, the quarterly determination of fair values of these contingent consideration liabilities would primarily reflect the passage of time and
12

risk-adjusted interest rates. Significant judgment is used in determining Level 3 inputs and fair value measurements as of the acquisition date and for each subsequent reporting period. Updates to assumptions could have a significant impact on the Company’s results of operations in any given period and actual results may differ from estimates. For example, significant increases in the probability of achieving a milestone or projected revenues would result in a significantly higher fair value measurement while significant decreases in the estimated probability of achieving a milestone or projected revenues would result in a significantly lower fair value measurement. Significant increases in the discount rate or in the anticipated timelines would result in a significantly lower fair value measurement while significant decreases in the discount rate or anticipated timelines would result in a significantly higher fair value measurement. The potential contingent consideration payments required upon achievement of development, regulatory approval and sales-based milestones related to the Company’s acquisition of ZX008 range from zero if none of the milestones are achieved to a maximum of $95.0 million (undiscounted). As of September 30, 2018, the Company has classified $32.5 million of the total contingent consideration liabilities of $80.1 million as current liabilities. The classification was based upon the Company’s reasonable expectation as to the timing of settlement of certain specified milestones.
The following table provides a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 20172018 and 20162017 (in thousands):


June 30,
2017		 Change in Fair Value September 30,
2017		 
June 30,
2016
 Change in Fair Value September 30,
2016		June 30, 2018Change in Fair Value September 30, 2018June 30, 2017Change in Fair Value September 30, 2017
Contingent consideration liabilities$53,900
 $10,500
 $64,400
 $53,600
 $200
 $53,800
Contingent consideration liabilities $74,400 $5,700 $80,100 $53,900 $10,500 $64,400 
Common stock warrant liabilities69
 380
 449
 692
 356
 1,048
Common stock warrant liabilities 543 64 607 69 380 449 


December 31,
2016
 Change in Fair Value September 30,
2017		 
December 31,
2015		 Change in Fair Value September 30,
2016		December 31, 2017Change in Fair Value September 30, 2018December 31, 2016Change in Fair Value September 30, 2017
Contingent consideration liabilities$52,800
 $11,600
 $64,400
 $51,000
 $2,800
 $53,800
Contingent consideration liabilities 76,900 $3,200 $80,100 $52,800 $11,600 $64,400 
Common stock warrant liabilities809
 (360) 449
 6,196
 (5,148) 1,048
Common stock warrant liabilities 512 95 607 809 (360)449 

The changes in fair value of the liabilities shown in the table above are recorded through change in fair value of contingent consideration liabilities within operating expense and the change in fair value of common stock warrant liabilities within other income (expense) in the condensed consolidated statements of operations.

There were no transfers between levels during the periods presented. See Note 5 – Contract Manufacturing Agreement with Endo and Associated Exit Activities
As part3 for further information regarding the amortized cost of the divestiture of the Company’s Sumavel DosePro business to Endo in May 2014, the Company entered into the Supply Agreement with Endo for the exclusive right, and contractual obligation, to manufacture and supply Sumavel DosePro to Endo for an initial term of eight years. To support the Company’s Sumavel DosePro manufacturing operations, Endo provided the Company with an interest-free working capital advance of $7.0 million under a promissory note (see Note 6). The working capital advance matures upon termination of the Supply Agreement.Company's financial instruments.
In January 2017, Endo notified the Company of its intention to terminate the Supply Agreement. The Company began to wind down Sumavel DosePro operations while the parties finalized termination of the Supply Agreement. As a result, the Company performed an analysis to estimate cash flows from property and equipment used in the production of Sumavel DosePro in the fourth quarter of 2016. Based on this analysis, the Company recognized an impairment charge for long-lived assets of $6.4 million. In the first quarter of 2017, the Company recorded an additional asset impairment charge of $0.8 million for long-lived manufacturing assets associated with the production of Sumavel DosePro. In the second quarter of 2017, the Company recorded a $2.2 million reduction to inventory to reflect its current net realizable value. These additional charges reflected ongoing negotiations with Endo over the course of finalizing the termination of the Supply Agreement.
In September 2017, the Company and Endo executed a termination agreement which resolved all matters under the Supply Agreement. Pursuant to the termination agreement, the Company received cash consideration of $1.5 million from Endo for reimbursement of a portion of the Company’s termination costs for its third-party suppliers and manufacturers related to Sumavel DosePro product. As part of the termination agreement, both parties also agreed to net settle outstanding accounts receivable of $4.7 million due from Endo and the Company’s remaining purchased raw materials and other costs of $2.3 million against the $7.0 million working capital advance note payable due to Endo.
In connection with the Endo termination agreement, the Company also executed termination agreements with its third-party suppliers and manufacturers related to the Sumavel DosePro product. Total costs incurred in connection with the termination of these agreements was $2.5 million. The Company paid $1.8 million of such costs during the third quarter of 2017, including certain asset retirement obligations accrued in prior periods of $0.6 million. The remaining $0.7 million recorded in accrued liabilities at September 30, 2017 will be paid in the fourth quarter of 2017. Excluding the non-cash loss on extinguishment of debt due to the write-off of unamortized discount related to imputed interest (see Note 6), these termination agreements resulted in a net loss on contract termination of $0.5 million, which has been included in loss on contract termination in the condensed consolidated statements of operations and comprehensive loss.

Note 6 – Debt Obligations
Term Loan
Scheduled maturities of the term loan are as follows (in thousands):
2017 (remaining 3 months)$—
20188,000
20198,000
20204,000
Principal balance outstanding20,000
Less: unamortized debt discount and issuance costs(777)
Net carrying value of debt19,223
Less: current portion(5,333)
Long-term debt$13,890
In December 2014, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) (collectively, the “Lenders”), under which the Company borrowed a $20.0 million term loan. In addition, the Loan Agreement provided for a revolving credit facility of up to $4.0 million. The obligations under the Loan Agreement are secured by liens on the Company’s personal property and the Company has agreed to not encumber any of its intellectual property. The Loan Agreement includes a material adverse change clause, which enables the Lenders to require immediate repayment of the outstanding debt if certain subjective acceleration provisions are triggered. The material adverse change clause covers provisions including a material impairment of underlying collateral, change in business operations or condition or material impairment of the Company’s prospects for repayment of any portion of the remaining debt obligation. To date, the Company has not received any notification from the Lenders that it is not in compliance with this clause.
In connection with the Loan Agreement, the Lenders were issued warrants to purchase an aggregate of up to 63,559 shares of the Company’s common stock at a per share exercise price of $9.44. The warrants are exercisable for 10 years. At the time of issuance, the fair value of the warrants was estimated to be $0.6 million using the Black-Scholes valuation model and was recorded at issuance as debt discount to the term loan with a corresponding increase to additional paid in capital in the consolidated balance sheet.
The term loan bore interest at an annual rate equal to the greater of (i) 8.75% or (ii) the sum of the prevailing prime rate (as reported by the Wall Street Journal) plus 5.25%. Payments under the loan were interest-only until January 1, 2016, followed by equal monthly payments of principal and interest through the scheduled maturity date of December 1, 2018.
On April 23, 2015, in connection with the sale of the Zohydro ER business, the Company and the Lenders entered into an amendment to the Loan Agreement, which terminated all encumbrances on the Company’s personal property related to its Zohydro ER business.
On June 17, 2016, the Company entered into a second amendment (the “Second Amendment”) to the Loan Agreement with the Lenders. The Second Amendment modified the loan repayment terms to be interest-only from July 1, 2016 to February 1, 2018, followed by equal monthly payments of principal and interest through a new maturity date of July 1, 2020. Under the terms of the Second Amendment, the interest rate applicable to the term loan bears interest at an annual rate equal to the greater of (i) 7.00% or (ii) the sum of the prevailing prime rate (as reported by the Wall Street Journal) plus 3.25%. In addition, the Second Amendment terminated the revolving credit facility previously available under the Loan Agreement. In connection with the Second Amendment, the Company paid (i) the end of term fee of $1.0 million due under the Loan Agreement as a result of entering into the Second Amendment and (ii) the end of term fee of $0.1 million with respect to the termination of the revolving credit facility. The Second Amendment also includes an end of term fee of $1.4 million payable on July 1, 2020, or upon early repayment of the term loan. An early repayment will be subject to a prepayment penalty of $0.2 million.
The Loan Agreement required the Company to establish a controlled deposit account with SVB containing at least 85% of the Company’s account balances at all financial institutions which can be utilized by the Lenders to satisfy the obligations in the event of default. The Second Amendment permitted the Company to maintain collateral account balances exceeding the greater of (i) $50.0 million, or (ii) 50% of the Company’s total collateral account balances (other than specifically excluded accounts), with financial institutions other than the Lenders; provided that, if the Company’s total collateral account balances are below $50.0 million, all such balances will be maintained with the Lenders. Other affirmative covenants include, among others, requiring the Company to maintain legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage and satisfy certain requirements regarding accounts receivable. Negative covenants include, among others, restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions,

paying dividends or making other distributions, making investments, creating liens, selling assets and consummation of a change in control, in each case subject to certain exceptions. The Company was in compliance with these covenants at September 30, 2017 and December 31, 2016.
Extinguishment of Working Capital Advance Note Payable
In connection with entering into the Supply Agreement for Sumavel DosePro with Endo in May 2014, Endo provided the Company with an interest-free working capital advance of $7.0 million in the form of a note payable to support the Company’s Sumavel DosePro operations. The note payable matures in the event the Supply Agreement is terminated. The note payable was initially recorded on the balance sheet net of a $4.7 million debt discount related to imputed interest. The debt discount was being amortized as interest expense using the effective interest method over the supply agreement’s initial term of eight years.
In September 2017, the Company and Endo terminated the Supply Agreement and the note payable became due and payable in accordance with its terms. Pursuant to the termination agreement, the $7.0 million promissory note was extinguished to settle amounts owed to the Company for accounts receivable and purchased raw materials (see Note 5). The Company recorded a non-cash charge upon extinguishment of debt of $3.4 million due to the write-off of unamortized discount related to imputed interest in the third quarter of 2017.
Note 75 – Commitments and Contingencies
Accrued Loss on Lease ObligationsLeases
The Company’s headquarters are located in Emeryville, California, where itCompany has two noncancellable operating leases consisting of administrative and research and development office space for its generalEmeryville, California headquarters and administrative and research and product development operations under a noncancelable operating lease that expires in November 2022. Prior to 2017, the Company’s former headquarters were located in San Diego, California where it leased office space under a noncancelable operating lease that runs throughexpire in November 2022 and March 2020. In September 2017, the Company completely vacated its2020, respectively. The former headquarters in anticipation of subleasing the available space. In October 2017, the Company entered into a sublease agreement withhas been subleased to an unrelated third party pursuant to which it will rent the vacated space throughfor the remainder of the Company’s original lease term. As ofFuture minimum lease payments under our non-cancellable operating leases at September 30, 2017,2018, net of sublease income, were as follows (in thousands):
Gross Lease
Payments
Sublease
Income
Net Lease
Payments
2018 (remaining 3 months) $481 $(136)$345 
20191,955 (576)1,379 
20201,234 (148)1,086 
20211,004 — 1,004 
2022946 — 946 
Total $5,620 $(860)$4,760 

13

In October 2018, the Company recognizedexecuted a lease for new headquarters with its current landlord to move to a facility nearby its current headquarters in Emeryville, California. The lease has an initial term that expires on June 30, 2027 and provides for one five-year renewal option. Concurrent with the fair value ofnew lease, the cease-use liability inlandlord agreed to terminate the amount of $1.1 million. The cease-use liability was calculated based onCompany's existing lease once it completes the present value of the remaining net cash flows relatedmove to the Company’s continuing obligations under the lease less the present value of sublease rental paymentsnew headquarters. The cash expected to be received under the sublease agreementpaid for rent over the term of the sublease. The net cash flows were discounted using the Company’s estimated incremental borrowing rate,new lease of eight years is approximately $15.3 million beginning in June 2019, partially offset by a Level 2 input within the fair value hierarchy (see Note 4). Additionally, the Company derecognized the related deferred rent liabilityreduction in the amount of $0.5 million. These adjustments resultedcommitments under its existing headquarter lease.
Legal Matters
The Company is not currently involved in a loss on lease of $0.6 million, which has been includedany material legal proceedings. The Company may become involved in generalvarious legal proceedings and administrative expensesclaims that arise in the condensed consolidated statementsordinary 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 its business, results of operations, and comprehensive loss.financial position or cash flows.
Note 86 – Stockholders’ DeficitSale of Common Stock
At-the-Market Equity Offering
In May 2016, theThe Company entered intohas an at-the-market offering program (“ATM”ATM Program”) offeringwith Cantor Fitzgerald & Co. (“Cantor”), as sales agreement with an investment bankagent, pursuant to which the Company may offer and sell, from time to time, at its sole discretion,through Cantor, shares of its common stock having an aggregate offering price of up to $25.0 million. During$75.0 million under a previously filed and effective registration statement on Form S-3 (File No. 333-220759) and a prospectus supplement filed in December 2017. Cantor is entitled to a commission at a fixed commission rate of up to 3% of the three months ended September 30, 2017,gross proceeds of the sales price of all common stock sold under the ATM program. The Company and Cantor may each terminate the ATM program at any time upon ten days’ prior notice.
In the second quarter of 2018, the Company issuedsold a total of 1,550,880740,417 shares of its common stock under the ATM program and received net proceeds of approximately $30.3 million, after deducting commissions and other offering program.expenses of $1.1 million.
In August 2018, the Company completed an underwritten public offering for the sale of 6,000,000 shares of its common stock. Net proceeds raised by the Company from the ATM offering amounted towere approximately $19.4$292.9 million, after deducting $0.7 million of underwriting discounts and commissions and other offering expenses.expenses of $19.1 million.
Note 97 – Stock-Based Compensation
The Company has adopted certain equity incentive and stock purchase plans as described in the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Upon adopting ASU 2016-092017.
In March 2018, our board of directors approved an amendment and restatement of our non-employee director compensation policy, pursuant to which any non-employee director who is first elected to the board of directors is granted an option to purchase 20,000 shares of our common stock on January 1, 2017,the date of his or her initial election to the board of directors. In addition, on the date of each annual meeting of our stockholders, commencing with the 2018 annual meeting, each non-employee director is eligible to receive an option to purchase 15,000 shares of common stock. Prior to March 2018, under our non-employee director compensation policy, any non-employee director who was first elected to the board of directors was granted an option to purchase 30,000 shares of our common stock on the date of his or her initial election to the board of directors. In addition, on the date of each annual meeting of our stockholders, each non-employee director was eligible to receive an option to purchase 20,000 shares of common stock.
Performance Stock Options
In October 2015, the Company electedgranted employees certain performance-based stock options for retention purposes. The stock options would vest upon satisfaction of a specified regulatory milestone within three years of the date of grant. In 2017, management determined the achievement of the performance condition was no longer probable and the cumulative compensation expense previously recognized was reversed. In September 2018, these awards were modified to accountallow for forfeitures as they occur.90% of such options outstanding at the modification date to vest immediately. The remaining 10% of the awards were canceled in October 2018 since the performance condition was not met. This improbable to probable modification resulted in the calculation and recognition of incremental stock-based compensation expense of $3.5 million during the third quarter of 2018.

Valuation of
14

Equity Incentive Awards Activity

Stock Options
The estimated grant date fair valuesfollowing is a summary of the stock options were calculated using the Black-Scholes valuation model, based on the following assumptions:


 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Risk free interest rate1.9% to 2.1% 1.1% to 1.3% 1.9% to 2.3% 1.1% to 1.4%
Expected term6.1 years 5.1 to 6.1 years 5.1 to 6.1 years 5.1 to 6.1 years
Expected volatility75.1% to 75.5% 77.0% to 78.1% 75.1% to 76.6% 77.0% to 78.1%
Expected dividend yield—% —% —% —%
Duringoption activity for the nine months ended September 30, 2017, the Company granted options to purchase approximately 0.9 million shares of common stock with a weighted average grant date fair value of $7.17.2018 (in thousands, except per share data):

Shares
(in thousands)
Weighted-
Average
Exercise
Price per Share
Outstanding at December 31, 20173,392 $14.41 
Granted842 43.13 
Exercised(290)16.45 
Canceled(59)26.10 
Outstanding at September 30, 20183,885 $20.30 

Restricted Stock Units with
The following is a Performance Conditionsummary of restricted stock unit activity for the nine months ended September 30, 2018 (in thousands, except per share data):
In March 2017, the Company granted approximately 0.2 million
Shares
(in thousands)
Weighted- Average Fair Value per Share at Grant Date 
Outstanding at December 31, 2017259 $10.43 
Granted146 42.76 
Vested(98)10.74 
Canceled(8)29.74 
Outstanding at September 30, 2018299 $25.58 
As of September 30, 2018, outstanding restricted stock units (“RSUs”)included 159,000 granted in March 2017 with service and performance-based conditions to employees and executives. The weighted average fair value of RSUs granted was $10.20 per share. The RSUsrestricted stock units vest upon the approval by the FDA of the Company’s new drug application for ZX008 by the FDA, provided such approval occurs within five years following the grant date. Due to the uncertainties associated with the FDA approval process, approval is not yet probable, as such term is used for accounting purposes, prior to the occurrence of the event. Accordingly, no compensation expense has been recognized as of September 30, 2017to date for these performance-based awards.

Valuation of Equity Awards
The fair value of the stock options granted or modified during the periods indicated was estimated using the Black-Scholes option pricing model, based on the following assumptions:

Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
Risk free interest rate 2.8% to 2.9% 1.9% to 2.1% 2.3% to 2.9% 1.9% to 2.3% 
Expected term 3.5 to 6.1 years 6.1 years 3.5 to 6.1 years 5.1 to 6.1 years 
Expected volatility 79.9% to 83.2% 75.1% to 75.5% 79.9% to 85.2% 75.1% to 76.6% 
Expected dividend yield — %— %— %— %
The fair value of restricted stock units granted is determined based on the price of the Company's common stock on the date of grant.
15

Stock-Based Compensation Expense
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 September 30, Nine Months Ended September 30, 
2018201720182017
Cost of contract manufacturing $— $— $— $71 
Research and development 3,275 294 5,018 1,313 
Selling, general and administrative 3,706 968 6,934 2,682 
Total $6,981 $1,262 $11,952 $4,066 

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Cost of contract manufacturing$—
 $98
 $71
 $294
Research and development294
 532
 1,313
 1,449
Selling, general and administrative968
 1,311
 2,682
 3,460
Total$1,262
 $1,941
 $4,066
 $5,203
Note 108 – Net Loss Per Share
Basic net loss from continuing operations per share is calculated by dividing net loss from continuing operations by the weighted average number of shares outstanding for the period. Diluted net loss from continuing operations per share is calculated by dividing net loss from continuing operations by the weighted average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period if the effect is dilutive. The Company’s potentially dilutive shares of common stock include outstanding stock options, restricted stock units and warrants to purchase common stock.
A reconciliation of the numerators and denominators used in computing net loss from continuing operations per share is as follows (in thousands, except per share amounts):
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30, 
2017 2016 2017 20162018201720182017
Numerator:       Numerator:
Net loss from continuing operations$(42,660) $(16,618) $(86,239) $(45,085)Net loss from continuing operations $(42,264)$(42,660)$(101,283)$(86,239)
       
Denominator:       Denominator:
Shares used in per share calculation25,431
 24,791
 25,024
 24,780
Shares used in per share calculation 39,242 25,431 36,485 25,024 
       
Net loss from continuing operations per share, basic and diluted$(1.68) $(0.67) $(3.45) $(1.82)Net loss from continuing operations per share, basic and diluted $(1.08)$(1.68)$(2.78)$(3.45)
The following table presents the potential shares of common stock outstanding that were excluded from the computation of diluted net loss from continuing operations per share for the periods presented because including them would have been anti-dilutive (in thousands):
Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
Shares subject to outstanding common stock options 3,957 4,121 3,752 3,879 
Shares subject to outstanding restricted stock units 303 271 287 228 
Shares subject to outstanding warrants to purchase common stock 28 1,251 35 1,522 
Total 4,288 5,643 4,074 5,629 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Shares subject to outstanding common stock options4,121
 3,310
 3,879
 3,128
Shares subject to outstanding restricted stock units271
 106
 228
 78
Shares subject to outstanding warrants to purchase common stock1,251
 1,975
 1,522
 1,975
Total5,643
 5,391
 5,629
 5,181

Note 119 – Subsequent EventsUnited Kingdom (U.K.) Research and Development Incentives
Common Stock OfferingThe Company carries out extensive research and development activities that benefit from the U.K.’s small and medium-sized enterprise (“SME”) research and development tax credit regime, whereby the Company may either receive an enhanced U.K. tax deduction on its eligible research and development activities or, when an SME entity is in a net operating loss position, elect to surrender net operating losses that arise from its eligible research and development activities in exchange for a cash
On October 5,
16

payment from the U.K. tax authorities. These refundable cash credits, which may be received without regard to actual tax liability, are not subject to accounting for income taxes and have been recorded as a component of other income.
In December 2017, the Company completedfiled a claim as an underwritten public offeringSME for a $3.0 million refundable cash credit for its 2015 tax year, which was received in July 2018. The Company recorded this amount as a component of 7.7 million shares of its common stock, which included 1.0 million shares of common stock issued uponother income for the exercise in fullnine months ended September 30, 2018. As of the option to purchase additional shares granted to the underwriters in the offering. The shares were sold to the public at an offering price of $37.50 per share. Net proceeds raised bydate hereof, the Company fromhas not filed claims for any refundable cash credit for its 2016 or 2017 tax years, nor has it recorded any balances related to claims for these years or for the offering amounted to approximately $271.3 million, after deducting underwriting discounts and commissions and other estimated offering expenses.2018 tax year, as collectability is deemed not probable or reasonably assured.

17

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:
• the progress and timing of clinical trials of ZX008;
• the safety and efficacy of our product candidates;
• the timing of submissions to, and decisions made by, the U.S. Food and Drug Administration or FDA,(“FDA”) and other regulatory agencies, including foreign regulatory agencies, with respect to our product candidates and our ability to demonstrate the safety and efficacy of our product candidates to the satisfaction of the FDA and such other regulatory agencies;
• the goals of our development activities and estimates of the potential markets for our product candidates, and our ability to compete within those markets; 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.
DosePro® 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., including 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, 20162017 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, 2016.2017.
Overview
We are a pharmaceutical company committed to developing and commercializing innovative central nervous system or CNS,(“CNS”) therapies that address specific clinical needs for people living with orphanserious and otherlife-threatening rare CNS disorders who need innovative treatment alternatives to help them improve their daily functioning.and medical conditions. Our current primary area of therapeutic focus is orphanrare, or rare“orphan” childhood-onset epilepsy and CNS disorders.
We currently own and control worldwide development and commercialization rights to ZX008, our lead Phase 3 product candidate. ZX008 is low-dose fenfluramine for the treatment of seizures associated with two rare and catastrophic forms of childhood-onset epilepsy: Dravet syndrome and Lennox-Gastaut syndrome.syndrome (“LGS”).
ZX008 for Patients with Dravet Syndrome
Dravet syndrome is a rare and catastrophic form of pediatric-onset epilepsy with life threatening consequences for patients and for which current treatment options are very limited. ZX008 has received orphan drug designation in the United States and the European
18

Union or the EU,(the “EU”) for the treatment of Dravet syndrome. In January 2016, we received notification of Fast

Track designation from the U.S. Food and Drug Administration, or the FDA, foraddition, ZX008 for the treatment of Dravet syndrome. syndrome received Fast Track designation from the FDA in January 2016 and Breakthrough Therapy designation in February 2018.
Study 1501 and 1502 (“Study 1”)
We initiated our Phase 3 clinical trials in North America (Study 1501)(“Study 1501”) in January 2016 and in Europe and Australia in June 2016 (Study 1502)(“Study 1502”). Study 1501 and Study 1502 are each identical randomized, double-blind placebo-controlled studies of ZX008 as adjunctive therapy for patients with uncontrolled seizures who have Dravet syndrome. In January 2017, we announced our plan to report top-line results from Study 1501 and Study 1502 via a prospective merged study analysis approach whereby top-line results from the first 119approximately 120 subjects randomized into either Study 1501 or 1502 would have their study results analyzed and be reported initially as “Study 1.”1”. In April 2017, we completed enrollment of Study 1 and, in September 2017, we announced positive top-line results for the 119 patients included in the Study 1. 1 Phase 3 trial. The Study 1 trial met its primary objective of demonstrating that ZX008, at a dose of 0.8 mg/kg/day (30mg/day maximum), is superior to placebo as adjunctive therapy in the treatment of Dravet syndrome in children and young adults based on change in the frequency of convulsive seizures between the 6-week baseline observation period and the 14-week treatment period (p<0.001). In the trial, ZX008 at a dose of 0.8 mg/kg/day also demonstrated statistically significant improvements versus placebo in all key secondary measures, including the proportion of patients with clinically meaningful reductions in seizure frequency (50% or greater) and longest seizure-free interval. The same analyses comparing a 0.2 mg/kg/day ZX008 dose versus placebo also demonstrated statistically significant improvement compared with placebo. ZX008 was generally well tolerated without any signs or symptoms of valvulopathy or pulmonary hypertension.
Study 1504
In September 2016, we initiated the pharmacokinetic and safety profile portionPart 1 of Study 1504, a two-part, double blind, randomized, two arm pivotal Phase 3 clinical trial of ZX008 in Dravet syndrome patients who are taking stiripentol, valproate andand/or clobazam as part of their baseline standard care. InPart 1 investigated the pharmacokinetic profile and safety of ZX008 when co-administered with the stiripentol regimen (stiripentol, valproate and/or clobazam). Based on the results of the pharmacokinetic and safety portion of the trial, in February 2017 we initiated the safety and efficacy portion of Study 1504 utilizing a dose of ZX008 0.5mg/kg/day (20mg/day maximum). Study 1504, a two-arm study that comparescompared ZX008 versus placebo across the titration and 12-week maintenance periods at multiple sites, which currently includesincluded sites in France, the Netherlands, United States, Canada, Germany, the United Kingdom and Spain. In January 2018, patient enrollment was completed at 87 patients and randomized between the ZX008-arm (n=43) or placebo (n=44).
Announcement of Top-line Clinical Trial Results for Study 1504 will enroll approximately 40 patients per treatment group. We expect to report
On July 12, 2018, we reported positive top-line results from Study 15041504. The study results, which are consistent with those reported in Study 1, successfully met the primary objective of demonstrating that ZX008, at a dose of 0.5 mg/kg/day, when co-administered with stiripentol regimen (stiripentol, valproate and/or clobazam), is superior to placebo as adjunctive therapy in the first halftreatment of 2018.Dravet syndrome in children and young adults based on change in the frequency of convulsive seizures between the 6-week baseline observation period and the 15-week treatment period (p<0.001). In the trial, ZX008 at a dose of 0.5 mg/kg/day also demonstrated statistically significant improvements versus placebo in both key secondary measures, the proportion of patients with clinically meaningful reductions in seizure frequency (50% or greater) and longest seizure-free interval. ZX008 was generally well-tolerated in this study, with the adverse events consistent with those observed in Study 1 and the known safety profile of fenfluramine without any signs or symptoms of valvulopathy or pulmonary hypertension. We believe we are on track to submit applications for regulatory approvals for ZX008 in the United States and Europe in the second halffirst quarter of 2018.2019.
Lennox-Gastaut syndrome, or ZX008 for Patients with LGS
LGS is another rare, and catastrophic form ofrefractory, debilitating pediatric-onset epilepsy with life threatening consequences for patients and for which current treatment options are very limited. Beginning in first quarter of 2016, we funded an open-label, dose-finding, twenty-patient investigator initiatedinvestigator-initiated study of the effectiveness and tolerability of ZX008 as an adjunctive therapy in patients with LGS. In December 2016, we presented initial data from an interim analysis of the first 13 patients to have completed at least 12 weeksThe results of this Phase 2 open-label, dose-finding clinical trial at the American Epilepsy Society Meeting. These data demonstrated that ZX008 provided clinically meaningful improvement in major motor seizure frequency in patients with severepilot study of 13 refractory LGS with seven out of 13 patients (54%) achieving at leastwere recently published in a 50%peer review journal (Epilepsia) and reported an overall 53% median reduction in the number of major motor seizures, at doses below the 0.8 mg/kg/day maximum.convulsive seizures,8 patients (62%) had a ≥50% convulsive seizure reduction and 3 patients (23%) had a ≥75% reduction. In addition, ZX008 was generally well tolerated without any observed signs or symptoms or echocardiographic findings of valvulopathy or pulmonary hypertension, as expected based on our epilepsy program to date.hypertension. We believe these data indicate that ZX008 has the potential to be a safe and effective adjunctive treatment of major motor and drop seizures for patients with LGS. Based on the strength of the LGS data generated, in the first quarter of 2017, we submitted an investigational new drug or IND,(“IND”) application to the FDA to initiate a Phase 3 program of ZX008 in LGS, which became effective in April 2017. In the first half of 2017, ZX008 received orphan drug designation for the treatment of LGS from the FDA in the United States and the EMAEuropean Medicines Agency (“EMA”) in the EU. We intend to initiate a Phase 3 program of ZX008 in LGS by the end of 2017.
Recent Business Developments
ZX008 Phase 3 Top-line Clinical Trial Results
19

On September 29,Study 1601
In November 2017, we announced positive top-line results from the initiation of our multicenter global Phase 3 clinical trial of ZX008 as an adjunctive treatment for seizures in patients with LGS (“Study 1.1601”). Study 1601 is planned for up to 85 sites in North America, Europe, Asia-Pacific, South America, South Africa and Australia and is divided in two parts. Part 1 is a double-blind, placebo-controlled investigation to assess the safety, tolerability and efficacy of ZX008, low-dose fenfluramine, when added to a patient’s current anti-epileptic therapy. The trial met its primary objectivewill include two dose levels of demonstrating that ZX008 at a dose of(0.2 mg/kg/day and 0.8 mg/kg/day, is superiorup to placeboa maximum daily dose of 30 mg), as adjunctive therapywell as placebo. After establishing baseline seizure frequency for 4 weeks, randomized patients will be titrated to their dose over a 2-week titration period, followed by a 12-week fixed dose maintenance period. We are targeting a total of 225 randomized patients (75 per treatment arm) in the treatmenttrial. The primary endpoint of Dravet syndrome in children and young adults based onthe clinical trial is change in the frequencynumber of convulsive seizures that result in drops between the 6-week baseline observation period and the 14-week treatment period (p<0.001). ZX008combined titration and maintenance periods at the 0.8 mg/kg/day also demonstrated statistically significant improvements versus placebo in alldose. The key secondary measures, includingendpoints include change in the number of seizures that result in drops between baseline and the combined titration and maintenance periods at the 0.2 mg/kg/day dose, and the proportion of patients with clinically meaningful reductionsachieving a 50 percent reduction in seizure frequency and longest seizure-free interval. The same analyses comparing a 0.2 mg/kg/day ZX008 dose versus placebo also demonstrated statistically significant improvement compared with placebo.
Relday™ Development and License Agreement Termination
In July 2011, we entered into a development and license agreement with Durect Corporation, or Durect, under which we were granted an exclusive worldwide development and commercialization license to intellectual property related to Relday. Relday is an investigational, proprietary, long-acting formulationdrop seizures. Part 2 of risperidone, an atypical anti-psychotic agent. Under the development and license agreement, we were responsible for the clinical development and commercialization of Relday while Durect was responsible for pre-clinical, formulation and chemistry, manufacturing and controls development. Under the terms of the development and license agreement, we were obligated to use commercially reasonable efforts to fund the development and seek and maintain regulatory approval for Relday and if successful, to pay Durect up to $103.0 million in total future milestone payments with respect to Relday, subject to and upon the achievement of various development, regulatory, and sales-related milestones.
On August 1, 2017, we and Durect entered into an agreement to terminate the development and license agreement related to Relday. Under the terms of the termination agreement, all of our development and commercialization rights related to Relday were returned to Durect and all our regulatory filings and development information related to Reldaytrial will be assigned and/or transferreda 12-month open-label extension to Durect. Upon termination, we have no further obligations to make any potential future milestone payments with respect to Relday. In addition,evaluate the termination agreement does not provide us with any future royalty entitlements.long-term safety, tolerability and effectiveness of ZX008.

Termination of Contract Manufacturing Supply Agreement
Following our previously announced decision with Endo Ventures Limited, or Endo, to discontinue the manufacturing and supply of Sumavel DosePro, on September 19, 2017, we and Endo entered into a Termination Agreement, or the Termination Agreement, which terminates the License Agreement dated May 16, 2014, by and between us and Endo, or the License Agreement, and the Manufacturing and Supply Agreement dated May 16, 2014, by and between the Company and Endo, or the Supply Agreement, as well as certain quality agreements related thereto. We previously sold our Sumavel DosePro business to Endo, but retained the exclusive right and contractual obligation to manufacture and supply Sumavel DosePro to Endo under the License Agreement and Supply Agreement. In connection with the Termination Agreement, we have also terminated our relationships with third-party suppliers and manufacturers related to the Sumavel DosePro product.
The termination agreements with Durect and Endo related to Relday and Sumavel DosePro, respectively, will enable us to focus our resources on the development of ZX008, our lead product candidate. As of September 30, 2017, we no longer have a source of recurring revenue. Unless and until we obtain regulatory approval of and commercialize ZX008, our ability to generate any meaningful revenue will be limited.
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 generally accepted accounting principles in the United States, or 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 believe that the assumptions and estimates associated with revenue recognition, the impairment assessments related to goodwill and indefinite-lived intangible assets, and other long-lived assets, business combinations, discontinued operations,estimated fair value measurements,of contingent consideration, accrued clinical trials expense accrualtrial expenses and the related prepaid expenses, stock-based compensation and income taxes have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2017,2018, as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
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 NotesSignificant Accounting Policies” in the notes to Condensed Consolidated Financial Statements included elsewherecondensed consolidated financial statements in Part I, Item 1 of this Quarterly Report.Report on Form 10-Q.
Results of Operations
Comparison of Three and Nine Months Ended September 30, 2018 and 2017 and 2016
Contract Manufacturing Revenue
Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands) 20182017Change 20182017Change 
Contract manufacturing revenue $— $— $— $— $9,821 $(9,821)
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2017 2016 Change 2017 2016 Change
Contract manufacturing revenue$—
 $6,345
 $(6,345) $9,821
 $17,537
 $(7,716)
Service and other product revenue—
 225
 (225) —
 327
 (327)
Total revenue$—
 $6,570
 $(6,570) $9,821
 $17,864
 $(8,043)
OurThrough April 2017, we generated contract manufacturing revenue was solely generated byfrom supplying Sumavel DosePro to Endo International plc (“Endo”), who purchased our Supply Agreement with Endo.Sumavel DosePro business in May 2014. In JanuarySeptember 2017, we and Endo notified us of their intention to terminateterminated the Supply Agreement. We began to wind down Sumavel DosePro operations while the parties finalized termination of the Supply Agreement. In April 2017,supply agreement. As a result, we completed fulfillment of the remaining open orders from Endo and all remaining deferred revenue associated with the Supply Agreement was recognized. The resulting negotiations culminated in the execution of the termination agreement in September 2017. The decreases indid not generate any contract manufacturing revenue forin the three and nine months ended September 30, 2017, as compared to the same periods in 2016,

were due to the wind-down of Sumavel DosePro operations in 2017, which was completed with the entry into the termination agreement in the third quarter of 2017.
Since our final product delivery to Endo in April 2017, we2018 and no longer have a source of recurring revenue. Unless and until we obtain regulatory approval of and commercialize ZX008, our lead product candidate, our ability to generate any meaningful revenue will be limited.contracts with customers.
20

Cost of Contract Manufacturing
Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands) 20182017Change 20182017Change 
Cost of contract manufacturing $— $— $— $— $10,729 $(10,729)
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2017 2016 Change 2017 2016 Change
Cost of contract manufacturing$—
 $6,469
 $(6,469) $10,729
 $16,480
 $(5,751)
The decreases in cost ofWe did not incur contract manufacturing forcosts during the three and nine months ended September 30, 2017, as compared to the same periods in 2016, corresponded with the decrease in contract manufacturing revenue discussed above. In the second quarter of 2017, based on ongoing negotiations with Endo to finalize the termination agreement, we recorded a $2.2 million charge2018 as a componentresult of costthe aforementioned termination of contract manufacturingthe supply agreement to reduce inventorymanufacture and supply Sumavel DosePro to its net realizable value.Endo.
Research and Development Expenses
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands)2017 2016 Change 2017 2016 Change(in thousands) 20182017Change 20182017Change 
Research and development$21,178
 $10,076
 $11,102
 $49,369
 $28,447
 $20,922
Research and development $27,608 $21,178 $6,430 $77,329 $49,369 $27,960 
Research and development expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including: license and milestone payments; payments made to third-party clinical research organizations or CROs,(“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; personnel related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation; and facility, maintenance, depreciation and other related expenses.
We utilize contract manufacturing organizations, CROs, contract laboratories and independent contractors to produce product candidate material and for the conduct of our pre-clinical studies and clinical trials. We track third-party costs by program. We recognize the expenses associated with the services provided by CROs based on estimated progress toward completion at the end of each reporting period. We coordinate clinical trials through a number of contracted investigational sites and recognize the associated expense based on a number of factors, including actual and estimated subject enrollment and visits, direct pass-through costs and other clinical site fees. The table below sets forth information regarding our research and development costs for our major development programs.
Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands) 20182017Change 20182017Change 
ZX008 $16,564 $16,520 $44 $52,547 $35,111 $17,436 
Other(1) 11,044 4,658 6,386 24,782 14,258 10,524 
Total $27,608 $21,178 $6,430 $77,329 $49,369 $27,960 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2017 2016 Change 2017 2016 Change
ZX008$16,520
 $7,275
 $9,245
 $35,111
 $20,321
 $14,790
Other(1)
4,658
 2,801
 1,857
 14,258
 8,126
 6,132
Total$21,178
 $10,076
 $11,102
 $49,369
 $28,447
 $20,922
(1) Other research and development expenses include employee and infrastructure resources that are not tracked on a program-by-program basis, as well as development costs incurred for other product candidates.
(1)Other research and development expenses include employee and infrastructure resources that are not tracked on a program-by-program basis, as well as development costs incurred for other product candidates.
We acquired ZX008 in October 2014 and have since incurred significant expenditures related to conducting clinical trials of ZX008. Research and development expenses related to ZX008 remained flat for the three months ended September 30, 2018 compared to the same period in 2017 as a decrease in activity within Study 1504 was offset by an increase in activity within Study 1601, which was initiated in November 2017. Research and development expenses related to ZX008 increased by $9.2$17.4 million for the nine months ended September 30, 2018 compared to the same period in 2017 reflecting the progression and expansion of our clinical trial activities within Study 1504 as well as Study 1601. Other research and development expenses increased by $6.4 million and $14.8$10.5 million for the three and nine months ended September 30, 2017,2018, respectively, compared to the same periods in 2016.2017. The increases reflect the progression and expansion of our clinical trial activities relatedincrease was primarily attributable to our Phase 3 development program of ZX008 in Dravet syndrome, which commenced in January 2016. The increases in unallocated research and development expenses for the three and nine months ended September 30, 2017 comparedpersonnel-related costs from additions to the same periods in 2016 were primarilyheadcount as well as increased stock-based compensation due to increased personnel-related costs as a resultmodification of increases in research and development headcount.

stock options. 
Selling, General and Administrative Expenses
Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands) 20182017Change 20182017Change 
Selling $4,200 $648 $3,552 $8,911 $3,071 $5,840 
General and administrative 6,816 5,425 1,391 18,752 15,058 3,694 
Total selling, general and administrative $11,016 $6,073 $4,943 $27,663 $18,129 $9,534 
21

 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2017 2016 Change 2017 2016 Change
Selling$648
 $1,119
 $(471) $3,071
 $3,938
 $(867)
General and administrative5,425
 5,419
 6
 15,058
 15,568
 (510)
Total selling, general and administrative$6,073
 $6,538
 $(465) $18,129
 $19,506
 $(1,377)
Selling expense consists primarily of salaries and benefits of sales and marketing management and market research expenses for product candidates that are in development. 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.
Selling expense decreasedincreased by $0.5$3.6 million and $0.9$5.8 million for the three and nine months ended September 30, 2017,2018, respectively, compared to the same periods in 2016.2017. The decreases reflect lower spend onincrease was primarily attributable to costs incurred for market research activities related to ZX008. and commercialization planning as we prepare for the potential commercialization of ZX008 for Dravet syndrome.
General and administrative expense decreasedincreased by $0.5$1.4 million inand $3.7 million for the three and nine months ended September 30, 20172018, respectively, compared to the same periodperiods in 20162017 and was primarily attributable to a decrease in legal fees. Legal fees fluctuatepersonnel-related costs, including stock-based compensation due to incremental expense from period to period depending on the nature, scope and timingmodification of services provided.stock options.
Loss on Contract Termination
Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands) 20182017Change 20182017Change 
Loss on contract termination $— $478 $(478)$— $478 $(478)
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2017 2016 Change 2017 2016 Change
Loss on contract termination$478
 $—
 $478
 $478
 $—
 $478
For the three and nine months ended September 30, 2017, we entered into a termination agreement of the Supply Agreement with Endo related to Sumavel DosePro. The loss on contract termination represents costs incurred by us to terminate agreements with our third-party manufacturers and suppliers of Sumavel DosePro that were in excess of reimbursements received from Endo for such costs.costs.

Impairment Charges
Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands) 20182017Change 20182017Change 
Asset impairment charges $— $196 $(196)$— $1,116 $(1,116)
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2017 2016 Change 2017 2016 Change
Asset impairment charges$196
 $—
 $196
 $1,116
 $—
 $1,116
For the three months ended September 30, 2017, we recorded an impairment charge of $0.2 million related to leasehold improvements at our former headquarters in San Diego as discussions with prospective subtenants indicated these assets were not recoverable. In addition to leasehold improvements,Asset impairment charges for the three and nine months ended September 30, 2017 consistedprimarily resulted from the wind down of an $0.8 million write-down of long-livedour contract manufacturing assets associated with the production of Sumavel DosePro recorded in the first quarter of 2017.operations.
Change in Fair Value of Contingent Consideration
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands)2017 2016 Change 2017 2016 Change(in thousands) 2018201720182017
Change in fair value of contingent consideration$10,500
 $200
 $10,300
 $11,600
 $2,800
 $8,800
Change in fair value of contingent consideration $5,700 $10,500 $3,200 $11,600 
The contingent consideration liability relates to milestone payments under an existing agreement in connection with our prior acquisition of ZX008. 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/commercial 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.
Changes inFor the three and nine months ended September 30, 2018, the estimated fair value of our contingent consideration liabilities increased by $5.7 million and $3.2 million, respectively, due to the positive top-line results announced in July 2018 from our second confirmatory Phase 3 study (Study 1504) of ZX008 for the treatment of Dravet syndrome. For the three and nine months ended September 30, 2017, the estimated fair value of our contingent consideration liabilities increased by $10.5 million and $11.6 million, respectively, due to the positive top-line results announced in September 2017 from our first Phase 3 trial (Study 1) of ZX008 for the treatment of Dravet syndrome. As a result of the positive top-line data from clinical trials for the reporting periods presented, the probability of success used to calculate the specified milestone payments increased.
22

Other Income (Expense)
Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands) 2018201720182017
Other income (expense): 
Interest income $2,133 $121 $3,995 $332 
Interest expense — (702)(6)(2,065)
Loss on extinguishment of debt — (3,378)— (3,378)
Change in fair value of common stock warrant liabilities (64)(380)(95)360 
Other income, net (9)62 3,015 71 
Total other income (expense) $2,060 $(4,277)$6,909 $(4,680)
Total other income for the three months ended September 30, 2018 of $2.1 million primarily consisted of interest income attributable to higher average cash and investment balances resulting from our recent capital raising activities described below. Total other income for the nine months ended September 30, 2018 of $6.9 million primarily consisted of interest income and a $3.0 million claim for cash payment under the U.K.’s small and medium-sized enterprise and research and development tax credit regime for qualifying expenditures incurred in the 2015 tax year.
Total other expense for the three and nine months ended September 30, 2017 were driven by an adjustment to the probabilities of achieving certain milestones used in calculating the fair value of contingent consideration in light of the positive top-line results from Study 1 announced on September 29, 2017.

Other Income (Expense)
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2017 2016 Change 2017 2016 Change
Other income (expense)$(4,277) $(898) $(3,379) $(4,680) $3,362
 $(8,042)
Other income (expense)$4.3 million and $4.7 million, respectively, primarily consistsconsisted of interest expense net, changesrecognized under a term loan and its related loss upon early repayment in fair value of our common stock warrant liabilities and foreign currency gains and losses resulting from transactions denominated in U.K. pounds sterling and euros.full.
For the three months ended September 30, 2017, other expense, net increased by $3.4 million compared to the same period in 2016 due to the loss on extinguishment of debt as we wrote-off the unamortized discount on our working capital advance note payable from Endo (see Note 6 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report). For the nine months ended September 30, 2017, other income (expense) decreased by $8.0 million as compared to the same period in 2016. The decrease was primarily attributable to a lower fair value adjustment on warrant liabilities recognized in other income of $0.4 million in the nine months ended September 30, 2017, as compared to $5.1 million in the same period in 2016, and the loss on extinguishment of debt recorded in the current year.
Liquidity and Capital Resources
Since we commenced operations in 2006,Excluding gains from two discrete business divestitures, we have incurred significant net losses and as of September 30, 2017, wenegative cash flows from operating activities since inception. We had an accumulated deficit of $532.3 million. In$673.5 million at September 2017,30, 2018. We expect to continue to incur significant operating losses and negative cash flows from operations to advance our only revenue generating contract was terminated. Asproduct candidates through development and commercialization. Additionally, upon acceptance of our regulatory submissions for ZX008 by the FDA or the EMA and regulatory approval of ZX008 by the FDA or EMA, if at all, each a result,milestone event, we will owe milestone payments under an existing agreement in connection with our prior acquisition of ZX008. We currently do not engage in any revenue-generating activities. We do not know when, or if, we will generate any revenue from product sales and do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize ZX008. AsTo date, the Company has relied primarily on the proceeds from equity offerings to finance its operations. The Company's recent equity offerings include the following transactions.
In the third quarter of September 30, 2017, we had cash and cash equivalents of $64.7 million.
In August and September 2017, we issuedsold a total of 1,550,880 shares of our common stock under anthe ATM offering program and receivedProgram with Cantor resulting in net proceeds of approximately $19.4 million of net proceeds, after deducting underwriting discounts and commissions and other offering expenses. million.
OnIn October 5, 2017, we completed an underwritten public offering for the sale of 7.7 million7,700,000 shares of our common stock, which included 1.0 million shares of common stock issued upon the exercise in full of the option to purchase additional shares granted to the underwriters in the offering. The shares were sold to the public at an offering price of $37.50 per share.stock. Net proceeds raised by us from the offering amounted to approximately $271.3 million, after deducting underwriting discounts and commissions and other estimated offering expenses.
In the second quarter of 2018, we sold a total of 740,417 shares of our common stock under the ATM Program and received net proceeds of approximately $30.3 million, after deducting commissions and other offering expenses of $1.1 million.
In August 2018, we completed an underwritten public offering for the sale of 6,000,000 shares of our common stock. Net proceeds raised from the offering were approximately $292.9 million, after deducting underwriting discounts and commissions and other offering expenses of $19.1 million.
As of September 30, 2018, our cash, cash equivalents and marketable securities totaled $539.1 million. 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:
• the rate of progress and cost of our clinical trials and other product development programs for ZX008 and our other product candidates and any other product candidates that we may develop, in-license or acquire;
• the timing of regulatory approval for any of our other product candidates and the commercial success of any approved products;
23

• the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with ZX008 and any of our other product candidates;
• the costs of establishing or outsourcing sales, marketing and distribution capabilities, should we elect to do so;
• the costs, terms and timing of completion of outsourced commercial manufacturing supply arrangements for any product candidate; and
• the effect of competing technological and market developments.
Until such time, if ever, as 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. 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, or other operations and potentially delay product development in an effort to provide sufficient funds to continue its operations. If any of these events occurs, our ability to achieve the development and commercialization goals could be adversely affected.

The following table presents selected information from our statements of cash flows (in thousands):
Nine Months Ended September 30, 
20182017
Cash and cash equivalents, beginning of the period $293,503 $91,551 
Net cash used in operating activities (83,236)(46,435)
Net cash used in investing activities (375,687)(35)
Net cash provided by financing activities 328,458 19,649 
Net decrease in cash and cash equivalents (130,465)(26,821)
Cash and cash equivalents, end of the period $163,038 $64,730 
 Nine Months Ended September 30,
 2017 2016
Cash and cash equivalents, beginning of the period$91,551
 $155,349
Net cash used in operating activities(46,435) (54,383)
Net cash (used in) provided by investing activities(35) 9,899
Net cash provided by (used in) financing activities19,649
 (999)
Net decrease in cash and cash equivalents(26,821) (45,483)
Cash and cash equivalents, end of the period$64,730
 $109,866
Operating Activities
For the nine months ended September 30, 2018, net cash used in operating activities of $83.2 million was primarily attributable to a net loss of $101.5 million, plus the net effect of non-cash items of $14.8 million, primarily from stock-based compensation and changes in the estimated fair value of contingent consideration, and a net cash inflow from changes in operating assets and liabilities of $3.4 million. Cash inflows from changes in operating assets and liabilities was primarily attributable to the timing of payments for prepaid and accrued clinical trial costs.
For the nine months ended September 30, 2017, net cash used in operating activities was primarily attributable toconsisted of a net loss of $87.1 million, offset by non-cash charges of $23.2 million and a net cash inflow from changes in operating assets and liabilities of $17.5 million. Non-cash charges primarily consisted of change in fair value of contingent consideration, stock-based compensation, inventory write-down and impairment charges for long-lived assets related to our Endo supply agreement. The increase in cash provided by operating assets and liabilities was primarily attributable to cash received from Endo for previously delivered product and the wind down of manufacturing operations under the supply agreement. Certain working capital balances which were net settled by the extinguishment of the working capital advance note payable pursuant to the Endo termination agreement were accounted for as a non-cash activity.
Investing Activities
For the nine months ended September 30, 2016,2018, net cash used in operatinginvesting activities was primarilyattributable to purchases of marketable securities. There were no sales/maturities of marketable securities for the result of a net loss of $46.2 million, offset by non-cash charges of $4.8 million and a net cash outflow from changenine months ended September 30, 2018 as our initial investments were made in operating assets and liabilities of $12.9 million.
Investing ActivitiesJuly 2018.
For the nine months ended September 30, 2017, net cash used in investing activities was minimal. Asattributable to purchases of April 2017, we have no further obligation to supply Endo with additional Sumavel DosePro. As a result, we expect capital expenditures for the remainder of 2017 to be minimal.property and equipment.
Financing Activities
For the nine months ended September 30, 2016,2018, net cash provided by investingfinancing activities was primarily attributable to $10.0of $328.5 million consisted of cash releasednet proceeds from an escrow accountsales of common stock of $323.1 million in connection with the saleequity offerings described above and $6.7 million in proceeds received from the issuance of our Zohydro ER business in 2015.
Financing Activitiescommon stock under equity incentive plans. These cash inflows were offset by cash used to remit withholding taxes of $1.4 million related to the vesting of restricted stock units that were net share-settled by us to cover the required withholding tax. 
For the nine months ended September 30, 2017, net cash provided by financing activities of $19.6 million consisted of netwas due to proceeds from sales of common stock of $19.4 million under an ATM offering described above and $0.2 million in proceeds received from the issuance of common stock under equity incentive plans. Pursuant to a termination agreement with Endo executed in September 2017, our $7.0 million working capital advance note payable was extinguished through net settlement of certain working capital balances owed to us by Endo and has been presented as a non-cash financing activity in the condensed consolidated statements of cash flows in the accompanying financial statements included elsewhere in this Quarterly Report on Form 10-Q.
For the nine months ended September 30, 2016, net cash used in financing activities consisted of principal repayments on our term loan, offset by net proceeds from our amended term loan with Oxford and SVB and proceeds from stock issuances underemployee equity incentive plans.
Debt Obligations
As of September 30, 2017, we were in compliance with all covenants under our term loan. There are no covenants related to our working capital advance note payable. Our term loan agreement includes a material adverse change clause, which enables the lenders to require immediate repayment of the outstanding debt if certain subjective acceleration provisions are triggered. The material adverse change clause covers provisions including a material impairment of underlying collateral, change in business operations or condition or material impairment of our prospects for repayment of any portion of the remaining debt obligation. To date, we have not received any notification from the Lenders that we are not in compliance with this clause. For a detailed description of our debt obligations, see Note 6 of Notes to Condensed Consolidated Financial Statements included elsewhere in the Quarterly Report.
24


Contractual Obligations
There were no material changes outside the ordinary course of our business during the nine months ended September 30, 20172018 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 Annual Report on Form 10-K for the year ended December 31, 2016.2017.
In October 2018, we executed a lease for new headquarters with our current landlord to move to a facility nearby our current headquarters in Emeryville, California. The lease has an initial term that expires on June 30, 2027 and provides for one five-year renewal option. Concurrent with the new lease, the landlord agreed to terminate our existing lease once we complete the move to our new headquarters. The cash expected to be paid for rent over the eight-year term of the new lease is approximately $15.3 million beginning in June 2019, partially offset by a reduction in the commitments under our existing headquarter lease.
Off-Balance Sheet Arrangements
As of September 30, 2017,2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
25

Item 3. Quantitative and Qualitative Disclosures About Market Risk
ThereAs part of our investment portfolio, we own financial instruments that are sensitive to market risks. The primary objective of our investment activities is to preserve our capital until it is required to fund operations, including our research and development activities.
Interest Rate Risk
We place our investments with high quality credit issuers and, by policy, limit the amount of credit exposure to any one issuer. We invest our excess cash primarily in money market funds and certificate of deposits, securities issued by the U.S. government and its agencies, corporate debt securities and commercial paper. These investments are denominated in U.S. Dollars. A portion of our investments consisting of interest-bearing securities are subject to interest rate risk and could decline in value if interest rates fluctuate. The portfolio includes cash equivalents and investments in marketable securities with active secondary or resale markets to ensure portfolio liquidity. Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk. A 100 basis points change in interest rates would not have a significant impact on the total value of our portfolio. We had no debt outstanding as of September 30, 2018.

Foreign Exchange Risk
As a result of our U.K operations, we face exposure to movements in foreign currency exchange rates, primarily the British Pound Sterling and the Euro against the U.S. Dollar. The current exposures arise primarily from cash and payables and accruals denominated in the British Pound Sterling and the Euro. We have not hedged our foreign currency since the exposure has not been no material changesto our historical operating results. Based on our foreign currency exchange rate exposures at September 30, 2018, a hypothetical 10% adverse fluctuation in marketthe average exchange rate of the Euro or the British Pound Sterling would not have had a material impact on our condensed consolidated financial statements. We will continue to monitor and evaluate our exposure to foreign exchange risk fromas a result of entering into transactions denominated in currencies other than the information provided in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2016.U.S. Dollar.
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 or the SEC’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 September 30, 20172018 at the reasonable assurance level.
Changes in Disclosure Controls and Procedures
There were no changes in our internal control over financial reporting during the nine months ended September 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

26

PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material updates to the legal proceedings as set forth in “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Item 1A. Risk Factors
We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. Certain factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors, in addition to the risk factors set in our Annual Report on Form 10-K and our other information contained in our public filings with the Securities and Exchange Commission, or SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations. Other than as set forth below, thereThere have been no material changes to thein our risk factors describedfrom those disclosed in Part 1,I, Item 1A inof our Annual Report on Form 10-K for the year ended December 31, 2016.
Top-line data may not accurately reflect the complete results of a particular study or trial.2017, other than as set forth below.
We may publicly disclose top-line or interim data from timeare exposed to time,fluctuations in the market values of our investments.
As of September 30, 2018, our cash, cash equivalents and marketable securities totaled $539.1 million. Our cash equivalents and marketable securities include money market funds and certificate of deposits, securities issued by the U.S. government and its agencies, corporate debt securities and commercial paper meeting the criteria of our investment policy, which is based on a preliminary analysisprioritizes the preservation of then-available efficacy and safety data such as the top-line results we reported from Study 1, and the results and related findings and conclusionscapital. These investments are subject to change following a more comprehensive review ofgeneral credit, liquidity, market and interest rate risks, instability in the data related to the particular studyglobal financial markets, or trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data.other factors. As a result, the top-line results that we report may differ from future resultsvalue or liquidity of the same studies, or different conclusions or considerations may qualify such results, once additional data have been receivedour investments could decline and fully evaluated. Top-line data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, top-line data should be viewed with caution until the final data are available.
Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimations, calculations, conclusions or analyses or may interpret or weigh the importance of data differently,material impairment, which could impact the value of the particular program, the approvability or commercialization of the particular drug candidate or drug and our company in general. In addition, the information we may publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular drug, drug candidate or our business. If the top-line data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business, operating results, prospects or financial condition.
Our success depends substantially on our only product candidate, ZX008. We cannot be certain that our product candidate will receive regulatory approval or be successfully commercialized.
We have only one product candidate in development, and our business depends substantially on its successful development and commercialization. Following the completion of the sale of our Zohydro ER business in April 2015, we have no drug products approved for sale, and we may not be able to develop marketable drug products in the future. Following the termination of the development and license agreement with Durect in August 2017, our sole product candidate is ZX008. ZX008, our sole product candidate, and any future product candidates, will require additional clinical, pre-clinical and manufacturing development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenues from product sales. The research, testing, manufacturing, labeling, approval, sale, marketing, distribution and promotion of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, whose regulations differ from country to country.
We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA, or in any foreign countries until we receive the requisite approval from the regulatory authorities of such countries, and we may never receive such regulatory approvals. Obtaining regulatory approval for a product candidate is a lengthy, expensive and uncertain process, and may not be successful. Any failure to obtain regulatory approval of ZX008, or failure to obtain such approval for all of the indications and labeling claims we deem desirable, would limit our ability to generate future revenues, would potentially harm the development prospects of our ZX008 and would have a material and adverse impacteffect on our business.financial results and the availability of cash to fund our operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.Erle T. Mast, a member of our Board of Directors and chair of our Audit Committee, served as Executive Vice President and Chief Financial Officer of Clovis Oncology, Inc., a public biopharmaceutical company, from its inception in April 2009 until his retirement in March 2016. As previously disclosed, the U.S. Securities and Exchange Commission, or SEC, had an ongoing investigation to determine whether Clovis violated federal securities laws in connection with its regulatory update announced in November 2015 that the FDA had requested additional clinical data on the efficacy and safety of a product under development by Clovis. On September 18, 2018, the SEC announced that it had reached an agreement with Clovis and certain of its executive officers, including Mr. Mast, to settle this matter on negligence based charges. Pursuant to the settlement, without admitting or denying the SEC’s allegations, Mr. Mast paid a civil penalty and disgorgement and agreed to a standard injunction against future violations of those provisions of the federal securities laws. The settlement agreement does not allege that Clovis or any of its current or former officers, including Mr. Mast, engaged in any intentional fraud or misconduct and it does not preclude Mr. Mast from continuing to serve as a director or officer of a public company.

27

Item 6. Exhibits
EXHIBIT INDEX
Exhibit
Number
Description
3.1(2)3.1(1) 
3.2(5)3.2(4) 
3.3(7)3.3(5) 
3.4(2)3.4(1) 
4.1(3)4.1(2) 
4.2(1)4.5(3) 
4.3(1)
Amendment to Third Amended and Restated Investors’ Rights Agreement dated as of July 1, 2010
4.4(4)
Second Amendment to Third Amended and Restated Investors’ Rights Agreement dated June 30, 2011
4.5(1)
Warrant dated June 30, 2008 issued by the Registrant to Oxford Finance Corporation
4.6(1)
Transfer of Warrant dated March 24, 2009 from CIT Healthcare LLC to The CIT Group/Equity Investments, Inc.
4.7(4)
Warrant dated July 18, 2011 issued by the Registrant to Healthcare Royalty Partners (formerly Cowen Healthcare Royalty Partners II, L.P.)
4.8(6)10.1†  
31.1
31.2
32.1*
32.2*
101101.INSThe following financial statements fromXBRL Instance Document - the Registrant’s Quarterly Report on Form 10-Q forinstance document does not appear in the period ended September 30, 2017 formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv)Interactive Data File because its XBRL tags are embedded within the Notes to Condensed Consolidated Financial Statements.Inline XBRL document. 
101.SCHXBRL Taxonomy Extension Schema Document. 
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. 
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. 
101.LABXBRL Taxonomy Extension Label Linkbase Document. 
101.PREXBRL Taxonomy Extension Presentation Linkbase Document. 
 
(1)Filed with the Registrant’s Registration Statement on Form S-1 on September 3, 2010.
(2)
1. Filed with Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 on October 27, 2010.
(3)Filed with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 on November 4, 2010.
(4)Filed with the Registrant’s Quarterly Report on Form 10-Q on August 12, 2011.
(5)Filed with the Registrant’s Quarterly Report on Form 10-Q on November 8, 2012.
(6)Filed with the Registrant’s Current Report on Form 8-K on December 31, 2014.
(7)Filed with the Registrant’s Quarterly Report on Form 10-Q on August 10, 2015.


*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.

2. Filed with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 on November 4, 2010.

3. Filed with the Registrant’s Quarterly Report on Form 10-Q on August 12, 2011.

4. Filed with the Registrant’s Quarterly Report on Form 10-Q on November 8, 2012.
5. Filed with the Registrant’s Quarterly Report on Form 10-Q on August 10, 2015.
† Indicates management contract or compensatory plan.
∗ 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.

28

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. 
ZOGENIX, INC.
Date: November 8, 2018By: 
Date:November 7, 2017By:/s/ Stephen J. Farr
President and Chief Executive Officer
(Principal Executive Officer)
Date:November 7, 20178, 2018By:/s/ Michael P. Smith
Executive Vice President, Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)


26