UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~June~~September 30, 2019


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

For the transition period from to

Commission file number: 001-34962

ZOGENIX, INC.

(Exact Name of Registrant as Specified in its Charter)

____________________________________________


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

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

510-550-8300

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ZGNX

The Nasdaq Global Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes 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 filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of ~~July~~October 31, 2019 was ~~42,541,503.~~44,254,761.

ZOGENIX, INC.

FORM 10-Q

For the Quarterly Period Ended ~~June~~September 30, 2019

Table of Contents


			Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of ~~June~~September 30,, 2019 and December 31, 2018	3

	Condensed Consolidated Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	4

	Condensed Consolidated Statements of Comprehensive Loss for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	5

	Condensed Consolidated Statements of Stockholders' Equity for the ~~Six~~ Nine Months Ended ~~June~~September 30, 2019 and 2018	76

	Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	68

	Notes to the Condensed Consolidated Financial Statements	89

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2124

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3137

Item 4.	Controls and Procedures	3137

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3238

Item 1A.	Risk Factors	3238

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3455

Item 3.	Defaults Upon Senior Securities	3555

Item 4.	Mine Safety Disclosures	3556

Item 5.	Other Information	3556

Item 6.	Exhibits	3657

	Signatures	3759

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Zogenix, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except par value)


		June 30, 2019		December 31, 2018			September 30, 2019		December 31, 2018
Assets:	Assets:					Assets:
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	50,788	$	68,454	Cash and cash equivalents	$	33,099	$	68,454

Marketable securities	Marketable securities	412,180		445,733		Marketable securities	221,865		445,733

Prepaid expenses	Prepaid expenses	7,701		6,718		Prepaid expenses	9,108		6,718
Acquisition holdback amount placed in escrow						Acquisition holdback amount placed in escrow	25,000		—
Other current assets	Other current assets	5,113		11,825		Other current assets	3,202		11,825

Total current assets	Total current assets	475,782		532,730		Total current assets	292,274		532,730
Property and equipment, net	Property and equipment, net	10,141		2,870		Property and equipment, net	9,782		2,870
Operating lease right-of-use assets	Operating lease right-of-use assets	8,110		—		Operating lease right-of-use assets	8,134		—
Intangible assets	Intangible assets	102,500		102,500		Intangible assets	102,500		102,500
Goodwill	Goodwill	6,234		6,234		Goodwill	6,234		6,234
Other noncurrent assets	Other noncurrent assets	1,850		3,997		Other noncurrent assets	1,442		3,997

Total assets	Total assets	$	604,617	$	648,331	Total assets	$	420,366	$	648,331
Liabilities and stockholders’ equity:	Liabilities and stockholders’ equity:					Liabilities and stockholders’ equity:
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	3,012	$	7,989	Accounts payable	$	7,553	$	7,989
Accrued and other current liabilities	Accrued and other current liabilities	20,946		18,086		Accrued and other current liabilities	23,125		18,086
Acquisition holdback liability						Acquisition holdback liability	24,444		—
Deferred revenue, current	Deferred revenue, current	6,027		—		Deferred revenue, current	5,688		—
Current portion of operating lease liabilities	Current portion of operating lease liabilities	1,402		—		Current portion of operating lease liabilities	1,431		—
Current portion of contingent consideration	Current portion of contingent consideration	34,800		32,300		Current portion of contingent consideration	35,200		32,300

Total current liabilities	Total current liabilities	66,187		58,375		Total current liabilities	97,441		58,375

Deferred revenue, noncurrent	Deferred revenue, noncurrent	8,404		—		Deferred revenue, noncurrent	8,113		—
Operating lease liabilities, net of current portion	Operating lease liabilities, net of current portion	11,186		—		Operating lease liabilities, net of current portion	11,095		—
Contingent consideration, net of current portion	Contingent consideration, net of current portion	35,700		45,900		Contingent consideration, net of current portion	35,700		45,900
Deferred income taxes	Deferred income taxes	17,425		17,425		Deferred income taxes	17,425		17,425
Other long-term liabilities	Other long-term liabilities	—		3,830		Other long-term liabilities	—		3,830
Total liabilities	Total liabilities	138,902		125,530		Total liabilities	169,774		125,530
Commitments and contingencies	Commitments and contingencies					Commitments and contingencies
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding		—		—
Common stock, $0.001 par value; 100,000 and 50,000 shares authorized and 42,498 and 42,078 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		42		42
Preferred stock, $0.001 par value; 10,000 shares authorized; NaN issued and outstanding						Preferred stock, $0.001 par value; 10,000 shares authorized; NaN issued and outstanding	—		—
Common stock, $0.001 par value; 100,000 and 50,000 shares authorized and 44,251 and 42,078 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively						Common stock, $0.001 par value; 100,000 and 50,000 shares authorized and 44,251 and 42,078 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	44		42
Additional paid-in capital	Additional paid-in capital	1,233,866		1,218,710		Additional paid-in capital	1,309,523		1,218,710
Accumulated deficit	Accumulated deficit	(768,919)		(695,954)		Accumulated deficit	(1,059,397)		(695,954)
Accumulated other comprehensive income	Accumulated other comprehensive income	726		3		Accumulated other comprehensive income	422		3
Total stockholders’ equity	Total stockholders’ equity	465,715		522,801		Total stockholders’ equity	250,592		522,801
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	604,617	$	648,331	Total liabilities and stockholders’ equity	$	420,366	$	648,331

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share amounts)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018			2019		2018		2019		2018
Collaboration revenue	Collaboration revenue	$	1,069	$	—	$	1,069	$	—	Collaboration revenue	$	630	$	—	$	1,699	$	—
Operating expenses:	Operating expenses:									Operating expenses:
Research and development	Research and development	27,096		26,741		51,448		49,721		Research and development	28,372		27,608		79,820		77,329
Selling, general and administrative	Selling, general and administrative	15,459		8,577		26,377		16,647		Selling, general and administrative	15,762		11,016		42,139		27,663
Acquired in-process research and development and related costs										Acquired in-process research and development and related costs	249,437		—		249,437		—
Change in fair value of contingent consideration	Change in fair value of contingent consideration	(700)		(2,500)		2,300		(2,500)		Change in fair value of contingent consideration	400		5,700		2,700		3,200
Total operating expenses	Total operating expenses	41,855		32,818		80,125		63,868		Total operating expenses	293,971		44,324		374,096		108,192
Loss from operations	Loss from operations	(40,786)		(32,818)		(79,056)		(63,868)		Loss from operations	(293,341)		(44,324)		(372,397)		(108,192)
Other income (expense):	Other income (expense):									Other income (expense):
Interest income	Interest income	2,983		1,029		6,139		1,862		Interest income	2,382		2,133		8,521		3,995

Other income (expense)	Other income (expense)	40		2,950		(48)		2,987		Other income (expense)	481		(73)		433		2,914
Total other income	Total other income	3,023		3,979		6,091		4,849		Total other income	2,863		2,060		8,954		6,909

Net loss from continuing operations	Net loss from continuing operations	(37,763)		(28,839)		(72,965)		(59,019)		Net loss from continuing operations	(290,478)		(42,264)		(363,443)		(101,283)
Loss from discontinued operations, net of tax	Loss from discontinued operations, net of tax	—		(198)		—		(198)		Loss from discontinued operations, net of tax	—		—		—		(198)
Net loss	Net loss	$	(37,763)	$	(29,037)	$	(72,965)	$	(59,217)	Net loss	$	(290,478)	$	(42,264)	$	(363,443)	$	(101,481)
Net loss per share, basic and diluted:	Net loss per share, basic and diluted:									Net loss per share, basic and diluted:
Continuing operations	Continuing operations	$	(0.89)	$	(0.82)	$	(1.72)	$	(1.68)	Continuing operations	$	(6.75)	$	(1.08)	$	(8.54)	$	(2.78)
Discontinued operations	Discontinued operations	—		(0.01)		—		(0.01)		Discontinued operations	—		—		—		—
Total	Total	$	(0.89)	$	(0.83)	$	(1.72)	$	(1.69)	Total	$	(6.75)	$	(1.08)	$	(8.54)	$	(2.78)

Weighted average common shares used in the calculation of basic and diluted net loss per common share	Weighted average common shares used in the calculation of basic and diluted net loss per common share	42,458		35,355		42,348		35,099		Weighted average common shares used in the calculation of basic and diluted net loss per common share	43,029		39,242		42,577		36,485

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018			2019		2018		2019		2018
Net loss	Net loss	$	(37,763)	$	(29,037)	$	(72,965)	$	(59,217)	Net loss	$	(290,478)	$	(42,264)	$	(363,443)	$	(101,481)
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Change in unrealized gains on marketable securities		353		—		723		—

Available-for-sale marketable securities:										Available-for-sale marketable securities:
Unrealized gains (losses) arising during period										Unrealized gains (losses) arising during period	18		(46)		741		(46)
Reclassification adjustments for realization of gain on sale of marketable securities included in net loss										Reclassification adjustments for realization of gain on sale of marketable securities included in net loss	(322)		—		(322)		—
Total other comprehensive (loss) income										Total other comprehensive (loss) income	(304)		(46)		419		(46)
Comprehensive loss	Comprehensive loss	$	(37,410)	$	(29,037)	$	(72,242)	$	(59,217)	Comprehensive loss	$	(290,782)	$	(42,310)	$	(363,024)	$	(101,527)

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc.

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

(in thousands)

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


		Six Months Ended June 30, 2018																															Nine Months Ended September 30, 2019
		Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit					Total Stockholders’ Equity			Common Stock											Additional Paid-in Capital			Accumulated Other Comprehensive Income			Accumulated Deficit	Total Stockholders’ Equity
		Shares	Amount																Shares		Accumulated Other Comprehensive Income				Accumulated Deficit				Total Stockholders’ Equity
Balance at December 31, 2017		34,808	$	35	$	873,526							$	—			$	(572,040)												$	301,521
Balance at December 31, 2018													Balance at December 31, 2018		42,078				$	42			$	1,218,710			$	3			$	(695,954)		$	522,801
Net loss	Net loss	—	—		—		—		(30,180)		(30,180)		Net loss		—				—			—				—				(35,202)			(35,202)

Other comprehensive income													Other comprehensive income		—				—			—				370				—			370
Issuance of common stock under employee equity plans	Issuance of common stock under employee equity plans	198	—		1,930		—		—		1,930		Issuance of common stock under employee equity plans		380				—			5,293				—				—			5,293
Shares repurchased for tax withholdings related to net share settlement of employee equity awards	Shares repurchased for tax withholdings related to net share settlement of employee equity awards	(33)	—		(1,411)		—		—		(1,411)		Shares repurchased for tax withholdings related to net share settlement of employee equity awards		(12)				—			(606)				—				—			(606)
Stock-based compensation	Stock-based compensation	—	—		1,912		—		—		1,912		Stock-based compensation		—				—			4,223				—				—			4,223
Balance at March 31, 2018		34,973	$	35	$	875,957	$	—	$	(602,220)	$	273,772
Balance at March 31, 2019													Balance at March 31, 2019		42,446				$	42		$	1,227,620			$	373			$	(731,156)		$	496,879
Net loss	Net loss								(29,037)		(29,037)		Net loss		—				—			—				—				(37,763)			(37,763)
Issuance of common stock, net of offering costs		740	1		30,251		—		—		30,252
Other comprehensive income													Other comprehensive income		—				—			—				353				—			353
Issuance of common stock under employee equity plans													Issuance of common stock under employee equity plans		52				—			888				—				—			888
Stock-based compensation													Stock-based compensation		—				—			5,358				—				—			5,358
Balance at June 30, 2019													Balance at June 30, 2019		42,498				$	42		$	1,233,866			$	726			$	(768,919)		$	465,715
Net loss													Net loss		—				—			—				—				(290,478)			(290,478)
Other comprehensive loss													Other comprehensive loss		—				—			—				(304)				—			(304)
Issuance of common stock as consideration for asset acquisition													Issuance of common stock as consideration for asset acquisition		1,595				2			68,122				—				—			68,124
Issuance of common stock under employee equity plans	Issuance of common stock under employee equity plans	114	—		1,838		—		—		1,838		Issuance of common stock under employee equity plans		163				—			2,238				—				—			2,238
Shares repurchased for tax withholdings related to net share settlement of employee equity awards	Shares repurchased for tax withholdings related to net share settlement of employee equity awards	—	—		(18)		—		—		(18)		Shares repurchased for tax withholdings related to net share settlement of employee equity awards		(5)				—			(138)				—				—			(138)
Stock-based compensation	Stock-based compensation	—	—		3,059		—		—		3,059		Stock-based compensation		—				—			5,435				—				—			5,435
Balance at June 30, 2018		35,827	$	36	$	911,087	$	—	$	(631,257)	$	279,866

Balance at September 30, 2019													Balance at September 30, 2019		44,251				$	44		$	1,309,523			$	422			$	(1,059,397)		$	250,592

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc.

Condensed Consolidated Statements of ~~Cash Flows~~Stockholders' Equity (Unaudited)

(in thousands)

Six Months Ended June 30,
2019 2018
Cash flow from operating activities:
Net loss $ (72,965) $ (59,217)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Stock-based compensation 9,581 4,971
Depreciation and amortization 552 50
Net accretion and amortization of investments in marketable securities (3,299) —
Change in fair value of warrant liabilities 158 31
Change in fair value of contingent purchase consideration 2,300 (2,500)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 6,071 (3,482)
Other assets (5,963) 2,891
Accounts payable, accrued and other liabilities (5,193) 1,689
Operating lease liability 12,588 —
Deferred revenue 14,431 —
Net cash used in operating activities (41,739) (55,567)
Cash flows from investing activities:
Purchases of marketable securities (251,782) —
Proceeds from maturities of marketable securities 289,357 —
Purchases of property and equipment (8,922) (84)
Net cash provided by (used in) investing activities 28,653 (84)
Cash flows from financing activities:
Payment of contingent consideration (10,000) —
Proceeds from issuance of common stock under equity incentive plans 6,026 5,427
Taxes paid related to net share settlement of equity awards (606) (1,426)
Proceeds from issuance of common stock, net of issuance costs — 30,250
Net cash (used in) provided by financing activities (4,580) 34,251
Net decrease in cash and cash equivalents (17,666) (21,400)
Cash and cash equivalents, beginning of the period 68,454 293,503
Cash and cash equivalents, end of the period $ 50,788 $ 272,103
Noncash financing activities:
Purchases of property and equipment in accounts payable and accrued liabilities $ 662 $ —


	Nine Months Ended September 30, 2018
	Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2017	34,808	$	35	$	873,526	$	—	$	(572,040)	$	301,521
Net loss	—	—		—		—		(30,180)		(30,180)


Issuance of common stock under employee equity plans	198	—		1,930		—		—		1,930
Shares repurchased for tax withholdings related to net share settlement of employee equity awards	(33)	—		(1,411)		—		—		(1,411)
Stock-based compensation	—	—		1,912		—		—		1,912
Balance at March 31, 2018	34,973	$	35	$	875,957	$	—	$	(602,220)	$	273,772
Net loss	—	—		—		—		(29,037)		(29,037)

Issuance of common stock, net of offering costs	740	1		30,251		—		—		30,252
Issuance of common stock under employee equity plans	114	—		1,838		—		—		1,838
Shares repurchased for tax withholdings related to net share settlement of employee equity awards	—	—		(18)		—		—		(18)
Stock-based compensation	—	—		3,059		—		—		3,059
Balance at June 30, 2018	35,827	36		911,087		—		(631,257)		279,866
Net loss	—	—		—		—		(42,264)		(42,264)
Other comprehensive loss	—	—		—		(46)		—		(46)
Issuance of common stock, net of offering costs	6,000	6		292,880		—		—		292,886
Issuance of common stock under employee equity plans	98	—		1,357		—		—		1,357
Stock-based compensation	—	—		6,981		—		—		6,981
Balance at September 30, 2018	41,925	$	42	$	1,212,305	$	(46)	$	(673,521)	$	538,780

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2019		2018
Cash flow from operating activities:
Net loss	$	(363,443)	$	(101,481)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Stock-based compensation	15,016		11,952
Depreciation and amortization	910		76

Net accretion and amortization of investments in marketable securities	(4,495)		(521)
Realized gain on sale of available-for-sale marketable securities	(322)		—
Change in fair value of warrant liabilities	(241)		95
Acquired in-process research and development and related costs	249,437		—
Change in fair value of contingent purchase consideration	2,700		3,200
Changes in operating assets and liabilities:


Prepaid expenses, escrow holdback and other current assets	(18,056)		1,429
Other assets	(5,225)		551
Accounts payable, accrued and other liabilities	20,863		1,463
Operating lease liability	12,172		—
Deferred revenue	13,801		—
Net cash used in operating activities	(76,883)		(83,236)
Cash flows from investing activities:
Cash paid for asset acquisition, net of cash acquired	(175,732)		—
Purchases of marketable securities	(308,202)		(375,612)
Proceeds from maturities of marketable securities	364,345		—
Proceeds from sales of marketable securities	172,960		—
Purchases of property and equipment	(9,584)		(75)
Net cash provided by (used in) investing activities	43,787		(375,687)
Cash flows from financing activities:
Payment of contingent consideration	(10,000)		—
Proceeds from issuance of common stock under equity incentive plans	8,399		6,749
Taxes paid related to net share settlement of equity awards	(658)		(1,426)
Proceeds from issuance of common stock, net of issuance costs	—		323,135
Net cash (used in) provided by financing activities	(2,259)		328,458
Net decrease in cash and cash equivalents	(35,355)		(130,465)
Cash and cash equivalents, beginning of the period	68,454		293,503
Cash and cash equivalents, end of the period	$	33,099	$	163,038

Noncash investing activities:

Common stock issued as consideration for asset acquisition	$	68,124	$	—
Net liabilities assumed in connection with asset acquisition	$	3,688	$	—
Unpaid transaction costs related to asset acquisition	$	2,449	$	—

See accompanying notes to the unaudited condensed consolidated financial statements.

Zogenix, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 – Organization and Basis of Presentation

Zogenix, Inc. and subsidiaries (the Company, we, us or our) is a global pharmaceutical company committed to developing and commercializing transformative therapies to improve the lives of patients and their families living with rare diseases. We are currently focused on developing and commercializing ~~central nervous system (CNS)~~ therapies to address rare or orphan ~~childhood-onset epilepsy~~ disorders. Our lead product candidate, Fintepla (ZX008, fenfluramine) is currently being developed for the treatment of seizures associated with Dravet syndrome and Lennox-Gastaut syndrome (LGS).

In September 2019, we acquired all of the outstanding equity interests in Modis Therapeutics, Inc. (Modis), a privately-held biopharmaceutical company. Modis’ lead product, MT1621, is an investigational deoxynucleoside substrate enhancement therapy in development for the treatment of thymidine kinase 2 deficiency (TK2d), an inherited mitochondrial DNA depletion disorder that predominantly affects children and is often fatal. See Note 3 for additional information.

We operate in ~~one~~1 business segment—the research, development and commercialization of pharmaceutical products and our headquarters are located in Emeryville, California.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Zogenix, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The results of operations for any interim period are not necessarily indicative of results of operations for any future period. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and related notes included in our 2018 Annual Report on Form 10-K, which was filed with the SEC on February 28, 2019.

Certain prior period amounts within the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to current period presentation. These reclassifications did not affect our financial position, net loss, comprehensive loss, or cash flows as of and for the periods presented.

Our accompanying condensed consolidated financial statements include the assets acquired and liabilities assumed in connection with the acquisition of Modis, in addition to the operating results and cash flows, beginning with the date of the acquisition.

Future Funding Requirements

Excluding gains from two discrete business divestitures, we have incurred significant net losses and negative cash flows from operating activities since inception resulting in an accumulated deficit of ~~$768.9 million~~$1.1 billion as of ~~June~~September 30, 2019. We expect to continue to incur significant operating losses and negative cash flows from operations as we continue to advance our product candidates through development and commercialization. Additionally, pursuant to our acquisition of Brabant Pharma Limited (Brabant) in 2014 to obtain worldwide development and commercialization rights to Fintepla, we are required to make additional payments to the former ~~owners~~shareholders of Brabant in the event we achieve certain regulatory and sales milestones with Fintepla (See Note 5)6). Pursuant to our asset acquisition of Modis in September 2019, we are required to make additional payments to the former shareholders of Modis in the event we achieve certain regulatory milestones (See Note 3). Historically, we have relied primarily on the proceeds from equity offerings to finance our operations. Until such time, if ever, we can generate a sufficient amount of revenue to finance our cash requirements, we may need to continue to rely on additional financing to achieve our business objectives. However, if such financing is not available at adequate levels when needed, we may be required to significantly delay, scale back or discontinue one or more of our product development programs or commercialization efforts or other aspects of our business plans, and our operating results and financial condition would be adversely affected.

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

Our other significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K. As a result of material transactions entered into during the nine months ended September 30, 2019 and the adoption of the new lease accounting standard, we have updated our significant accounting policies disclosures herein. There were no other changes to our significant accounting policies from those disclosed in our 2018 Annual Report on Form 10-K.

Revenue Recognition

We analyze our collaboration arrangements to assess whether such arrangements, or transactions between arrangement participants, involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities or are more akin to a vendor-customer relationship. In making this evaluation, we consider whether the activities of the collaboration are considered to be distinct and deemed to be within the scope of the collaborative arrangement guidance and those that are more reflective of a ~~vendor-~~

~~customer~~vendor-customer relationship and, therefore, within the scope of the revenue with contracts with customers guidance. This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.

For elements of collaboration arrangements that are not accounted for pursuant to the revenue from contracts with customers guidance, an appropriate recognition method is determined and applied consistently, generally by analogy to the revenue from contracts with customers guidance. Amounts related to transactions with a counterparty in a collaborative arrangement that is not a customer are presented as collaboration revenue and on a separate line item from revenue recognized from contracts with customers, if any, in our condensed consolidated statements of operations.

Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the condensed consolidated balance sheets. If the related efforts underlying the deferred revenue is expected to be satisfied within the next twelve months this will be classified in current liabilities. Unconditional rights to receive consideration in advance of performance are recorded as receivables and deferred revenue in the condensed consolidated balance sheets when we have a contractual right to bill and receive the payment, performance is expected to commence shortly and there is less than a year between billing and performance. Amounts recognized for satisfied performance obligations prior to the right to payment becoming unconditional are recorded as contract assets in the condensed consolidated balance sheets. If we expect to have an unconditional right to receive consideration in the next twelve months, this will be classified in current assets. A net contract asset or liability is presented for each contract with a customer.

For arrangements or transactions between arrangement participants determined to be within the scope of the contracts with customers guidance, we perform the following steps to determine the appropriate amount of revenue to be recognized as we fulfill our obligations: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation.

At contract inception, we assess the goods or services promised in a contract with a customer and identify those distinct goods and services that represent a performance obligation. A promised good or service may not be identified as a performance obligation if it is immaterial in the context of the contract with the customer, if it is not separately identifiable from other promises in the contract (either because it is not capable of being separated or because it is not separable in the context of the contract), or if the performance obligation does not provide the customer with a material right.

We consider the terms of the contract and our customary business practices to determine the transaction price. The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration will only be included in the transaction price when it is not considered constrained, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

If it is determined that multiple performance obligations exist, the transaction price is allocated at the inception of the agreement to all identified performance obligations based on the relative stand-alone selling prices unless the transaction price is variable and meets the criteria to be allocated entirely to one or more, but not all, performance obligations in the contract. The relative selling price for each performance obligation is based on observable prices if it is available. If observable prices are not available, we estimate stand-alone selling price for the performance obligation utilizing the estimated cost of the performance obligation with an estimated assumed margin. Once the transaction price has been allocated to a performance obligation using the applicable methodology, it is not subject to reassessment for subsequent changes in stand-alone selling prices.

Revenue is recognized when, or as, we satisfy a performance obligation by transferring a promised good or service to a customer. An asset is transferred when, or as, the customer obtains control of that asset. For performance obligations that are satisfied over time, we recognize revenue using an input or output measure of progress that best depicts our satisfaction of the relevant performance obligation. Revenues from performance obligations associated with a purchase order of Fintepla will be recognized when the customer obtains control of our product, which will occur at a point in time which may be upon shipment or delivery to the customer.

After contract inception, the transaction price is reassessed at every period end and updated for changes such as resolution of uncertain events. Any change in the overall transaction price is allocated to the performance obligations on the same methodology as at contract inception.

identified performance obligations, which may include forecasted revenue, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations.

Acquisitions

We evaluate acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not we have acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant ~~Accounting Policies~~judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets.

~~Our other significant accounting policies~~For asset acquisitions, a cost accumulation model is used to determine the cost of an asset acquisition. Common stock issued as consideration in an asset acquisition is generally measured based on the acquisition date fair value of the equity interests issued. Direct transaction costs are ~~described~~recognized as part of the cost of an asset acquisition. We also evaluate which elements of a transaction should be accounted for as a part of an asset acquisition and which should be accounted for separately. Consideration deposited into escrow accounts are evaluated to determine whether it should be included as part of the cost of an asset acquisition or accounted for as contingent consideration. Amounts held in ~~Note 2 of Notes~~escrow where we have legal title to ~~Consolidated Financial Statements included~~such balances but where such accounts are not held in our ~~2018 Annual Report~~name, are recorded on ~~Form 10-K. As~~ a ~~result~~gross basis as an asset with a corresponding liability in our condensed consolidated balance sheet.

The cost of ~~entering into~~an asset acquisition, including transaction costs, are allocated to identifiable assets acquired and liabilities assumed based on a ~~collaborative arrangement~~relative fair value basis. Goodwill is not recognized in ~~March 2019~~an asset acquisition. Any difference between the cost of an asset acquisition and the ~~adoption~~fair value of the ~~new lease accounting standard, we have updated~~net assets acquired is allocated to the non-monetary identifiable assets based on their relative fair values. Assets acquired as part of an asset acquisition that are considered to be in-process research and development (IPR&D) are immediately expensed unless there is an alternative future use in other research and development projects.

In addition to upfront consideration, our ~~revenue recognition and lease accounting policies~~asset acquisitions may also include contingent consideration payments to be made for future milestone events or royalties on net sales of future products. We assess whether such contingent consideration meets the definition of a derivative. Contingent consideration payments in an asset acquisition not required to be accounted for as detailed below. There were no other changes to our significant accounting policies from those disclosed in our 2018 Annual Report on Form 10-K. See Notes 3 and 7 for additional details related to our collaborative arrangementderivatives are recognized when the contingency is resolved, and the ~~adoption~~consideration is paid or becomes payable. Contingent consideration payments required to be accounted for as derivatives are recorded at fair value on the date of the ~~new lease accounting standard, respectively.~~acquisition and are subsequently remeasured to fair value at each reporting date. Contingent consideration payments made prior to regulatory approval are expensed as incurred. Contingent consideration payments made subsequent to regulatory approval are capitalized as intangible assets and amortized, subject to impairment assessments.

Recently Adopted Accounting Pronouncements

Accounting Standards Update (ASU) 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18) makes targeted improvements for collaborative arrangements by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under the contract with customer guidance (Topic 606) when the collaborative arrangement participant is a customer, (2) adding unit of account guidance to assess whether the collaborative arrangement, or a part of the arrangement, is with a customer and (3) precluding a company from presenting transactions with collaborative arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. Entities must apply the guidance retrospectively as of the date of their initial application of Topic 606 and should recognize the cumulative effect of initially applying the amendments as an adjustment to opening retained earnings as of the later of (1) the earliest annual period presented and (2) the annual period that includes the date of the entity’s initial application of Topic 606. ASU 2018-18 is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted. We elected to early adopt this standard effective January 1, 2019 and have applied its guidance to our arrangement entered into in March 2019 with Nippon Shinyaku Co., Ltd. (See Note 3)4). No retrospective adjustment to our condensed consolidated financial statements was required as a result of our application of these amendments.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. Additionally, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, a summary of changes in each caption of stockholders’ equity presented in the consolidated balance sheets must be provided in a note or separate statement, and we have provided this disclosure beginning with the first quarter of 2019.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Topic 842 establishes a right-of-use asset model 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.

We adopted Topic 842 effective January 1, 2019 using the modified retrospective approach and elected the package of practical expedients permitted under transition guidance. Consequently, prior period financial information and related disclosures have not been adjusted and will continue to be presented in accordance with the previous lease standard. In addition, we elected the package of transition provisions available for existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct lease costs for existing leases. We did not elect the practical expedient allowing the use-of-hindsight which would require us to reassess the lease term of our leases based on all facts and circumstances through the effective date and did not elect the practical expedient pertaining to land easements as this is not applicable to the current contract portfolio.

The adoption of Topic 842 did not have a material impact on our condensed consolidated statements of operations and cash flows. The impact on the accompanying condensed consolidated balance sheet as of January 1, 2019 was as follows (in thousands):


	December 31, 2018		Adjustments Due to the Adoption of Topic 842		January 1, 2019
Assets
Operating lease right-of-use assets	$	—	$	8,641	$	8,641

Liabilities
Other accrued liabilities	$	1,845	$	(363)	$	1,482
Current portion of operating lease liabilities	—		1,058		1,058
Operating lease liabilities, net of current portion	—		11,776		11,776
Other long-term liabilities	3,830		(3,830)		—
Total	$	5,675	$	8,641	$	14,316

December 31, 2018 Adjustments Due to the
Adoption of Topic 842 January 1, 2019
Assets
Operating lease right-of-use assets $ — $ 8,641 $ 8,641
Liabilities
Other accrued liabilities $ 1,845 $ (363) $ 1,482
Current portion of operating lease liabilities — 1,058 1,058
Operating lease liabilities, net of current portion — 11,776 11,776
Other long-term liabilities 3,830 (3,830) —
Total $ 5,675 $ 8,641 $ 14,316

Upon adoption on January 1, 2019, we recorded operating lease ROU assets and lease liabilities of $8.6 million and $12.8 million, respectively, with the difference between ROU assets and lease liabilities attributed to the reclassifications of deferred rent and lease incentive obligations, a cease-use liability and initial direct leasing costs as a component of ROU assets.

Prior to January 1, 2019, we recognized related rent expense on a straight-line basis over the term of the lease. Incentives granted under our operating lease, including allowances for leasehold improvements and rent holidays, were recognized as reductions to rent expense on a straight-line basis over the term of the lease. Deferred rent consisted of the difference between rent expense recognized on a straight-line basis and cash rent payments. Subsequent to the adoption of Accounting Standards Update (ASU) 2016-02 and related amendments (collectively, Topic 842) on January 1, 2019, we determine whether the arrangement is or contains a lease at the inception of the arrangement and if such a lease is classified as a financing lease or operating lease at lease commencement. All of our leases are classified as operating leases. Leases with a term greater than one year are included in operating lease right-of-use assets (ROU asset), current portion of lease liabilities, and lease liabilities, net of current portion in our condensed consolidated balance sheet at ~~June~~September 30, 2019. If a lease contains an option to renew, the renewal option is included in the calculation of lease liabilities if we are reasonably certain at lease commencement the renewal option will be exercised. Lease liabilities and their corresponding ROU assets are measured at the present value of the remaining lease payments, discounted at an appropriate incremental borrowing rate at lease commencement, or as of January 1, 2019, for our existing leases. Management uses judgment to estimate the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the ROU asset may be required for items such as initial direct lease costs, lease incentives, scheduled rent escalations and impairment charges if we determine the ROU asset is impaired. Operating lease expense is recognized on a straight-line basis over the lease term.

We elected the post-transition practical expedient to not separate lease components from non-lease components for all existing lease classes. We also elected a policy of not recording leases on our condensed balance sheets when a lease has a term of one year or less.

Recent Accounting Pronouncements Not Yet Effective

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. This standard update is effective for us on January 1, 2020 with early adoption permitted. We expect to adopt this ASU on January 1, 2020 and are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. 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. We are currently evaluating the timing and effect that the updated standard will have on our 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. We are currently evaluating the timing and effect that the updated standard will have on our consolidated financial statements and related disclosures.

Note 3 – Modis Asset Acquisition and Assumption of License Agreements

Asset Acquisition of Modis

On September 6, 2019, the date the transaction closed, we acquired all of the outstanding equity interests of Modis, a privately-held biopharmaceutical company, to expand our late-stage development pipeline. Modis was formed in May 2016 through a collaboration with academic experts in mitochondrial biology. Modis holds an exclusive worldwide license from Columbia University in New York City (Columbia) to certain intellectual property rights owned or controlled by Columbia to develop and commercialize MT1621. MT1621 is an investigational deoxynucleoside substrate enhancement therapy (SET) for the treatment of thymidine kinase 2 deficiency (TK2d), an inherited mitochondrial DNA depletion disorder that predominantly affects children and is often fatal. Aggregate upfront consideration transferred of approximately $246.5 million consisted of $175.5 million in cash payments made and 1,595,025 unregistered shares of our common stock issued to the outstanding shareholders of Modis as well as employee award holders under the legacy Modis 2017 Stock Plan (Modis Plan). The fair value of common stock issued as acquisition consideration was $68.1 million on the date the transaction closed. Also included in the aggregate upfront consideration transferred were $3.5 million of transaction costs incurred, reduced by a net working capital adjustment receivable of $0.6 million. Pursuant to the terms of the Modis purchase agreement, certain unvested awards held by employees under the Modis Plan converted into the right to receive a pro-rata share of the purchase consideration at the date of acquisition, with no future service requirement. A component of the total consideration transferred was attributed to the unvested awards with a fair value of $4.9 million and was accounted for as a separate transaction from the asset acquisition. This amount was immediately expensed and included in the “Acquired in-process research and development and related costs” line item in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019.

Of the upfront cash consideration, $25.0 million was deposited into an escrow account to fund post-closing net working capital adjustments, and general representations and warranties for a one-year period. In addition, the former shareholders of Modis are eligible to receive milestone payments consisting of $100.0 million upon FDA approval and $50.0 million upon EMA approval of MT1621, as well as a 5% royalty on any future net sales of specified Modis products. The upfront cash consideration was funded by our cash and marketable securities on hand. The shares of our common stock provided as consideration were subsequently registered under our existing shelf registration statement on Form S-3 (No. 333-220759).

We determined substantially all of the fair value of Modis was concentrated in a single IPR&D asset group, which included license rights, clinical trial data, clinical trial development plans, research and development materials, formulations and intellectual property related to MT1621. Accordingly, the acquired set of assets and activities did not meet the definition of a business. As a result, we accounted for the transaction as an asset acquisition and allocated the remaining upfront consideration transferred to the identifiable tangible and intangible assets acquired and liabilities assumed based on their relative fair values resulting in $244.5 million being assigned to the IPR&D asset associated with MT1621 and $2.8 million for assumed net liabilities. In connection with the acquisition, 13 former Modis employees continued their employment with Zogenix on an at-will basis. The relative fair value attributed to this assembled workforce was deemed to be insignificant.

As of the acquisition date, Modis had completed a pivotal Phase 2 retrospective treatment clinical trial study (RETRO) of MT1621 substrate enhancement therapy in patients with TK2d and commenced a Phase 2 prospective, open-label extension clinical trial study of patients with TK2d. As the MT1621 program had not yet reached technological feasibility and had no alternative future use, the purchased IPR&D asset was expensed immediately subsequent to the acquisition within our condensed consolidated statements of operations. As we had no tax basis in the acquired IPR&D asset, and the acquired IPR&D asset was expensed prior to the measurement of any deferred taxes, no deferred taxes were recognized for the initial differences between the amounts recognized for financial reporting and tax purposes.

We have recorded the acquisition holdback amount placed in escrow of $25.0 million within current assets with a corresponding current liability, net of post-closing adjustment of $0.6 million on our condensed consolidated balance sheet at September 30, 2019.

The milestone payments due upon FDA or EMA approval and royalty payments on future net sales of MT1621 products were determined to be contingent consideration. We determined the contingent consideration was not subject to derivative accounting and will be recognized when the contingency is resolved, and the consideration is paid or becomes payable.

The nature of the remaining efforts for completion of the MT1621 program primarily consist of performing clinical trials and validating contract manufacturing abilities, the cost, length and success of which are extremely difficult to determine. Numerous risks and uncertainties can delay or stop clinical development of a pharmaceutical product prior to the receipt of marketing approval, including, but not limited to, results from clinical trials that do not support continuing development, issues related to manufacturing or intellectual property protection, and other events or circumstances that cause unanticipated delays, technical problems or other difficulties. Given these risks and uncertainties, there can be no assurance that the development of

MT1621 will be successfully completed. If the development of MT1621 is not successful, in whole or in part, or completed in a timely manner, we may not realize the expected financial benefits from the development of MT1621.

License Agreement with Columbia University

As a result of our acquisition of Modis, we became party to the Exclusive License Agreement, by and between Modis and the Trustees of Columbia University in the City of New York, dated as of September 26, 2016, related to MT1621. We are required to use commercially reasonable efforts to develop and commercialize licensed products worldwide, including to meet certain development and commercialization milestones within specified periods of time. Upon the achievement of certain regulatory and commercial milestones, we are required to pay Columbia University up to $2.9 million and $25.0 million, respectively, as well as tiered royalties on sales for each licensed product, at percentages ranging from the mid-single digits to the high single-digits. The royalty obligations and License Agreement will expire on a country-by-country and product-by-product basis upon the later of (i) 15 years after the first bona fide commercial sale of a licensed product, (ii) the expiration of the last to expire valid patent claim covering a licensed product in a country or (iii) expiration of any regulatory exclusivity covering such licensed product. The License Agreement may be terminated by either by Columbia or by us in the event of an uncured material breach by the other party, or by Columbia in the event we are subject to specified bankruptcy, insolvency or similar circumstances. We can terminate the License Agreement either in its entirety or on a product-by-product and country-by-country basis, upon specified prior written notice to Columbia, provided we are not exploiting licensed products in such countries.

Other License Agreement Assumed

We also became party to a license agreement between two other research institutions related to MT1621 where we may be required to pay up to $2.7 million for research, development and regulatory milestone events and up to $10.0 million for certain sales milestone events. We are also required to pay tiered royalties ranging from low to mid-single digits on net sales of licensed product.

Note 34 – Collaborative Arrangement

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

Shinyaku has agreed to support development and regulatory approval of Fintepla in Japan by actively participating in the design of non-clinical, clinical and manufacturing requirements needed for regulatory submission, actively planning and participating in product labeling decisions and discussions with the Japanese Ministry of Health, Labor and Welfare (MHLW) and obtained distribution exclusivity through the payment of $20.0 million, of which $15.5 million was received shortly after the execution of the agreement with the remainder payable over the next two years. We will be actively running the clinical trials, performing manufacturing validation activities, preparing regulatory filings and holding discussions with MHLW, and negotiating pricing. We and Shinyaku have agreed to proportionally share the Japan specific development costs that may arise outside of the initial development plan and any post-approval clinical study costs in Japan. In addition, we can earn up to $66.0 million from Shinyaku for the achievement of certain regulatory milestones related to the treatment of Dravet syndrome and the treatment of LGS.

After regulatory approval of Fintepla in Japan has been obtained, we have agreed to supply Shinyaku with Fintepla upon receipt of purchase orders at our actual manufacturing cost plus a fixed transfer price mark-up, a fixed percentage of Shinyaku's net sales of Fintepla in Japan for such fiscal year, and a net price mark-up based on a percent of the applicable aggregate sales of Fintepla by Shinyaku for such fiscal year. The net price mark-up percentage increases with Shinyaku’s sales of Fintepla annual net sales in Japan and ranges between mid-twenties and is capped at a low thirties of the aggregate annual net sales for an applicable fiscal year.

In addition, we can earn up to an additional $42.5 million tied to the achievement of certain net sales milestones by Shinyaku through the term of the agreement.

The Shinyaku Agreement expires in September of 2045, unless earlier terminated by either party for a change in control, a material breach, bankruptcy, dissolution, or winding up of such other party. The Shinyaku Agreement may be also terminated by either party: (1) with one year prior written notice to the other party on or after the date of the first commercial sale of a competing generic version of the Fintepla in Japan, (2) if, prior to the launch of the Fintepla in Japan, a party has a good faith concern, based on credible evidence, that such launch is not likely to be possible with commercially reasonable efforts, or (3) if a party believes Fintepla poses a substantial safety concern. We may also terminate the agreement following the second anniversary of the first commercial sale of the Fintepla in Japan if Shinyaku has failed to achieve or maintain certain diligence obligations under the Shinyaku Agreement. Shinyaku may also terminate the agreement if, prior to the launch of the Fintepla in Japan, Shinyaku has a good faith concern that Fintepla will not be commercially viable in Japan.

We concluded that collaborative activities under the Shinyaku Agreement prior to regulatory approval are within the scope of the collaborative arrangements guidance as both parties are active participants and are exposed to significant risks and rewards dependent on the success of commercializing Fintepla in Japan. Shinyaku is not a customer as it does not obtain an output of our development and regulatory approval activities for Fintepla as they were not provided a license to its intellectual property or the ability to manufacture the product, and we do not consider performing development and regulatory approval services to be a part of our ongoing activities.

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

The initial collaboration consideration allocated on a relative standalone selling price basis to each associated development program was determined using the most likely method to consist solely of the fixed consideration payments of $20.0 million. Analogizing to the revenue from contracts with customers variable consideration guidance, all potential regulatory milestone payment consideration will be included in the collaboration consideration if and when it is probable that a significant reversal in the amount of cumulative collaboration consideration recognized will not occur when the uncertainty associated with the variable collaboration consideration is subsequently resolved. At contract inception and through ~~June~~September 30, 2019, this consideration was fully constrained as the achievement of the events tied to these regulatory milestone payments was highly dependent on factors outside our control.

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

As of ~~June~~September 30, 2019, we had received $15.5 million out of the $20.0 million in fixed consideration. The remaining $4.5 million will be billed in accordance with the terms of the agreement and will be recorded when there is an unconditional right to receive this payment. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, we recognized collaboration revenue of ~~$1.1 million.~~$0.6 million and $1.7 million, respectively. As of ~~June~~September 30, 2019, we$13.8 million related to this agreement was recorded ~~$14.4 million in~~as deferred revenue, which is classified as either current or net of current portion in the accompanying condensed consolidated balance sheets based on the period over which the collaboration revenue is expected to be recognized. We expect to recognize collaboration revenue related to these collaborative activities through the end of 2023.

We concluded that the supply of Fintepla to Shinyaku will be within the scope of the revenue from contracts with customers guidance if regulatory approval in Japan occurs and when a purchase order is received from Shinyaku. Such activity is considered to be a vendor customer relationship as Shinyaku will be a party that has contracted with an us to obtain goods or

services that are an output of our ordinary activities in exchange for consideration and selling approved commercial product to a customer is expected to be part of our ongoing activities. Each purchase order for a shipment of Fintepla will be identified as a separate performance obligation as we did not grant Shinyaku intellectual property rights. The agreed upon price for the supply of Fintepla (cost plus a fixed transfer price mark-up, fixed percentage of aggregate sales of Fintepla by Shinyaku per year, the net price mark-up and sales milestones) to Shinyaku does not represent a material right, and therefore is not a performance obligation, and such pricing on an aggregate basis represents the standalone selling price a distributor would typically pay for such a product in that region or market. There are also no minimum purchase commitments. The transaction price to be allocated to the performance obligation will include the fixed consideration associated with the cost-plus price of Fintepla and variable consideration associated with a fixed percentage of aggregate sales of Fintepla by Shinyaku per year, the net price mark-up and sales milestones subject to the constraint. As of ~~June~~September 30, 2019, Shinyaku has not provided us with any purchase orders and thus no0 revenue has been recognized for the supply of Fintepla.

Note 45 – Cash, Cash Equivalents and Marketable Securities

The following tables summarize the amortized cost and the estimated fair value of our cash, cash equivalents and marketable securities as of ~~June~~September 30, 2019 and December 31, 2018 (in thousands):


		June 30, 2019															September 30, 2019
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Current assets:	Current assets:									Current assets:
Cash	Cash	$	18,157	$	—	$	—	$	18,157	Cash	$	23,568	$	—	$	—	$	23,568
Cash equivalents:	Cash equivalents:									Cash equivalents:
Commercial paper	Commercial paper	17,443		—		—		17,443		Commercial paper	996		—		—		996

Money market funds	Money market funds	15,188		—		—		15,188		Money market funds	8,535		—		—		8,535
Total cash equivalents	Total cash equivalents	32,631		—		—		32,631		Total cash equivalents	9,531		—		—		9,531
Total cash and cash equivalents	Total cash and cash equivalents	50,788		—		—		50,788		Total cash and cash equivalents	33,099		—		—		33,099
Marketable securities:	Marketable securities:									Marketable securities:
Commercial paper	Commercial paper	153,691		—		—		153,691		Commercial paper	86,936		—		—		86,936
Corporate debt securities	Corporate debt securities	83,108		431		(5)		83,534		Corporate debt securities	81,835		425		(3)		82,257
Certificate of deposits	Certificate of deposits	70,175		—		—		70,175		Certificate of deposits	52,672		—		—		52,672
U.S. Treasuries		104,480		300		—		104,780

Total marketable securities	Total marketable securities	411,454		731		(5)		412,180		Total marketable securities	221,443		425		(3)		221,865
Total cash, cash equivalents and marketable securities	Total cash, cash equivalents and marketable securities	$	462,242	$	731	$	(5)	$	462,968	Total cash, cash equivalents and marketable securities	$	254,542	$	425	$	(3)	$	254,964


	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Current assets:
Cash	$	5,222	$	—	$	—	$	5,222


Cash equivalents:
Money market funds	63,232		—		—		63,232

Total cash and cash equivalents	68,454		—		—		68,454
Marketable securities:
Commercial paper	152,940		—		—		152,940
Corporate debt securities	60,622		58		(75)		60,605
Certificate of deposits	128,647		—		—		128,647
U.S. Treasury securities	103,521		31		(11)		103,541
Total marketable securities	445,730		89		(86)		445,733
Total cash, cash equivalents and marketable securities	$	514,184	$	89	$	(86)	$	514,187

The following table summarizes the cost and fair value of marketable securities based on stated effective maturities as of ~~June~~September 30, 2019 (in thousands):


		Amortized Cost		Fair Value			Amortized Cost		Fair Value
Due within one year	Due within one year	$	361,446	$	361,814	Due within one year	$	168,397	$	168,490
Due between one and two years	Due between one and two years	50,008		50,366		Due between one and two years	53,046		53,375
Total	Total	$	411,454	$	412,180	Total	$	221,443	$	221,865

~~There have been no significant~~We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $0.3 million for the three and nine months ended September 30, 2019. There were 0 sales of available-for-sale securities ~~for~~during the ~~periods presented.~~three and nine months ended September 30, 2018. We reflect these gains and losses as a component of other income (expense), net in the condensed consolidated statements of operations. As of ~~June~~September 30, 2019, available-for-sale debt securities that were in a continuous loss position but were not deemed to be other than temporarily impaired were not material.

See Note 56 for further information regarding the fair value of our financial instruments.

Note 56 – Fair Value Measurements

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


Level 1:			Observable inputs such as quoted prices in active markets;
Level 2:			Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:			Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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

The following tables summarize assets and liabilities recognized or disclosed at fair value on a recurring basis as of ~~June~~September 30, 2019 and December 31, 2018 (in thousands):


		June 30, 2019															September 30, 2019
		Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
Assets:	Assets:									Assets:
Cash equivalents:	Cash equivalents:									Cash equivalents:
Commercial paper	Commercial paper	$	—	$	17,443	$	—	$	17,443	Commercial paper	$	—	$	996	$	—	$	996
Money market funds	Money market funds	15,188		—		—		15,188		Money market funds	8,535		—		—		8,535

Marketable securities:	Marketable securities:									Marketable securities:
Commercial paper	Commercial paper	—		153,691		—		153,691		Commercial paper	—		86,936		—		86,936
Corporate debt securities	Corporate debt securities	—		83,534		—		83,534		Corporate debt securities	—		82,257		—		82,257
Certificate of deposits	Certificate of deposits	—		70,175		—		70,175		Certificate of deposits	—		52,672		—		52,672
U.S. Treasury securities		—		104,780		—		104,780

Total assets⁽¹⁾	Total assets⁽¹⁾	$	15,188	$	429,623	$	—	$	444,811	Total assets⁽¹⁾	$	8,535	$	222,861	$	—	$	231,396
Liabilities:	Liabilities:									Liabilities:
Common stock warrant liabilities⁽²⁾	Common stock warrant liabilities⁽²⁾	$	—	$	—	$	501	$	501	Common stock warrant liabilities⁽²⁾	$	—	$	—	$	102	$	102
Contingent consideration liabilities⁽³⁾	Contingent consideration liabilities⁽³⁾	—		—		70,500		70,500		Contingent consideration liabilities⁽³⁾	—		—		70,900		70,900
Total liabilities		$	—	$	—	$	71,001	$	71,001

1518


Total liabilities						$	—					$	—					$	71,002					$	71,002


	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Money market funds	$	63,232	$	—	$	—	$	63,232
Marketable securities:
Commercial paper	—		152,940		—		152,940
Corporate debt securities	—		60,605		—		60,605
Certificate of deposits	—		128,647		—		128,647
U.S. Treasury securities	—		103,541		—		103,541
Total assets⁽¹⁾	$	63,232	$	445,733	$	—	$	508,965
Liabilities:
Common stock warrant liabilities⁽²⁾	$	—	$	—	$	343	$	343
Contingent consideration liabilities⁽³⁾	—		—		78,200		78,200
Total liabilities	$	—	$	—	$	78,543	$	78,543

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

(2) Represents the fair value of common stock warrants outstanding that may require cash settlement under certain circumstances. We estimated the fair value of the warrant liabilities using the Black-Scholes valuation model. As of ~~June~~September 30, 2019 and December 31, 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 our common stock at an exercise price of $72.00 per share and expires in July 2021.

(3) In connection with a prior acquisition in 2014, we may be required to pay future contingent consideration upon the achievement of specified development, regulatory approval or sales-based milestone events. We 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 interest rates. Subsequent to the acquisition date, at each reporting period prior to settlement, we revalue 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 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 our 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 acquisition provides for aggregate contingent consideration of up to $95.0 million, of which $10.0 million was paid in March 2019. As of ~~June~~September 30, 2019, the estimated fair value of our contingent consideration liabilities was ~~$70.5~~$70.9 million, of which ~~$34.8~~$35.2 million has been classified as current liabilities. The classification was based upon our reasonable expectation as to the timing of settlement of certain specified milestones.

1619

The following tables provide a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands):

Contingent Consideration Liabilities


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018			2019		2018		2019		2018
Balance at beginning of period	Balance at beginning of period	$	71,200	$	76,900	$	78,200	$	76,900	Balance at beginning of period	$	70,500	$	74,400	$	78,200	$	76,900
Change in fair value	Change in fair value	(700)		(2,500)		2,300		(2,500)		Change in fair value	400		5,700		2,700		3,200
Settlements	Settlements	—		—		(10,000)		—		Settlements	—		—		(10,000)		—
Balance at end of period	Balance at end of period	$	70,500	$	74,400	$	70,500	$	74,400	Balance at end of period	$	70,900	$	80,100	$	70,900	$	80,100

Common Stock Warrant Liabilities


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018			2019		2018		2019		2018
Balance at beginning of period	Balance at beginning of period	$	646	$	495	$	343	$	512	Balance at beginning of period	$	501	$	543	$	343	$	512
Change in fair value	Change in fair value	(145)		48		158		31		Change in fair value	(399)		64		(241)		95
Balance at end of period	Balance at end of period	$	501	$	543	$	501	$	543	Balance at end of period	$	102	$	607	$	102	$	607

The changes in fair value of the liabilities shown in the tables 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 45 for further information regarding the amortized cost of our financial instruments.

Note 67 – Accrued and Other Current Liabilities

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


		June 30, 2019		December 31, 2018			September 30, 2019		December 31, 2018
Accrued clinical trial expenses	Accrued clinical trial expenses	$	11,627	$	10,621	Accrued clinical trial expenses	$	11,100	$	10,621
Accrued compensation	Accrued compensation	4,328		5,277		Accrued compensation	6,219		5,277
Other accrued liabilities	Other accrued liabilities	4,490		1,845		Other accrued liabilities	5,704		1,845
Common stock warrant liabilities	Common stock warrant liabilities	501		343		Common stock warrant liabilities	102		343
Total accrued and other current liabilities	Total accrued and other current liabilities	$	20,946	$	18,086	Total accrued and other current liabilities	$	23,125	$	18,086

Note 78 – Leases

We have ~~two~~ noncancellable operating leases consisting of administrative and research and development office space for our Emeryville, California headquarters and former headquarters in San Diego, California that expire in May 2027 and March 2020, respectively. Our Emeryville lease includes a renewal option for an additional five years, which was not included in our determination of the lease term under the legacy lease standard as renewal was not reasonably assured at the inception of the lease. As a result, the renewal option to extend the lease was not included in determining our ROU assets and lease liabilities. Our former headquarters has been subleased to an unrelated third party for the remainder of our original lease term. As part of ~~June~~our acquisition of Modis in September 2019, we assumed the lease for Modis’ headquarters in Oakland, California. The Oakland lease expires in July 2021 and has been included in our ROU assets and lease liabilities in our condensed consolidated balance sheets. As of September 30, 2019, we do not have any material finance leases or service contracts with lease arrangements. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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

1720


		Three Months Ended June 30, 2019		Six Months Ended June 30, 2019			Three Months Ended September 30,		Nine Months Ended September 30,
Lease costs	Lease costs					Lease costs
Operating lease cost	Operating lease cost	$	496	$	995	Operating lease cost	$	510	$	1,505
Short-term lease cost⁽¹⁾	Short-term lease cost⁽¹⁾	220		548		Short-term lease cost⁽¹⁾	142		690
Sublease income	Sublease income	(145)		(290)		Sublease income	(145)		(435)
Total	Total	$	571	$	1,253	Total	$	507	$	1,760

⁽¹⁾Short-term lease cost included $0.2 million related to a short-term lease that expired in March 2019.

Cash paid for amounts included in the measurement of lease liabilities for the ~~six~~nine months ended ~~June~~September 30, 2019 was ~~$0.6~~$1.2 million and was included in net cash used in operating activities in our condensed consolidated statements of cash flows.

Maturities of operating lease liabilities as of ~~June~~September 30, 2019 and lease commitments under noncancellable operating leases as of December 31, 2018 were as follows (in thousands):


		June 30, 2019		December 31, 2018			September 30, 2019		December 31, 2018
2019 (remaining 6 months and 12 months, respectively)		$	1,164	$	1,777
2019 (remaining 3 months and 12 months, respectively)						2019 (remaining 3 months and 12 months, respectively)	$	632	$	1,777
2020	2020	1,788		1,788		2020	1,986		1,788
2021	2021	1,839		1,839		2021	1,957		1,839
2022	2022	1,894		1,894		2022	1,894		1,894
2023	2023	1,951		1,951		2023	1,951		1,951
Thereafter	Thereafter	7,111		7,296		Thereafter	7,111		7,296
Total lease payments	Total lease payments	15,747		$	16,545	Total lease payments	15,531		$	16,545
Less imputed interest	Less imputed interest	(3,159)				Less imputed interest	(3,005)
Total operating lease liabilities	Total operating lease liabilities	$	12,588			Total operating lease liabilities	$	12,526


	~~June~~September 30, 2019
Current portion of operating lease liabilities	$	~~1,402~~1,431
Operating lease liabilities, net of current portion	~~11,186~~11,095
Total lease liabilities	$	~~12,588~~12,526

As of ~~June~~September 30, 2019, the weighted average remaining lease term was ~~7.5~~7.3 years and the weighted average discount rate, weighted based on the remaining balance of lease payments, was 6.0%.

Note 89 – Common Stock and Stock-Based Compensation

Increase in Authorized Shares of Common Stock

In May 2019, our stockholders approved and we filed an amendment to our Fifth Amended and Restated Certificate of Incorporation, as amended, to increase the total number of authorized shares of common stock from 50,000,000 to 100,000,000.

Equity Incentive Plans

We have issued stock-based awards from various equity incentive and stock purchase plans, as more fully described in the consolidated financial statements and related notes included in our 2018 Annual Report on Form 10-K.

At December 31, 2018, 1,550,351 shares were available for grant under our 2010 Equity Incentive Award Plan (2010 Plan). Pursuant to its evergreen provision, the number of shares reserved for issuance under the 2010 Plan automatically increases on January 1 of each year, commencing on January 1, 2013, and on each January 1 through and including January 1, 2020, in an amount equal to 4% of the total number of shares of common stock outstanding on December 31 of the preceding year, or a lesser number of shares as determined by our board of directors. On January 1, 2019, the increase in shares reserved for issuance pursuant to the evergreen provision was limited to 589,619 shares as the 2010 Plan’s maximum 7,500,000 shares reserved for issuance was reached.

In May 2019, our stockholders approved the amendment and restatement of our 2010 Plan (2010 Restated Plan), which provided an increase in the number of shares of common stock reserved for issuance pursuant to awards granted under our 2010

Plan from 7,500,000 to 11,500,000 and an extension of the term of the 2010 Plan through March 2029. In addition, the 2010 Restated Plan eliminated the evergreen provision that provided for an annual increase in the number of shares available for issuance under the 2010 Plan on January 1 of each year discussed above. Following its approval, all future issuance of equity awards will be granted under the 2010 Restated Plan (other than the shares available for purchase under our 2010 Employee Stock Purchase Plan). As of ~~June~~September 30, 2019, ~~5,226,029~~5,218,040 shares were available for future issuance under the 2010 Restated Plan.

Stock Options

The following is a summary of stock option activity for the ~~six~~nine months ended ~~June~~September 30, 2019 (in thousands, except per share data):


		Shares	Weighted- Average Exercise Price per Share			Shares	Weighted- Average Exercise Price per Share
Outstanding at December 31, 2018	Outstanding at December 31, 2018	3,744	$	20.69	Outstanding at December 31, 2018	3,744	$	20.69
Granted	Granted	924	50.28		Granted	994	49.94
Exercised	Exercised	(386)	14.83		Exercised	(544)	14.82
Canceled	Canceled	(46)	34.57		Canceled	(81)	34.46
Outstanding at June 30, 2019		4,236	$	27.53
Outstanding at September 30, 2019					Outstanding at September 30, 2019	4,113	$	28.26

Restricted Stock Units

The following is a summary of restricted stock unit activity for the ~~six~~nine months ended ~~June~~September 30, 2019 (in thousands, except per share data):


		Shares	Weighted- Average Fair Value per Share at Grant Date			Shares	Weighted- Average Fair Value per Share at Grant Date
Outstanding at December 31, 2018	Outstanding at December 31, 2018	289	$	25.56	Outstanding at December 31, 2018	289	$	25.56
Granted	Granted	169	52.56		Granted	169	52.56
Vested	Vested	(31)	42.65		Vested	(37)	43.10
Canceled	Canceled	(16)	26.15		Canceled	(42)	32.20
Outstanding at June 30, 2019		411	$	35.33
Outstanding at September 30, 2019					Outstanding at September 30, 2019	379	$	35.13

Stock-Based Compensation Expense Allocation

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018			2019		2018		2019		2018
Research and development	Research and development	$	2,074	$	1,062	$	3,509	$	1,743	Research and development	$	2,012	$	3,275	$	5,521	$	5,018
Selling, general and administrative	Selling, general and administrative	3,284		1,997		6,072		3,228		Selling, general and administrative	3,423		3,706		9,495		6,934
Compensation expense related to acquired IPR&D										Compensation expense related to acquired IPR&D	4,927		—		4,927		—
Total	Total	$	5,358	$	3,059	$	9,581	$	4,971	Total	$	10,362	$	6,981	$	19,943	$	11,952

Note 910 – 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~~Our potentially dilutive shares of common stock include outstanding stock options, restricted stock units and warrants to purchase common stock.

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018			2019		2018		2019		2018
Numerator:	Numerator:									Numerator:
Net loss from continuing operations	Net loss from continuing operations	$	(37,763)	$	(28,839)	$	(72,965)	$	(59,019)	Net loss from continuing operations	$	(290,478)	$	(42,264)	$	(363,443)	$	(101,283)

Denominator:	Denominator:									Denominator:
Shares used in per share calculation	Shares used in per share calculation	42,458		35,355		42,348		35,099		Shares used in per share calculation	43,029		39,242		42,577		36,485

Net loss from continuing operations per share, basic and diluted	Net loss from continuing operations per share, basic and diluted	$	(0.89)	$	(0.82)	$	(1.72)	$	(1.68)	Net loss from continuing operations per share, basic and diluted	$	(6.75)	$	(1.08)	$	(8.54)	$	(2.78)

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 June 30,			Six Months Ended June 30,				Three Months Ended September 30,		Nine Months Ended September 30,
		2019	2018	2019	2018		2019	2018	2019	2018
Shares subject to outstanding common stock options		4,227	3,816	3,973	3,648
Shares subject to outstanding stock options						Shares subject to outstanding stock options	4,172	3,957	4,040	3,752
Shares subject to outstanding restricted stock units	Shares subject to outstanding restricted stock units	415	292	355	279	Shares subject to outstanding restricted stock units	402	303	371	287
Shares subject to outstanding warrants to purchase common stock	Shares subject to outstanding warrants to purchase common stock	28	38	28	38	Shares subject to outstanding warrants to purchase common stock	28	28	28	35
Total	Total	4,670	4,146	4,356	3,965	Total	4,602	4,288	4,439	4,074

Note 1011 – United Kingdom (U.K.) Research and Development Incentives

We carry 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 we may either receive an enhanced U.K. tax deduction on our 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 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 2018, we filed a claim as an SME for a $7.1 million refundable cash credit for our 2016 tax year, which was received in February 2019. We recorded this amount as a component of other income for the year-ended December 31, 2018. As of the date hereof, we have not filed claims for any refundable cash credit for our 2017 or 2018 tax years, nor have we recorded any balances related to claims for these years or for the 2019 tax year, as collectability is deemed not probable or reasonably assured.

2023

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 ~~timing of the resubmission of the NDA for Fintepla~~

•~~the~~ progress and timing of clinical trials of our ~~lead~~ product ~~candidate Fintepla;~~candidates Fintepla and MT1621;

•the safety and efficacy of our product candidates;

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

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

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

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

•the impact of healthcare reform laws; and

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

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

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

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

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

The condensed consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our 2018 Annual Report on Form 10-K.

Overview

We are a global pharmaceutical company committed to developing and commercializing transformative therapies to improve the lives of patients and their families living with rare diseases. We are currently focused on developing and commercializing ~~central nervous system (CNS)~~ therapies to address rare or orphan ~~childhood-onset epilepsy~~ disorders.

We own and control worldwide development and commercialization rights to Fintepla, our lead product candidate,, other than in Japan where we have entered into an exclusive distribution agreement with Nippon Shinyaku Co., Ltd. (Shinyaku). Fintepla is low-dose fenfluramine under development for the treatment of seizures associated with two rare and catastrophic forms of childhood-onset epilepsy: Dravet syndrome and Lennox-Gastaut syndrome (LGS).

Recent Developments

Asset Acquisition of Modis

MT1621 is designed to restore mitochondrial function by targeting the underlying pathophysiology of TK2d. Deoxynucleoside SET has been shown to improve cell function and prolong life in preclinical models of TK2d. Data from a Phase 2 retrospective treatment clinical study, or the RETRO study as further described below, demonstrated increased survival probability and improved functional abilities for 38 patients treated with MT1621 compared with untreated natural history control patients, and suggest that MT1621 may meaningfully alter the course of the disease. The RETRO study began in November 2018 and was completed in May 2019. MT1621 has received Breakthrough Therapy designation and access to the PRIME scheme and is therefore eligible for an accelerated regulatory path in both the United States and Europe. In July, a Phase 2 prospective, open-label extension (OLE) trial to study patients with TK2d was commenced with a targeted enrollment of approximately 40 patients. The nature of the remaining efforts for completion of the MT1621 program primarily consist of performing clinical trials and validating contract manufacturing abilities, the cost, length and success of which are extremely difficult to determine.

As a result of our acquisition of Modis, we became party to the Exclusive License Agreement, by and between Modis and the Trustees of Columbia University in the City of New York, dated as of September 26, 2016 related to MT1621. We are required to use commercially reasonable efforts to develop and commercialize licensed products worldwide, including to meet certain development and commercialization milestones within specified periods of time. Upon the achievement of certain regulatory and commercial milestones, we are required to pay Columbia University up to $2.9 million and $25.0 million, respectively, as well as tiered royalties on sales for each licensed product, at percentages ranging from the mid-single digits to the high single-digits. The royalty obligations and License Agreement will expire on a country-by-country and product-by-product basis upon the later of (i) 15 years after the first bona fide commercial sale of a licensed product, (ii) the expiration of the last to expire valid patent claim covering a licensed product in a country or (iii) expiration of any regulatory exclusivity covering such licensed product. The License Agreement may be terminated by either by Columbia or by us in the event of an uncured material breach by the other party, or by Columbia in the event we are subject to specified bankruptcy, insolvency or similar circumstances. We can terminate the License Agreement either in its entirety or on a product-by-product and country-by-country basis, upon specified prior written notice to Columbia, provided we are not exploiting licensed products in such countries.

Key Development Programs

Fintepla for Patients with Dravet Syndrome

Dravet syndrome is a rare form of pediatric-onset epilepsy with life threatening consequences for patients and for which current treatment options are very limited. Fintepla has received orphan drug designation in the United States and the European Union (EU) for the treatment of Dravet syndrome. In addition, Fintepla for the treatment of Dravet syndrome received Fast Track designation from the ~~U.S. Food and Drug Administration (FDA)~~FDA in January 2016. In September 2016, we initiated Part 1 of Study 1504, a two-part, double blind, randomized, two arm pivotal Phase 3 clinical trial of Fintepla in Dravet syndrome patients who are taking stiripentol with valproate and/or clobazam as part of their baseline standard care. Part 1 investigated the pharmacokinetic profile and safety of Fintepla when co-administered with the stiripentol regimen (stiripentol with 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 Fintepla 0.5mg/kg/day (20mg/day maximum). Study 1504, a two-arm study, compared Fintepla versus

placebo across the titration and 12-week maintenance periods at multiple sites located the Netherlands, United States, Canada, Germany, the United Kingdom and Spain. In January 2018, we announced patient enrollment was complete at 87 patients, with 43 patients randomized into the Fintepla-arm and 44 patients randomized to the placebo arm.

In July 2018, we reported positive top-line results from Cohort 2 of Study 1504. The study results, which are consistent with those reported in Study 1, successfully met the primary objective of demonstrating that Fintepla, at a dose of 0.5 mg/kg/day, when co-administered with stiripentol regimen (stiripentol with valproate and/or clobazam), was 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 15-week treatment period (p<0.001). In the trial, Fintepla at a dose of 0.5 mg/kg/day also demonstrated statistically significant improvements versus placebo in all key secondary measures, the proportion of patients with clinically meaningful reductions in seizure frequency (50% or greater) and longest seizure-free interval. Fintepla 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 valvular heart disease (valvulopathy) or pulmonary hypertension.

Upon completion of our Fintepla Phase 3 trials, eligible patients were permitted to enroll in an ongoing ~~open-label extension (OLE)~~OLE trial to study the long-term safety and effectiveness of Fintepla (Study 1503). In December 2018, we presented interim data from Study 1503 regarding the effectiveness and overall safety of Fintepla observed in the study, including the long-term cardiovascular assessments and findings at the 72nd Annual Meeting of the American Epilepsy Society. A total of 232 patients from Study 1503 were included in the interim analysis of the OLE trial. As of March 13, 2018, the interim cutoff date, the median duration of treatment with Fintepla was 256 days and the range was 58-634 days (equivalent to 161 patient-years of exposure to Fintepla). In this interim analysis population of 232 patients, a total of 22 (9.5%) patients had discontinued treatment for the following reasons: lack of efficacy (16), subject withdrawal (2), adverse event (1), Sudden Unexpected Death in Epilepsy (SUDEP) (1), physician decision (1), and withdrawal by caregiver (1). Approximately 90% of patients remained in the study at the time of the interim analysis. The median percent reduction in monthly convulsive seizure frequency over the entire OLE treatment period was 66.8% (compared with baseline frequency established in the core Phase 3 studies). Over the same period, 64.4% of children and young adults showed a >50% reduction in convulsive seizure frequency and 41.2% showed a >75% reduction.

The occurrence of adverse events was consistent with the Phase 3 placebo-controlled studies. The most common adverse events occurring in more than 10% of children and young adults were pyrexia (22%), nasopharyngitis (20%), decreased appetite (16%), influenza (12%), diarrhea (11%), and upper respiratory tract infection (10%). A total of 13.4% of children lost >7% body weight at some point during the trial; in 42% of those children weight loss abated during the period covered by the interim analysis. Over the course of the OLE treatment period included in the interim analysis, one patient died from SUDEP that was deemed unrelated to Fintepla. A total of 703 color doppler echocardiograms were performed to assess cardiovascular

health at baseline, week 4 or 6, and then every 3 months during the OLE trial. No patient developed valvular heart disease (valvulopathy) or pulmonary arterial hypertension at any time after daily treatment with Fintepla.

In October 2019, we presented additional data from the OLE trial at the Childhood Neurology Society (CNS) Congress which showed long-term, clinically meaningful reduction in convulsive seizure frequency in young Dravet syndrome patients (under six years of age). A total of 42 of 158 (26.6%) subjects enrolled in the OLE trial were under six years of age. The median baseline monthly convulsive seizure frequency for this age group prior to treatment was 10.7 seizures per month (ranging from 4.0 to 147.3). The median decrease in monthly convulsive seizure frequency for the under six years of age group over the entire observation period compared to baseline was 75.5% (p<0.001). This compared to a median decrease of 60.1% (p<0.001) in the older, over-six years of age group and a median decrease of 63.6% (p<0.001) in the overall study population (aged 2-18 years). Fintepla was generally well-tolerated and no case of valvular heart disease or pulmonary arterial hypertension was observed in any patient at any time.

Also at the October 2019 CNS Congress, we presented post-hoc analysis from Study 1 and Study 1504 which demonstrated that Fintepla reduced frequency of generalized tonic-clonic seizures and focal-to-bilateral tonic-clonic seizures. A total of 206 enrolled patients were randomized to placebo (n=84), or to treatment with Fintepla 0.7 (n=40), 0.4 (n=43), or 0.2 (n=39) mg/kg/day. The median baseline monthly frequency of generalized tonic-clonic seizures ranged from 8.0 to 12.3 per month in the four dose groups, and decreased by 80%, 64%, and 48% in the Fintepla 0.7, 0.4, and 0.2 mg/kg/day groups, respectively, compared to 10% in the placebo group. Focal-to-bilateral tonic-clonic seizures were experienced by fewer patients and had a median baseline frequency of 2.0 to 4.7 per month. During treatment, median percent reductions in focal-to-bilateral tonic-clonic seizure frequency were 97%, 33% and 69% in the Fintepla 0.7, 0.4, and 0.2 mg/kg/day groups, respectively, and 39% in the placebo group. Fintepla was generally well-tolerated and no case of valvular heart disease or pulmonary arterial hypertension occurred in any patient. The most common treatment emergent adverse events occurring in ≥10% of patients in any treatment group were decreased appetite, lethargy, fatigue, somnolence, and diarrhea.

In October 2019, at CNS, we also presented data from a Phase 1, Single-Dose, Open-Label Pharmacokinetic Study to Investigate the Drug-Drug Interaction Potential of ZX008 (Fenfluramine HCl Oral Solution) and Cannabidiol. This poster described data from a Phase 1, single-dose, open-label study to assess the tolerability and pharmacokinetic profiles (potential drug-drug interaction) of fenfluramine with and without co-administration of CBD. The results of the study showed that the effects of CBD on fenfluramine are unlikely to require dose adjustments when the drugs are co-administered.

In February 2019, we completed our rolling submission of a New Drug Application (NDA) with the FDA and submitted a Marketing Authorization Application ~~(MAA)~~ to the ~~European Medicines Agency (EMA)~~EMA for Fintepla for the treatment of seizures associated with Dravet syndrome. The EMA has accepted the MAA and initiated its review.

In April 2019, we received a Refusal to File (RTF) letter from the FDA regarding our NDA for Fintepla for the treatment of seizures associated with Dravet syndrome. Upon its preliminary review, the FDA determined that the NDA submitted in February 2019 was not sufficiently complete to permit a substantive review. In the RTF letter, the FDA cited two reasons for the RTF decision: first, certain non-clinical studies were not submitted to allow assessment of the chronic administration of fenfluramine; and, second, the application contained an incorrect version of a clinical dataset, which prevented the completion of the review process that is necessary to support the filing of the NDA.

We held a Type A meeting with the FDA in May 2019 to review the two issues identified in the RTF letter. Based on the final meeting minutes received, the FDA has agreed with our plan to resubmit the NDA for Fintepla without the inclusion of the new chronic toxicity studies requested in the RTF letter. With regards to the second issue, we conducted and discussed with the FDA a root cause analysis identifying the issue with the incorrect clinical dataset submitted in the original NDA, and the FDA has requested that we include certain findings from our analysis in the resubmitted NDA. ~~We intend to resubmit~~In September 2019, we resubmitted the NDA for Fintepla infor the ~~third quarter~~treatment of ~~2019.~~seizures associated with Dravet syndrome to the FDA.

Fintepla for Patients with LGS

LGS is another rare, refractory, debilitating pediatric-onset epilepsy with life threatening consequences for patients and for which current treatment options are limited and suboptimal. Beginning in first quarter of 2016, we funded an open-label, dose-finding, investigator-initiated study of the effectiveness and tolerability of Fintepla 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 weeks of this Phase 2 clinical trial at the 70th Annual Meeting of the AES. In this interim analysis, Fintepla was observed to provide clinically meaningful improvement in major motor seizure frequency in patients with severe refractory LGS, with 7 out of 13 patients (54%) achieving at least a 50% reduction in the number of major motor seizures, at doses below the 0.8 mg/kg/day maximum allowed dose. In addition, Fintepla was generally well tolerated without any observed signs or symptoms of valvulopathy or pulmonary hypertension. We believe these data indicate that Fintepla has the potential to be a safe and effective adjunctive treatment of major motor 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 Application (IND) to the FDA to initiate a Phase 3 program of Fintepla in LGS. Our IND for Fintepla as a potential treatment for LGS became effective in April 2017. In the first half of 2017, Fintepla received orphan drug designation for the treatment of LGS from the FDA in the United States and the EMA in the EU.

Study 1601

In November 2017, we announced the initiation of our multicenter global Phase 3 clinical trial of Fintepla as an adjunctive treatment for seizures in patients with LGS (Study 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 Fintepla when added to a patient’s current anti-epileptic therapy. The trial will include two dose levels of Fintepla (0.2 mg/kg/day and 0.8 mg/kg/day, up to a maximum daily dose of 30 mg), as well 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. The primary endpoint of the clinical trial is change in the number of seizures that result in drops between baseline and the combined titration and maintenance periods at the 0.8 mg/kg/day dose compared to placebo. The key secondary endpoints include change in the number of drop seizures between baseline and the combined titration and maintenance periods at the 0.2 mg/kg/day dose, and the proportion of patients achieving a 50% reduction in drop seizures. Part 2 of the clinical trial will be a 12-month OLE to evaluate the long-term safety, tolerability and effectiveness of Fintepla. In July 2019, we completed enrollment for Study 1601 with a total of 263 randomized patients, with approximately 87 subjects per treatment arm. We expect top-line data from this study will be available in the first quarter of 2020.

MT1621 for Patients with thymidine kinase 2 deficiency (TK2d)

TK2d is a rare, debilitating, and often fatal genetic disorder that primarily affects infants and children and for which there are currently no approved therapies. As of the September 6, 2019 acquisition date, Modis had completed a pivotal Phase 2 retrospective treatment study, or the RETRO study, of MT1621 in patients with TK2d and commenced a Phase 2 prospective, OLE study of patients with TK2d.

RETRO Study

RETRO is a global retrospective study of MT1621, a fixed combination treatment of two pyrimidine nucleosides (dC/dT), in 38 pediatric and adult patients with TK2 deficiency (median age of disease onset, 2.5 years) treated at eight clinical sites in three countries (United States, Spain and Israel). Subjects received MT1621 for a median of 77 weeks (range 92 days – 7 years). Each subject was scored across motor, respiratory, and feeding domains according to pre-defined response criteria and was compared to pre-treatment status to assess whether responses improved, remained stable, or worsened. Parallel to RETRO, we compiled a comprehensive, global TK2d Natural History dataset from published studies and individual case reports to document untreated patients’ disease course. From this natural history dataset, 68 patients reflecting the range of disease severity, age, and age of disease onset, were selected as a control group for treated patients in the RETRO study.

In October 2019, we announced positive top-line results from the pivotal Phase 2 RETRO study at the recent World Muscle Society congress in Copenhagen. 94.7% of treated patients had either improved (68%) or stabilized (26%) responses in major functional domains. A survival analysis using a time-dependent Cox regression model showed that the difference in probability of survival between treated patients and untreated natural history control patients was highly statistically significant (p<0.0006). Among clinical responders, a subset demonstrated profound responses, in some cases re-acquiring previously lost motor milestones such as ambulation, respiratory function and feeding. Safety data from RETRO indicated that MT1621 is generally safe and well-tolerated. Most reported adverse events were considered not related to study drug (199 of 292), with mild or moderate diarrhea being the most common treatment-related adverse event (AE), occurring in 63% of patients. Serious AEs (SAEs) were reported in 14 subjects (37%). The majority of SAEs were deemed related to TK2d; two patients experienced three events related to study drug alone (kidney stone, kidney stone removal, diarrhea). Two adult-onset patients stopped treatment due to asymptomatic increases in aminotransferase liver enzymes (no increase in bilirubin levels), which resolved upon discontinuation of treatment.

Collaborative Arrangement with Nippon Shinyaku

commercialization activities including the promotion, marketing, sale and distribution of Fintepla in Japan. Upon regulatory approval of Fintepla in Japan, Shinyaku will also act as our exclusive distributor for commercial shipment and distribution of Fintepla in Japan. If we pursue global development of Fintepla for indications other than Dravet syndrome or LGS, Shinyaku has the option to participate in the development for such indications in Japan, subject to cost sharing requirements pursuant to the agreement. Activities under the Shinyaku Agreement will be governed by a joint steering committee (JSC) consisting of three representatives from each party to the agreement. All decisions of the JSC are to be made by a unanimous vote with tie-breaking rights provided to each party for certain matters related to development, regulatory approval and commercialization.

annual net sales in Japan and ranges between mid-twenties and is capped at a low thirties of the aggregate annual net sales for an applicable fiscal year.

In addition, we can earn up to an additional $42.5 million tied to the achievement of certain net sales milestones by Shinyaku through the term of the agreement.

Clinical Supply Agreement with PCI Pharma

In July 2019, we entered into a Supply Agreement (PCI Pharma Agreement) with Penn Pharmaceutical Services Limited, trading as PCI Pharma Services (PCI Pharma), pursuant to which PCI Pharma will be the commercial manufacturer and supplier of Fintepla. The PCI Pharma Agreement was effective as of June 17, 2019 (Effective Date). Pursuant to the PCI Pharma Agreement, PCI Pharma will procure the raw materials (other than the active pharmaceutical ingredient) for, test, bottle and package an oral solution of Fintepla for a specified price per batch. We will provide fenfluramine, the active pharmaceutical ingredient used in Fintepla, to PCI Pharma free of charge for these purposes. Under the PCI Pharma Agreement, the product will be supplied pursuant to purchase orders which we may deliver to PCI Pharma from time to time. Pursuant to the PCI Pharma Agreement, at a specified time prior to the anticipated receipt of the first marketing authorization by a regulatory agency to market Fintepla, and then each month following such receipt, we are required to deliver a rolling forecast of our expected commercial orders, a portion of which will be considered a binding, firm order.

The term of the PCI Pharma Agreement is five years from the Effective Date, which term shall be automatically extended for successive two-year periods thereafter, unless terminated earlier. After the second anniversary of the Effective Date, either party may terminate the PCI Pharma Agreement at any time without cause following a specified notice period applicable to the respective party. In addition, either party may terminate the agreement (1) upon written notice if the other party has failed to remedy a material breach of any of its representations, warranties or other obligations under the PCI Pharma Agreement within a specified period following receipt of written notice of such breach, (2) immediately in the event of a material breach of the other party’s representations, warranties or other obligations under the PCI Pharma Agreement and in the event that such breach is not capable of remedy and (3) in the event that the other party files for bankruptcy, reorganization, liquidation, administration or receivership proceedings, or a substantial portion of the assets of such party is assigned for the benefit of such party’s creditors. We may also terminate the PCI Pharma Agreement immediately in the event PCI Pharma is unable to supply Fintepla at specified quantities and within certain times. PCI Pharma may also terminate the Agreement upon notice if it determines its performance of services would violate applicable law. PCI Pharma’s manufacturing services under the PCI Pharma Agreement will also terminate automatically if Fintepla is withdrawn as a result of regulatory review or we decide to cease development activities of Fintepla.

Critical Accounting Policies and Estimates

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

We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Our critical accounting policies and estimates are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2018 Annual Report on Form 10-K. As a result of ~~entering~~material transactions entered into during the ~~Shinyaku Agreement in March~~nine months ended September 30, 2019 and the adoption of the new lease accounting standard, we have updated our ~~revenue recognition and lease~~critical accounting policies ~~as detailed below.~~and estimates herein. There were no other significant changes to our critical accounting policies during the ~~six~~nine months ended ~~June~~September 30, 2019, as compared to the critical accounting policies and estimates disclosed in our 2018 Annual Report on Form 10-K.

Revenue Recognition

or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration will only be included in the transaction price when it is not considered constrained, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

Management may be required to exercise ~~considerable~~ judgment in estimating revenue to be recognized. Judgment is required in identifying performance obligations, estimating the transaction price, estimating the stand-alone selling prices of identified performance obligations, which may include forecasted revenue, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, and estimating the progress towards satisfaction of performance obligations.

Leases

Acquisitions

definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets.

For asset acquisitions, a cost accumulation model is used to determine the cost of an asset acquisition. Common stock issued as consideration in an asset acquisition is generally measured based on the acquisition date fair value of the equity interests issued. Direct transaction costs are recognized as part of the cost of an asset acquisition. We also evaluate which elements of a transaction should be accounted for as a part of an asset acquisition and which should be accounted for separately. Consideration deposited into escrow accounts are evaluated to determine whether it should be included as part of the cost of an asset acquisition or accounted for as contingent consideration. Amounts held in escrow where we have legal title to such balances but where such accounts are not held in our name, are recorded on a gross basis as an asset with a corresponding liability in our condensed consolidated balance sheet.

The cost of an asset acquisition, including transaction costs, are allocated to identifiable assets acquired and liabilities assumed based on a relative fair value basis. Goodwill is not recognized in an asset acquisition. Any difference between the cost of an asset acquisition and the fair value of the net assets acquired is allocated to the non-monetary identifiable assets based on their relative fair values. Assets acquired as part of an asset acquisition that are considered to be in-process research and development (IPR&D) are immediately expensed unless there is an alternative future use in other research and development projects.

In addition to upfront consideration, our asset acquisitions may also include contingent consideration payments to be made for future milestone events or royalties on net sales of future products. We assess whether such contingent consideration meets the definition of a derivative. Contingent consideration payments in an asset acquisition not required to be accounted for as derivatives are recognized when the contingency is resolved, and the consideration is paid or becomes payable. Contingent consideration payments required to be accounted for as derivatives are recorded at fair value on the date of the acquisition and are subsequently remeasured to fair value at each reporting date. Contingent consideration payments made prior to regulatory approval are expensed as incurred. Contingent consideration payments made subsequent to regulatory approval are capitalized as intangible assets and amortized, subject to impairment assessments.

Recent Accounting Pronouncements

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

Results of Operations

Comparison of Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018

Collaboration Revenue


		Three Months Ended June 30,										Six Months Ended June 30,											Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2019		2018		Change		2019		2018		Change		(in thousands)	2019		2018		Change		2019		2018		Change
Collaboration revenue	Collaboration revenue	$	1,069	$	—	$	1,069	$	1,069	$	—	$	1,069	Collaboration revenue	$	630	$	—	$	630	$	1,699	$	—	$	1,699

We currently do not have an approved product for sale. Collaboration revenue increased from prior periods as a result of our Shinyaku Agreement entered into in March 2019 and related performance of such collaboration activities under the agreement. We may also be entitled to receive additional milestone payments pursuant to the Shinyaku Agreement upon the occurrence of specific events. ~~Due to~~As the recognition of this collaboration revenue is based on costs incurred to date relative to total estimated costs at completion when measuring progress and the uncertainty of when the events underlying various milestones are resolved, we expect our collaboration revenue will fluctuate from period to period.

Research and Development Expenses


		Three Months Ended June 30,										Six Months Ended June 30,											Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2019		2018		Change		2019		2018		Change		(in thousands)	2019		2018		Change		2019		2018		Change
Research and development	Research and development	$	27,096	$	26,741	$	355	$	51,448	$	49,721	$	1,727	Research and development	$	28,372	$	27,608	$	764	$	79,820	$	77,329	$	2,491

Research and development expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including: payments made to third-party clinical research organizations (CROs) and investigational sites, which conduct our clinical trials on our behalf, and consultants; expenses associated with regulatory submissions, ~~pre-clinical~~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 June 30,										Six Months Ended June 30,											Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2019		2018		Change		2019		2018		Change		(in thousands)	2019		2018		Change		2019		2018		Change
Fintepla for Dravet syndrome	Fintepla for Dravet syndrome	$	11,047	$	15,239	$	(4,192)	$	20,666	$	29,102	$	(8,436)	Fintepla for Dravet syndrome	$	10,153	$	13,496	$	(3,343)	$	30,819	$	42,598	$	(11,779)
Fintepla for LGS	Fintepla for LGS	6,668		4,176		2,492		12,671		6,881		5,790		Fintepla for LGS	6,843		3,068		3,775		19,514		9,949		9,565
Other(1)	Other(1)	9,381		7,326		2,055		18,111		13,738		4,373		Other(1)	11,376		11,044		332		29,487		24,782		4,705
Total	Total	$	27,096	$	26,741	$	355	$	51,448	$	49,721	$	1,727	Total	$	28,372	$	27,608	$	764	$	79,820	$	77,329	$	2,491

(1) Other research and development expenses include employee and infrastructure resources that are not tracked on a program-by-program basis, as well as pre-clinical development costs incurred for other product candidates.

In October 2014, we acquired worldwide development and commercialization rights to Fintepla through a business acquisition and have since incurred significant expenditures related to conducting clinical trials of Fintepla. Research and development expenses related to Fintepla for Dravet syndrome decreased by ~~$4.2~~$3.3 million and ~~$8.4~~$11.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, compared to the same periods in 2018 primarily due to wind-down of clinical activities related to our Phase 3 trials Study 1501 and Study 1504. Research and development spend related to Fintepla for LGS increased by ~~$2.5~~$3.8 million and ~~$5.8~~$9.6 million in the same year-over-year periods, respectively, reflecting the progression and expansion of our clinical trial activities within Study 1601, which was initiated in November 2017. Other research and development expenses increased by ~~$2.1 million and $4.4~~$4.7 million for the ~~three and six~~nine months ended ~~June~~September 30, 2019 ~~respectively,~~ compared to the same ~~periods~~period in ~~2018. The increase~~2018 was primarily attributable to personnel-related costs from headcount additions.

Selling, General and Administrative Expenses


		Three Months Ended June 30,										Six Months Ended June 30,											Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2019		2018		Change		2019		2018		Change		(in thousands)	2019		2018		Change		2019		2018		Change
Selling	Selling	$	7,517	$	2,266	$	5,251	$	11,432	$	4,711	$	6,721	Selling	$	6,498	$	4,200	$	2,298	$	17,930	$	8,911	$	9,019
General and administrative	General and administrative	7,942		6,311		1,631		14,945		11,936		3,009		General and administrative	9,264		6,816		2,448		24,209		18,752		5,457
Total selling, general and administrative	Total selling, general and administrative	$	15,459	$	8,577	$	6,882	$	26,377	$	16,647	$	9,730	Total selling, general and administrative	$	15,762	$	11,016	$	4,746	$	42,139	$	27,663	$	14,476

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 increased by ~~$5.3~~$2.3 million and ~~$6.7~~$9.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019. respectively, compared to the same periods in 2018 and was primarily attributable to increased personnel-related costs as a result of headcount additions as well as increased marketing programs and projects in preparation for the potential approval and commercialization of Fintepla for Dravet syndrome.

General and administrative expense increased by ~~$1.6~~$2.4 million and ~~$3.0~~$5.5 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019 ~~respectively,~~ compared to the same period in 2018 and was primarily attributable to increased personnel-related costs, including stock-based compensation and professional services.

Acquired In-Process Research and Development and Related Costs

Acquired IPR&D consists of existing research and development projects at the time of the acquisition. Projects that qualify as IPR&D assets represent those that have not yet reached technological feasibility and have no alternative future use.

Our asset acquisition of Modis in September 2019 included one IPR&D project, MT1621. We allocated $244.5 million of the cost of the acquisition to MT1621. As MT1621 has not reached technological feasibility and had no alternative future use, the amount allocated to MT1621 was charged to expense at the acquisition date. In addition, the terms of the purchase agreement provided for the conversion of certain outstanding, unvested stock-based compensation awards held by employees of Modis into rights to receive a pro-rata share of the purchase consideration at the date of acquisition, with no future service requirement. As a result, we incurred compensation expense related to the acquired IPR&D of $4.9 million.

Change in Fair Value of Contingent Consideration


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2019		2018		2019		2018		(in thousands)	2019		2018		2019		2018
Change in fair value of contingent consideration	Change in fair value of contingent consideration	$	(700)	$	(2,500)	$	2,300	$	(2,500)	Change in fair value of contingent consideration	$	400	$	5,700	$	2,700	$	3,200

The contingent consideration liability relates to milestone payments under an existing agreement in connection with our prior acquisition of Fintepla. At each reporting period, the estimated fair value of the liability is determined by applying the income approach which utilizes variable inputs, such as the probability of success for achieving regulatory/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.

For the three months ended June 30, 2019, the estimated fair value of our contingent consideration liabilities decreased by $0.7 million as a result of having to resubmit our February 2019 NDA for Fintepla for the treatment of seizures associated with Dravet syndrome, which resulted in a slight adjustment to our projected FDA approval timelines. For the six months ended JuneSeptember 30, 2019, the estimated fair value of our contingent consideration liabilities increased by ~~$2.3~~$0.4 million primarily due to the passage of time. For the nine months ended September 30, 2019, the estimated fair value of our contingent consideration liabilities increased by $2.7 million primarily due to the inclusion of sales in Japan in our forecast associated with the execution of the Shinyaku Agreement, which accelerated the estimated timing of when certain sales milestones will be reached, and a market driven decrease in the discount rate.

Other Income (Expense)


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	(in thousands)	2019		2018		2019		2018		(in thousands)	2019		2018		2019		2018
Other income (expense):	Other income (expense):									Other income (expense):
Interest income	Interest income	$	2,983	$	1,029	$	6,139	$	1,862	Interest income	$	2,382	$	2,133	$	8,521	$	3,995
Other income, net	Other income, net	40		2,950		(48)		2,987		Other income, net	481		(73)		433		2,914
Total other income	Total other income	$	3,023	$	3,979	$	6,091	$	4,849	Total other income	$	2,863	$	2,060	$	8,954	$	6,909

The increase in interest income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 compared to the same periods in 2018 was attributable to interest earned from higher average cash and investment balances as we invested our proceeds from our 2018 capital raises in marketable securities.

The decrease in other income, net for ~~three and six~~nine months ended ~~June~~September 30, 2019 compared to the same ~~periods~~period in 2018 was primarily attributable to $3.0 million of other income recognized in the prior year periods related to our U.K.’s small and medium-sized enterprise and research and development tax credit regime for qualifying expenditures incurred in the 2015 tax year.

Liquidity and Capital Resources

Excluding gains from two discrete business divestitures, we have incurred significant net losses and negative cash flows from operating activities since inception. We had an accumulated deficit of ~~$768.9 million~~$1.1 billion at ~~June~~September 30, 2019. We expect to continue to incur significant operating losses and negative cash flows from operations to advance our product candidates through development and commercialization. Additionally, ~~upon acceptance of our regulatory submission for Fintepla by the FDA and regulatory approval of Fintepla by the FDA or EMA, if at all,~~ we ~~will owe~~are obligated to make future milestone payments ~~under an existing agreement in connection with our prior acquisition~~that are contingent upon the successful achievement of ~~Fintepla.~~certain substantive development, regulatory and sales-based milestone events related to Fintepla and MT1621. As of ~~June~~September 30, 2019, we derive collaboration revenue from our Shinyaku Agreement related to development and commercialization activities for Fintepla in Japan. 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 ~~Fintepla.~~our product candidates. To date, we have relied primarily on the proceeds from equity offerings to finance our operations.

As of ~~June~~September 30, 2019, our cash, cash equivalents and marketable securities totaled ~~$463.0~~$255.0 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 Fintepla, MT1621 and our other product candidates and any other product candidates that we may develop, in-license or acquire;

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

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

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

•the costs 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 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):


		Six Months Ended June 30,							Nine Months Ended September 30,
		2019		2018			2019		2018
Cash and cash equivalents, beginning of the period	Cash and cash equivalents, beginning of the period	$	68,454	$	293,503	Cash and cash equivalents, beginning of the period	$	68,454	$	293,503
Net cash used in operating activities	Net cash used in operating activities	(41,739)		(55,567)		Net cash used in operating activities	(76,883)		(83,236)
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	28,653		(84)		Net cash provided by (used in) investing activities	43,787		(375,687)
Net cash (used in) provided by financing activities	Net cash (used in) provided by financing activities	(4,580)		34,251		Net cash (used in) provided by financing activities	(2,259)		328,458
Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	(17,666)		(21,400)		Net decrease in cash and cash equivalents	(35,355)		(130,465)
Cash and cash equivalents, end of the period	Cash and cash equivalents, end of the period	$	50,788	$	272,103	Cash and cash equivalents, end of the period	$	33,099	$	163,038

Operating Activities

For the ~~six~~nine months ended ~~June~~September 30, 2019, net cash used in operating activities of ~~$41.7~~$76.9 million was primarily attributable to research and development spend related to clinical trials and manufacturing process development for Fintepla and general and administrative costs to support our research and development activities, offset by upfront payments received of $15.5 million in connection with the Shinyaku Agreement entered into in March 2019 and the receipt of $3.1 million in tenant improvement allowance related to our new headquarters.

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 ~~$73.0~~$101.5 million, plus the net effect of non-cash items of ~~$9.3~~$14.8 million ~~primarily from stock-based compensation,~~ and a net cash inflow from changes in operating assets and liabilities of ~~$21.9~~$3.4 million. Cash inflows from changes in operating assets and liabilities included the receipt of a $15.5 million upfront payment in connection with the Shinyaku Agreement entered into in March 2019. Changes in other operating assets and liabilities were primarily attributable to the timing of payments for prepaid and accrued clinical trial costs and accrued expenses in the normal course of business.

For the six months ended June 30, 2018, net cash used in operating activities of $55.6 million was primarily attributable to a net loss of $59.2 million, plus the net effect of non-cash items of $2.6 million, including 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 $1.1 million.

Investing Activities

For the ~~six~~nine months ended ~~June~~September 30, 2019, net cash provided by investing activities of ~~$28.7~~$43.8 million was attributable to ~~$289.4 million related to~~ net sales/maturities of our available-for-sale marketable securities ~~offset by~~of $229.1 million, of which approximately $175.7 million was used to fund the cash ~~outflows~~portion of ~~$251.8~~the upfront payment for the asset acquisition of Modis. In addition, we incurred capital expenditures of $9.6 million ~~for purchases of marketable securities and $8.9 million in capital spend~~ primarily related to the build-out of our new headquarters, which we began to occupy in early March 2019.

For the ~~six~~nine months ended ~~June~~September 30, 2018, net cash used in investing activities was attributable to purchases of ~~property and equipment.~~marketable securities.

Financing Activities

For the ~~six~~nine months ended ~~June~~September 30, 2019, net cash used in financing activities of ~~$4.6~~$2.3 million consisted of a $10.0 million payment of contingent consideration related to a prior acquisition and cash used to remit withholding taxes of $0.6 million related to the vesting of restricted stock units that were net share-settled by us to cover the required withholding tax. These cash outflows were offset by ~~$6.0~~$8.4 million of proceeds from common stock issuances pursuant to our equity incentive plans.

For the ~~six~~nine months ended ~~June~~September 30, 2018, net cash provided by financing activities of ~~$34.3~~$328.5 million consisted of net proceeds from sales of common stock of ~~$30.3~~$323.1 million ~~under an at-the-market offering~~in connection with equity offerings and ~~$5.4~~$6.7 million in proceeds received from the issuance of common 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.

Contractual Obligations

There were no material changes outside the ordinary course of our business during the ~~six~~nine months ended ~~June~~September 30, 2019 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 2018 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

As of ~~June~~September 30, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

3036

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our 2018 Annual Report on Form 10-K. Our exposures to market risk have not changed materially since December 31, 2018.

Item 4. Controls and Procedures

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

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

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2019 at the reasonable assurance level.

Changes in Disclosure Controls and Procedures

There were no changes in our internal control over financial reporting during the three months ended ~~June~~September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3137

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 2018 Annual Report on Form 10-K other than as set forth below:

On April 12, 2019, a plaintiff stockholder filed a class action lawsuit against us and certain of our executive officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act in the United States District Court for the Northern District of California captioned Lake v. Zogenix, Case No. 3:19-cv-01975-RS. The plaintiff seeks to represent a class of investors who purchased our stock between February 6, 2019 and April 8, 2019, and alleges that certain statements made during this period regarding the prospects for our New Drug Application for Fintepla were false or misleading. The plaintiff seeks damages, interest, costs, attorneys’ fees, and other unspecified equitable relief. We and our executive officers believe the claims alleged in the complaint are without merit and intend to vigorously defend against them.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our 2018 Annual Report on Form 10-K, other than as set forth below.

Risks Related to Our Business and Industry

Our success depends substantially on our ~~only~~ product ~~candidate~~candidates in development, ~~Fintepla.~~Fintepla and MT1621. We cannot be certain that Fintepla, MT1621 or ~~our~~any future product candidates will receive regulatory approval or be successfully commercialized.

We have only ~~one~~two product ~~candidate~~candidates in clinical development, Fintepla and MT1621, and our business depends substantially on ~~its~~the successful development and ~~commercialization.~~commercialization of these product candidates. We currently have no drug products approved for sale, and we may not be able to develop marketable drug products in the future. Fintepla, MT1621 and ~~our~~any future product candidates will require additional clinical and pre-clinical 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 a 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. In February 2019, we completed our rolling submission of a NDA with the FDA and submitted aan MAA to the EMA for Fintepla for the treatment of seizures associated with Dravet syndrome. The EMA has accepted the MAA and initiated its review. However, on April 5, 2019, we received a RTF letter from the FDA regarding our NDA for Fintepla for the treatment of seizures associated with Dravet syndrome. The RTF letter provided the FDA’s determination that the NDA, as submitted on February 5, 2019, was not sufficiently complete to permit a substantive review of the NDA. In the RTF letter, the FDA cited two reasons for the RTF decision: first, certain non-clinical studies were not submitted to allow assessment of the chronic administration of fenfluramine; and, second, the application contained an incorrect version of a clinical dataset, which prevented the completion of the review process that is necessary to support the filing of the NDA. The FDA did not request or recommend in the RTF letter that we conduct any additional clinical efficacy or safety studies.

We held ana Type A meeting with the FDA in May 2019 to review the two issues identified in the RTF letter. Based on the final meeting minutes received, the FDA has ~~agreed~~concurred with our plan to resubmit the NDA for Fintepla without the inclusion of the new chronic toxicity studies requested in the RTF letter. With regards to the second issue, we conducted and discussed with the FDA a root cause analysis identifying the issue with the incorrect clinical dataset submitted in the original NDA, and the FDA has requested that we include certain findings from our analysis in the resubmitted NDA. ~~We intend to resubmit~~In September 2019, we resubmitted the NDA for Fintepla infor the ~~third quarter~~treatment of ~~2019.~~ seizures associated with Dravet syndrome to the FDA. However, we cannot provide any assurance that we be able to adequately address the issues raised to FDA’s satisfaction or that the FDA will accept the resubmitted Fintepla NDA for filing, or that the FDA will ultimately approve our NDA following a substantive review. The FDA may determine later to require us to conduct additional non-clinical or clinical studies or may otherwise impose other requirements to be completed before or after approval of the NDA. In addition, the RTF letter could cause potential delays by the EMA on an approvability decision, or otherwise negatively affect such decision.

MT1621 has been evaluated in a Phase 2 retrospective treatment clinical study called RETRO, which demonstrated increased survival probability and improved functional abilities for patients treated with MT1621 compared with untreated

natural history control patients.However, the FDA or EMA may disagree with the design of the RETRO and the reliance on a natural history dataset as the comparator, and we may be required to conduct additional trials prior to seeking regulatory approval.

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 Fintepla, MT1621 or ~~our~~any future product ~~candidates,~~candidate, 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 Fintepla and MT1621 and would have a material and adverse impact on our business.

Even if we successfully obtain regulatory approvals to market our product candidates, our revenues will be dependent, in part, on our ability to commercialize such products as well as the size of the markets in the territories for which we gain regulatory approval. If the markets for our product candidates are not as significant as we estimate, our business and prospects will be harmed.

~~Any breakthrough therapy designation~~Our clinical trials may fail to demonstrate acceptable levels of safety and efficacy for Fintepla, MT1621 or any future product candidates, which could prevent or significantly delay their regulatory approval.

Fintepla, MT1621 and any future product candidates are prone to the risks of failure inherent in drug development. Before obtaining U.S. regulatory approval for the commercial sale of Fintepla, MT1621 or any future product candidates, we must gather substantial evidence from well-controlled clinical trials that demonstrate to the satisfaction of the FDA that the product candidate in question is safe and effective, and similar regulatory approvals would be necessary to commercialize our product candidates in other countries. Failure can occur at any stage of our clinical trials, and we could encounter problems that cause us to abandon or repeat clinical trials.

A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. If Fintepla or MT1621 is not shown to be safe and effective in clinical trials, the programs could be delayed or terminated, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

The results of previous clinical trials may ~~receive~~not be predictive of future results, and the results of our current and planned clinical trials may not satisfy the requirements of the FDA or non-U.S. regulatory authorities.

The results from the prior clinical trials of Fintepla or MT1621 may not necessarily be predictive of the results of future clinical trials or preclinical studies. The results of prior clinical trials of Fintepla or MT1621 may not be replicated in any future clinical trials of these product candidates. Clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in prior clinical trials nonetheless have failed to obtain FDA approval. If we fail to produce positive results in our clinical trials of our product candidates, the development timeline and regulatory approval and commercialization prospects for our product candidates and our business and financial prospects, would be adversely affected.

Further, Fintepla may not be approved even though recent, positive top-line results showed that Fintepla met its primary and all key secondary endpoints in our ongoing Phase 3 clinical trials. Similarly, MT1621 may not be approved even though the RETRO data demonstrated improved survival probability of patients treated with MT1621 compared with a natural history patient control group. The FDA or non-U.S. regulatory authorities may disagree with our trial design and our interpretation of data from preclinical studies and clinical trials, including with the design of the Phase 2 retrospective study comparing the outcomes from the MT1621 active treatment group against outcomes from a natural history dataset. In addition, any of these regulatory authorities may change its requirements for the approval of a product candidate even after reviewing and providing comments or advice on a protocol for a pivotal clinical trial that, if successful, would potentially form the basis for an application for approval by the FDA or another regulatory authority. Furthermore, any of these regulatory authorities may also approve our product candidates for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post-marketing clinical trials.

Top-line data may not accurately reflect the complete results of a particular study or trial.

We may publicly disclose top-line or interim data from time to time, which is based on a preliminary analysis of then-available efficacy and safety data such as the reported RETRO data which is based on preliminary analysis of key efficacy and safety data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study 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. As a result, the top-line results that we report may differ from future results of the same studies, or different conclusions or considerations

may qualify such results, once additional data have been received 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, 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.

Delays in the commencement or completion of clinical testing for Fintepla or MT1621 or pre-clinical or clinical testing for any future product candidates could result in increased costs to us and delay or limit our ability to pursue regulatory approval for, or generate revenues from, such product candidates.

Clinical trials are very expensive, time consuming and difficult to design and implement. Delays in the commencement or completion of clinical testing for Fintepla or MT1621 or pre-clinical or clinical testing for any future product candidates could significantly affect our product development costs and business plan.

Our Phase 3 program for Fintepla includes three randomized, double-blind placebo-controlled clinical trials of Fintepla as adjunctive therapy for patients with uncontrolled seizures who have Dravet syndrome and one randomized, double-blind placebo-controlled clinical trial of Fintepla for patients with LGS. In September 2017, we announced positive top line data from two identical clinical trials, Study 1501 in the United States and Canada and Study 1502 in Europe and Australia, which we collectively refer to as Study 1. Study 1 evaluated two dose levels of Fintepla (0.2 mg/kg/day and 0.8 mg/kg/day, up to a maximum daily dose of 30 mg) and met its primary efficacy endpoint of reducing convulsive seizures experienced by patients after treatment of Fintepla compared to treatment with a placebo. In December 2017, we reported additional data from Study 1. Study 1504 is evaluating a single dose a Fintepla (0.5 mg/kg/day, up to a maximum daily dose of 20 mg, which has been shown to be equivalent to 0.8mg/kg/day in patients not taking stiripentol), in patients taking stiripentol, valproate and/or clobazam. Study 1504 is a multi-national study commenced in the third quarter 2016 and is being conducted in western Europe and North America. We reported top-line results from the trial in July 2018. Notwithstanding the aforementioned plans, we may not be able to identify and enroll sufficient number of study participants and interpret results on these time frames, and consequently the completion of our ongoing Phase 3 clinical trials may be delayed.

In July 2019, we announced that we had completed enrollment in our Phase 3 clinical trial of Fintepla as an adjunctive treatment of seizures associated with LGS, Study 1601. Study 1601 is divided in two parts. Part 1 is a double-blind, placebo-controlled investigation to assess the safety, tolerability and efficacy of Fintepla, low-dose fenfluramine, when added to a patient’s current anti-epileptic therapy. The trial will include two dose levels of Fintepla (0.2 mg/kg/day and 0.8 mg/kg/day, up to a maximum daily dose of 30 mg), as well 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 patients (75 per treatment arm) in the trial. The primary endpoint of the clinical trial is change in the number of seizures that result in drops between baseline and the combined titration and maintenance periods at the 0.8 mg/kg/day dose. Part 2 of Study 1601 will be a 12-month open-label extension to evaluate the long-term safety, tolerability and effectiveness of Fintepla.

The completion of clinical trials can be delayed for a number of reasons, including delays related to:

•obtaining regulatory authorization to commence a clinical trial;

•reaching agreement on acceptable terms with CROs, clinical investigators and trial sites;

•manufacturing or obtaining sufficient quantities of a product candidate and placebo for use in clinical trials;

•obtaining institutional review board (IRB) approval to initiate and conduct a clinical trial at a prospective site;

•identifying, recruiting and training suitable clinical investigators;

•identifying, recruiting and enrolling subjects to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the treatment of similar indications;

•retaining patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy, personal issues, or for any other reason they choose, or who are lost to further follow-up;

•uncertainty regarding proper dosing; and

•scheduling conflicts with participating clinicians and clinical institutions.

In addition, if a significant number of patients fail to stay enrolled in any of our current or future clinical trials of Fintepla and such failure is not adequately accounted for in our trial design and enrollment assumptions, our clinical development program could be delayed. Clinical trials may also be delayed or repeated as a result of ambiguous or negative interim results or unforeseen complications in testing. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:

•inability to design appropriate clinical trial protocols;

•inability by us, our employees, our CROs or their employees to conduct the clinical trial in accordance with all applicable FDA, drug enforcement administration (DEA) or other regulatory requirements or our clinical protocols;

•inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

•discovery of serious or unexpected toxicities or side effects experienced by study participants or other unforeseen safety issues;

•lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties;

•lack of effectiveness of any product candidate during clinical trials;

•slower than expected rates of subject recruitment and enrollment rates in clinical trials;

•inability of our CROs or other third-party contractors to comply with all contractual requirements or to perform their services in a timely or acceptable manner;

•inability or unwillingness of medical investigators to follow our clinical protocols; and

•unfavorable results from on-going clinical trials and pre-clinical studies.

Additionally, changes in applicable regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to the FDA and IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, any of our clinical trials, the commercial prospects for Fintepla, MT1621 and any future product candidates may be harmed, which may have a material adverse effect on our business, results of operations, financial condition and prospects.

Breakthrough therapy designation and access to the PRIME scheme for MT1621 may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that MT1621 or any of our product candidates will receive marketing approval.

In February ~~2018,~~2019, the FDA granted breakthrough therapy designation for ~~Fintepla~~MT1621 in the United States for the treatment of Dravet syndrome. The FDA has subsequently rescinded this breakthrough therapy designation because there are now two approved therapies for the disease and, therefore, the administrative criteria for designation are no longer met.TK2d. A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. For drugs that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA are also eligible for accelerated approval. Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. We cannot be sure that any evaluation we may make of our product candidates as qualifying for breakthrough therapy designation will meet the FDA’s expectations. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even ~~if one or more of our product candidates qualify~~though MT1621 qualifies as a breakthrough ~~therapies,~~therapy, the FDA may later decide that ~~such~~MT1621, or any other product ~~candidates~~that qualifies as a breakthrough therapy, no longer meet the conditions for qualification, ~~such as the case with Fintepla in the United States for the treatment of Dravet syndrome,~~ or decide that the time period for FDA review or approval will not be shortened. ~~While~~For example, the FDA rescinded breakthrough therapy designation for Fintepla for Dravet syndrome because there are now two approved therapies for Dravet syndrome and, therefore, the administrative criteria for designation are no longer met.

The EMA has established the PRIME scheme to expedite the development and review of product candidates that show a potential to address to a significant extent an unmet medical need, based on early clinical data. In November 2018, MT1621 for the treatment of patients with TK2d was admitted to the PRIME scheme of the EMA. Even though we have access to PRIME for MT1621, this may not result in a materially faster development process, review or approval compared to conventional EMA procedures. Further, obtaining access to PRIME does not assure or increase the likelihood of EMA’s grant of a marketing authorization (MA).

We face intense competition, and if our competitors market and/or develop treatments for any of our product candidates’ indications that are marketed more effectively, approved more quickly than our product candidates or demonstrated to be safer or more effective than our products, our commercial opportunities will be reduced or eliminated.

The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary therapeutics. We face competition from a number of sources, some of which may target the same indications as our product candidates, including large pharmaceutical companies, smaller pharmaceutical companies, biotechnology companies, academic institutions, government agencies and private and public research institutions, many of which have greater financial resources, sales and marketing capabilities, including larger, well-established sales forces, manufacturing capabilities, experience in obtaining regulatory approvals for product candidates and other resources than we do.

If approved for the chronic treatment of Dravet syndrome, Fintepla may compete against other products and product candidates. In June 2018, the FDA approved the first treatment of seizures associated with Dravet syndrome, as well as LGS, GW Pharmaceuticals’ Epidiolex® (cannabidiol). Epidiolex is a liquid drug formulation of plant-derived purified cannabidiol (CBD), which is a chemical component of the Cannabis sativa plant, more commonly known as marijuana. In August 2018, the FDA approved a second treatment, Biocodex's Diacomit® (stiripentol), for the treatment of seizures associated with Dravet syndrome in patients who are also taking clobazam. Stiripentol is approved in Europe, Canada, Australia and Japan for the treatment of Dravet syndrome when used in conjunction with valproate and/or clobazam. GW Pharmaceuticals plc has filed a MAA in Europe for CBD in Dravet syndrome and LGS. Insys Therapeutics (Insys) is developing a synthetic CBD for the treatment of pediatric epilepsies, including Dravet syndrome. Insys previously advanced its synthetic CBD program, which has received orphan drug designation and Fast Track status by the FDA for use of CBD as a potential treatment for Dravet syndrome, into a Phase 1/2 clinical trial. Insys initiated Phase 2 development of its CBD product candidate for childhood absence epilepsy in December of 2017 and initiated a Phase 3 trial in infantile spasms, a pediatric epilepsy syndrome, in the first quarter of 2018. Ovid Therapeutics, Inc. is currently evaluating its product candidate OV935, a first-in-class inhibitor of the enzyme cholesterol 24-hydroxylase, for the potential treatment of adult and pediatric patients with Dravet syndrome and LGS in Phase 2 clinical trials.

We expect Fintepla, if approved, to compete on the basis of, among other things, product efficacy and safety, time to market, price, coverage and reimbursement by third-party payors, extent of adverse side effects and convenience of treatment procedures. One or more of our competitors may develop other products that compete with ours, obtain necessary approvals for such products from the FDA, or other agencies, if required, more rapidly than we do or develop alternative products or therapies that are safer, more effective and/or more cost effective than any products developed by us. The competition that we will encounter with respect to any of our product candidates that receive the requisite regulatory approval and classification and are marketed will have an effect on our product prices, market share and results of operations. We may not be able to successfully differentiate any products that we are able to market from those of our competitors, successfully develop or introduce new products that are less costly or offer better results than those of our competitors or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors. In addition, competitors may seek to develop alternative formulations of our product candidates and/or alternative drug delivery technologies that address our targeted indications.

The commercial opportunity for our product candidates could be significantly harmed if competitors are able to develop alternative formulations and/or drug delivery technologies outside the scope of our products. Compared to us, many of our potential competitors have substantially greater:

•capital resources;

•research and development resources, expertise and experience, including personnel and technology;

•drug development, clinical trial and regulatory resources and experience;

•sales and marketing resources and experience;

•manufacturing and distribution resources and experience;

•name recognition; and

•resources, experience and expertise in prosecution and enforcement of intellectual property rights.

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patent protection or other intellectual property rights that limit or block us from developing or commercializing our product candidates. Our competitors may also develop drugs that are more effective, more useful, better tolerated, subject to fewer or less severe side effects, more widely prescribed or accepted or less costly than ours and may also be more successful than we are in manufacturing and marketing their products. If we are unable to compete effectively with the marketed therapeutics of our competitors or if such competitors are successful in developing products that effectively compete with any of our product candidates that are approved, our business, results of operations, financial condition and prospects may be materially adversely affected.

If Fintepla or MT1621 receive regulatory approval but do not achieve broad market acceptance or coverage by third-party payors, the revenues that we generate will be limited.

The commercial success of Fintepla or MT1621, if approved by the FDA or other regulatory authorities, will depend upon the acceptance of these products by physicians, patients, healthcare payors and the medical community. Adequate coverage and reimbursement of our approved product by third-party payors will also be critical for commercial success. The degree of market acceptance of any product candidates for which we may receive regulatory approval will depend on a number of factors, including:

•acceptance by physicians and patients of the product as a safe and effective treatment;

•any negative publicity or political action related to our or our competitors’ products;

•the relative convenience and ease of administration;

•the prevalence and severity of adverse side effects;

•demonstration to authorities of the pharmacoeconomic benefits;

•demonstration to authorities of the improvement in burden of illness;

•limitations or warnings contained in a product’s FDA-approved or EMA-approved labeling;

•the clinical indications for which a product is approved;

•availability and perceived advantages of alternative treatments;

•the effectiveness of our or any current or future collaborators’ sales, marketing and distribution strategies;

•pricing and cost effectiveness;

•our ability to obtain sufficient U.S. third-party payor coverage and reimbursement;

•our ability to obtain European countries’ pricing authorities’ coverage and reimbursement; and

•the willingness of patients to pay out of pocket in the absence of third-party payor coverage.

Our efforts to educate the medical community, U.S. third-party payors and European countries’ health authorities on the benefits of Fintepla or any of our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities and gain broad market acceptance may require significant resources and may never be successful. If our products do not achieve an adequate level of acceptance by physicians, third-party payors, pharmacists, patients, and the medical community, we may not generate sufficient revenue from these products to become or remain profitable.

We have a history of significant net losses and negative cash flow from operations. We cannot predict if or when we will become profitable and anticipate that our net losses and negative cash flow from operations will continue for at least the next year.

We were organized in 2006, began commercialization of Sumavel DosePro in January 2010 and launched the commercial sale of Zohydro ER in the United States in March 2014. We sold our Sumavel DosePro business in April 2014 and sold our Zohydro ER business in April 2015. Our business and prospects must be considered in light of the risks and uncertainties frequently encountered by pharmaceutical companies developing and commercializing new products.

Excluding gains from two discrete business divestitures, we have incurred significant net losses from our operations since the inception and have an accumulated deficit of $1.1 billion as of September 30, 2019. During the nine months ended September 30, 2019, net cash used in operating activities was $76.9 million. We expect to continue to incur operating losses and negative cash flow from operating activities for at least the next year primarily as a result of costs incurred related to the

development and commercialization of Fintepla and MT1621. Additionally, in the event that Fintepla or MT1621 is approved in the United States or the EU, we will owe milestone payments related to our 2014 acquisition of development and commercialization rights to Fintepla and our 2019 acquisition of development and commercialization rights to MT1621, respectively. Our ability to generate revenues from Fintepla or MT1621 will depend on a number of factors including our ability to successfully complete clinical trials, obtain necessary regulatory approvals and negotiate arrangements with third parties to help finance the development of, and market and distribute, any product candidates that receive regulatory approval. In addition, we are subject to the risk that the marketplace will not accept our products.

Because of the numerous risks and uncertainties associated with our commercialization and product development efforts, we are unable to predict the extent of our future losses or when or if we will become profitable, if at all. If we do not ~~expect~~generate significant sales from Fintepla or MT1621 or any future product candidate that may receive regulatory approval, there would likely be a material adverse effect on our business, results of operations, financial condition and prospects which could result in our inability to continue operations.

We rely on third parties to conduct our pre-clinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We have agreements with third-party CROs to conduct our ongoing Phase 3 program for Fintepla and our clinical development program of MT1621. We rely heavily on these parties for the ~~rescission~~execution of ~~breakthrough therapy designation~~our clinical trials and pre-clinical studies, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and regulatory requirements. We and our CROs are required to ~~limit~~comply with good clinical practice (GCP) requirements for clinical studies of our product candidates, and good laboratory practice (GLP) requirements for certain pre-clinical studies. The FDA enforces these regulations through periodic inspections of trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable regulations, the ~~potential for receiving priority review status for~~data generated in our ~~planned resubmitted NDA for Fintepla,~~pre-clinical studies and clinical trials may be deemed unreliable and the FDA may ~~not grant priority review status~~require us to perform additional pre-clinical studies or clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA and similar foreign regulators will determine that any of our clinical trials comply or complied with GCP regulations. In addition, our clinical trials must be conducted with product produced under current good manufacturing practice (cGMP), regulations, and require a large number of test subjects. Our inability to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If any of our relationships with these third-party CROs terminates, we may not be able to enter into arrangements with alternative CROs on commercially reasonable terms, or at all. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate additional revenues could be delayed.

Switching or adding additional CROs can involve substantial cost and require extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a ~~longer review period~~material adverse impact on our business, results of operations, financial condition and prospects.

We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.

From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of products, product candidates or technologies. For example, in September 2019, we completed the acquisition of Modis, which owned worldwide development and commercialization rights to MT1621. Additional potential transactions that we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:

•exposure to unknown liabilities;

•disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates or technologies;

•incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;

•significant or higher than expected acquisition and integration costs;

•write-downs of assets or goodwill or impairment charges;

•increased amortization expenses;

•difficulty and cost in combining the ~~NDA.~~operations and personnel of any acquired businesses with our operations and personnel;

•impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management, personnel and ownership; and

•inability to retain key employees of any acquired businesses.

Accordingly, although there can be no assurance that we will undertake or successfully complete any additional transactions of the nature described above, any additional transactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and prospects.

We are dependent on numerous third parties in our manufacturing supply chain, all of which are currently single source suppliers, for the clinical supply of Fintepla and MT1621, and if we experience problems with any of these suppliers, the development of Fintepla or MT1621 could be delayed.

We outsource all manufacturing and packaging of the clinical trial materials for Fintepla and MT1621 to third parties. For example, in February 2019, we entered into a master supply agreement with Aptuit (Oxford) Limited, an Evotec company (Aptuit), pursuant to which Aptuit will be our commercial manufacturer and supplier of the fenfluramine active pharmaceutical ingredient (API). In addition, in July 2019 we entered into supply agreement with ~~Penn Pharmaceutical Services Limited, trading as~~ PCI Pharma ~~Services (PCI Pharma),~~ pursuant to which PCI Pharma will be our commercial manufacturer and supplier for Fintepla. Fintepla, if approved, would require us to complete process validation under FDA regulations, for which there can be no assurance of success. We may never be able to establish additional sources of supply for Fintepla.

Suppliers, including Aptuit and PCI Pharma, are subject to regulatory requirements covering, among other things, testing, quality control and record keeping relating to our product candidate, and are subject to ongoing inspections by regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in long delays and interruptions, and increase our costs, while we seek to secure another supplier who meets all regulatory requirements, including obtaining regulatory approval to utilize the new supplier. Accordingly, the loss of any of our current suppliers could have a material adverse effect on our business, results of operations, financial condition and prospects.

Reliance on suppliers entails risks to which we would not be subject if we manufactured our product candidate ourselves, including:

•reliance on the third parties for regulatory compliance and quality assurance;

•the possible breach of the manufacturing agreements by the third parties because of factors beyond our control or the insolvency of any of these third parties or other financial difficulties, labor unrest, natural disasters or other factors adversely affecting their ability to conduct their business; and

•the possibility of termination or non-renewal of the agreements by the third parties, at a time that is costly or inconvenient for us, because of our breach of the manufacturing agreement or based on their own business priorities.

If our contract manufacturers or suppliers are unable to provide the quantities of our product candidate required for our clinical trials and, if approved, for commercial sale, on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement manufacturers or suppliers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality, and on a timely basis, we would likely be unable to meet demand for our products and would have to delay or terminate our pre-clinical or clinical trials, and we would lose potential revenue. It may also take a significant period of time to establish an alternative source of supply for our products, product candidates and components and to have any such new source approved by the FDA or any applicable foreign regulatory authorities. Furthermore, any of the above factors could cause the delay or suspension of initiation or completion of clinical trials, regulatory submissions or

required approvals of our product candidates, cause us to incur higher costs and could prevent us from commercializing our product candidates successfully.

If we are unable to attract and retain key personnel, we may not be able to manage our business effectively or develop our product candidates or commercialize our products.

Our success depends on our continued ability to attract, retain and motivate highly qualified management and key clinical development, regulatory, sales and marketing and other personnel. As of September 30, 2019, we employed 136 full-time employees. Of the full-time employees, 72 were engaged in product development, quality assurance and clinical and regulatory activities, 43 were engaged in general and administrative activities (including business and corporate development) and 21 were engaged in sales and marketing activities. If we are not able to retain our employee base, we may not be able to effectively manage our business or be successful in commercializing our products.

We are highly dependent on the development, regulatory, commercial and financial expertise of our senior management team. We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, especially in the San Francisco Bay Area where we operate. If we are not able to attract, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development and commercialization objectives, our ability to raise additional capital, our ability to implement our business strategy and our ability to maintain effective internal controls for financial reporting and disclosure controls and procedures as required by the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act). The loss of the services of any members of our senior management team, especially our Chief Executive Officer and President, Stephen J. Farr, Ph.D., could delay or prevent the development and commercialization of Fintepla and our product candidates. Further, if we lose any members of our senior management team, we may not be able to find suitable replacements, and our business may be harmed as a result.

Although we have employment agreements with each of our executive officers, these agreements are terminable by them at will at any time with or without notice and, therefore, do not provide any assurance that we will be able to retain their services. We do not maintain “key man” insurance policies on the lives of our senior management team or the lives of any of our other employees. In addition, we have clinical advisors who assist us in formulating our clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have arrangements with other companies to assist in the development of products that may compete with ours. If we are unable to attract and retain key personnel, our business, results of operations, financial condition and prospects will be adversely affected.

We may never receive regulatory approval or commercialize our product candidate outside of the United States.

We intend to market Fintepla and MT1621 outside of the United States, if approved. For example, Fintepla has received orphan drug designation in the EU and MT1621 has access to the PRIME scheme in the European Union.In addition, we completed a Phase 3 clinical trial, which included sites in Europe and Australia, in 2017, and submitted a MAA to the EMA for Fintepla for the treatment of seizures associated with Dravet syndrome in February 2019. The EMA has accepted the MAA and initiated its review. In order to market our products outside of the United States, we, or any potential partner, must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution of our products. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed in these “Risk Factors” and those disclosed in Part I, Item 1A of our 2018 Annual Report on Form 10-K regarding FDA approval in the United States, as well as other risks.

For example, in the European Economic Area (EEA), which comprised of 28 EU member states plus Iceland, Liechtenstein, and Norway, medicinal products can only be commercialized after obtaining a MA. There are two types of MAs:

•The Community MA, which is issued by the European Commission through the Centralized · Procedure, based on the opinion of the Committee for Medicinal Products for Human Use (CHMP) of the EMA and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, and medicines that contain a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU. Under the Centralized Procedure the maximum timeframe for the evaluation of a MAA is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the CHMP). Accelerated evaluation might be granted by the CHMP in exceptional cases, when the authorization of a medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation. Under the accelerated procedure the standard 210-day review period is reduced to 150 days.

•National MAs, which are issued by the competent authorities of the member states of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a member state of the EEA, this National MA can be recognized in other member states through the Mutual Recognition Procedure. If the product has not received a National MA in any member state at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure.

In the EEA, upon receiving marketing authorization, new chemical entities generally receive eight years of data exclusivity and an additional two years of market exclusivity. If granted, data exclusivity prevents regulatory authorities in the EU from referencing the innovator’s data to assess a generic application. During the additional two-year period of market exclusivity, a generic marketing authorization can be submitted, and the innovator’s data may be referenced, but no generic product can be marketed until the expiration of the market exclusivity. However, there is no guarantee that a product will be considered by the EU’s regulatory authorities to be a new chemical entity and qualify for data exclusivity.

In the EEA, we have taken advantage of the hybrid application pathway of the EU Centralized Procedure, which is similar to the FDA’s 505(b)(2) pathway. Hybrid applications may rely in part on the results of pre-clinical tests and clinical trials contained in the authorization dossier of the reference product, but must be supplemented with additional data. In territories where data is not freely available, we or our partners may not have the ability to commercialize our products without negotiating rights from third parties to refer to their clinical data in our regulatory applications, which could require the expenditure of significant additional funds. We, or any potential partner, may be unable to obtain rights to the necessary clinical data and may be required to develop our own proprietary safety effectiveness dossiers. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.

Inability to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed in these “Risk Factors” and those disclosed in Part I, Item 1A of our 2018 Annual Report on Form 10-K regarding FDA approval in the United States. As described above, such effects include the risks that our product candidates may not be approved at all or for all requested indications, which could limit the uses of our product candidates and have an adverse effect on their commercial potential or require costly, post-marketing studies. In addition, we, or any potential partner, may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution if we are unable to comply with applicable foreign regulatory requirements.

Changes in accounting standards and their interpretations could adversely affect our operating results.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the SEC, and various other bodies that promulgate and interpret appropriate accounting principles. These principles and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

Risks Related to Our Financial Position and Capital Requirements

We have never generated net income from operations or positive cash flow from operations and are dependent upon external sources of financing to fund our business and development.

We launched our first approved product, Sumavel DosePro, in January 2010 and subsequently sold the business in April 2014. We launched our approved product, Zohydro ER, in March 2014 and subsequently sold the business in April 2015. In September 2017, our remaining revenue-generating agreement to manufacture and supply Sumavel DosePro to Endo International plc (Endo) was terminated. We have financed our operations primarily through the proceeds from the issuance of equity securities, the sale of the Sumavel DosePro and Zohydro ER businesses, and debt, and have incurred negative cash flow from operations in each year since our inception. For the years ended December 31, 2017 and 2018, we incurred net losses of $126.8 million and $123.9 million, $126.8 million, respectively, and net losses of $363.4 million during the nine months ended

September 30, 2019. Net cash used in operating activities was $75.9 million in 2017, $111.7 million in 2018, and $76.9 million during the nine months ended September 30, 2019. As of September 30, 2019, we had an accumulated deficit of $1.1 billion and $696.0 million, respectively.The losses and negative cash flows from operations have had a material adverse effect on our stockholders’ equity and working capital.

We expect to continue to incur net losses and negative cash flow from operating activities for at least the next year to conduct clinical trials to support regulatory approval of our product candidates. As a result, we will remain dependent upon external sources of financing to fund our business and the development and commercialization of any approved products and product candidates. To the extent we need to raise additional capital in the future, we cannot ensure that debt or equity financing will be available to us in amounts, at times or on terms that will be acceptable to us, or at all. Any shortfall in our cash resources could require that we delay or abandon certain development and commercialization activities and could otherwise have a material adverse effect on our business, results of operations, financial condition and prospects.

Risks Related to Government Regulation

Fintepla, MT1621 and any of our future product candidates are subject to extensive regulation, and we cannot give any assurance that it will receive regulatory approval or be successfully commercialized.

We currently are developing Fintepla for the treatment of seizures associated with Dravet syndrome and LGS and MT1621 for the treatment of TK2 deficiency.The research, testing, manufacturing, labeling, approval, sale, marketing, distribution and promotion of drug products, among other things, are subject to extensive regulation by the FDA and other regulatory authorities in the United States. We are not permitted to market Fintepla or any of our product candidates in the United States unless and until we receive regulatory approval from the FDA. We cannot provide any assurance that we will obtain regulatory approval for any of our product candidates, or that any such product candidates will be successfully commercialized.

Under the policies agreed to by the FDA under the Prescription Drug User Fee Act (PDUFA), the FDA is subject to a two-tiered system of review times for new drugs: standard review and priority review. For drugs that do not contain a new molecular entity, such as Fintepla, a standard review means the FDA has a goal to complete its review of the NDA and respond to the applicant within ten months from the date of receipt of an NDA. The review process and the PDUFA target action date may be extended if the FDA requests or the NDA sponsor otherwise provides additional information or clarification regarding information already provided in the submission. The FDA’s review goals are subject to change, and the duration of the FDA’s review may depend on the number and type of other NDAs that are submitted to the FDA around the same time period.

The FDA may also refer applications for novel products or products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. Although the FDA is not bound by the recommendation of an advisory committee, the matters discussed at the advisory committee meeting, and in particular any concerns regarding safety, could limit our ability to successfully commercialize our product candidates subject to advisory committee review.

As part of its review of an NDA, the FDA may inspect the facility or facilities where the drug is manufactured. If the FDA’s evaluations of the NDA and the clinical and manufacturing procedures and facilities are favorable, the FDA will issue an action letter, which will be either an approval letter, authorizing commercial marketing of the drug for a specified indication, or a Complete Response letter containing the conditions that must be met in order to secure approval of the NDA. These conditions may include deficiencies identified in connection with the FDA’s evaluation of the NDA submission or the clinical and manufacturing procedures and facilities. Until any such conditions or deficiencies have been resolved, the FDA may refuse to approve the NDA. If and when those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter. The FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. For example:

•the FDA may not deem a product candidate safe and effective;

•the FDA may not find the data from pre-clinical studies and clinical trials sufficient to support approval;

•the FDA may require additional pre-clinical studies or clinical trials;

•the FDA may not approve of our third-party manufacturers’ processes and facilities; or

•the FDA may change its approval policies or adopt new regulations.

Our lead product candidate Fintepla and any of our other product candidates may not achieve their specified endpoints in clinical trials. Further, Fintepla and our other product candidates may not be approved even if they achieve their specified

endpoints in clinical trials. The FDA may disagree with our trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials. The FDA may also approve a product candidate for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post-approval clinical trials. In addition, the FDA may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of our product candidates. Approval may also be contingent on a risk evaluation and mitigation strategy (REMS) program, which can limit the labeling and distribution of a drug product.

The safety and effectiveness of Fintepla has been evaluated in a single, continuing, long-term, open-label, study in patients with Dravet syndrome in Belgium. We initiated a Phase 3 clinical trial for Fintepla as an adjunctive treatment of seizures in children with Dravet syndrome in North America in January 2016 (Study 1501) and in Europe and Australia in June 2016 (Study 1502). In September 2017, we announced positive top-line results from Study 1501 and Study 1502 via a prospective merged study analysis approach whereby top-line results from the first approximately 120 subjects randomized into either Study 1501 or 1502 would have their study results analyzed and be reported initially as “Study 1”. In September 2016, we initiated Cohort 1 of Study 1504 that investigated the pharmacokinetic profile and safety of Fintepla when co-administered with the stiripentol regimen (stiripentol, valproate and/or clobazam). Based on the results of the Cohort 1 pharmacokinetic and safety portion of the trial, in February 2017 we initiated the Cohort 2 safety and efficacy portion of Study 1504 at multiple sites located in France, the Netherlands, United States, Canada, Germany, the United Kingdom and Spain. In July 2018, we reported positive top-line results from Study 1504, which are consistent with those reported in Study 1.

If we are unable to obtain regulatory approval for Fintepla or any of our product candidates on the timeline we anticipate, we may not be able to execute our business strategy effectively and our ability to generate revenues may be limited.

We may not be able to maintain orphan drug designation or obtain or maintain orphan drug exclusivity for Fintepla or MT1621.

We have obtained orphan drug designation for Fintepla in the United States and Europe for both the treatment of Dravet syndrome and LGS.We have also received orphan drug designation for MT1621 for the treatment of TK2 deficiency. In the United States, under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition affecting fewer than 200,000 individuals in the United States or, if it affects more than 200,000 people, there is no reasonable expectation that costs of research and development of the drug for the indication can be recovered by sales in the United States. In the EU, a drug may receive orphan designation if the prevalence of the condition in the EU is of no more than five in 10,000 or it if is unlikely that marketing of the medicine would generate sufficient returns to justify the investment needed for its development. Orphan drug designation in the United States confers certain benefits, including tax incentives and waiver of the applicable application fee upon submission of the product for approval in the rare disease or condition. In the EU, sponsors who obtain orphan designation benefit from a number of incentives, including protocol assistance and fee reductions.

If a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is eligible for a period of marketing exclusivity, which precludes the FDA or EMA from approving another marketing application for the same drug to treat the same rare disease or condition for that time period, except in limited circumstances. The applicable period is seven years in the United States and ten years in Europe. Also, we are only able to attain orphan drug status in Europe if we are able to demonstrate to EMA that Fintepla or MT1621 has incremental benefit over any other approved product for that orphan disorder. In July 2018, we reported positive top-line results from Study 1504 and in February 2019, we submitted a MAA to the EMA for Fintepla for the treatment of seizures associated with Dravet syndrome. The EMA has accepted the MAA and initiated its review. Currently in Europe, only stiripentol has orphan drug status, which has been approved for treatment of seizures in Dravet syndrome, but others could be approved.

The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

Orphan drug exclusivity may not effectively protect the product from competition in the United States because different drugs can be approved for the same condition. Even after an orphan drug is approved and granted exclusivity, the FDA and EMA can subsequently approve the same or a similar drug for the same condition during the exclusivity period if the FDA or the EMA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process.

Fintepla or MT1621 may cause undesirable side effects or have other unexpected properties that could delay or prevent approval orresult in post-approval regulatory action.

If we or others identify undesirable side effects, or other previously unknown problems, caused by Fintepla, MT1621 or any of our future product candidates with the same or related active ingredients, during development or after obtaining U.S. regulatory approval, a number of potentially significant negative consequences could result, including:

•regulatory authorities may not permit us to initiate our studies or could put them on hold;

•regulatory authorities may not approve, or may withdraw their approval of the product;

•regulatory authorities may require us to recall the product;

•regulatory authorities may add new limitations for distribution and marketing of the product;

•regulatory authorities may require the addition of warnings in the product label or narrowing of the indication in the product label;

•we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients;

•we may be required to change the way the product is administered or modify the product in some other way;

•we may be required to implement a REMS program;

•the FDA may require us to conduct additional clinical trials or costly post-marketing testing and surveillance to monitor the safety or efficacy of the product;

•we could be sued and held liable for harm caused to patients; and

•our reputation may suffer.

Any of the above events resulting from undesirable side effects or other previously unknown problems could prevent us from achieving or maintaining market acceptance of the affected product, if approved, and could substantially increase the costs of commercializing our product candidates.

Risks Related to Intellectual Property

Our success depends in part on our ability to protect our intellectual property. It is difficult and costly to protect our proprietary rights and technology, and we may not be able to ensure their protection.

Our commercial success depends in large part on obtaining and maintaining patent, trademark and trade secret protection of our product candidates, their respective components, formulations, methods used to manufacture them and methods of treatment, as well as successfully defending these patents against third-party challenges. Our ability to stop unauthorized third parties from making, using, selling, offering to sell or importing our product candidates is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.

We in-licensed certain data from a continuing, long-term, open-label study in 15 Dravet syndrome patients, as well as certain intellectual property related to fenfluramine for the treatment of Dravet syndrome from the Universities of Antwerp and Leuven in Belgium (the Universities).

Prior to receiving rights to four U.S. patents in 2017, we did not own or control any issued patents covering Fintepla or its use. There is no guarantee that any of our pending applications will issue as patents. The patents covering the API in Fintepla have expired and therefore it is not subject to patent protection. With respect to our MT1621 product candidate, we have certain patent rights that we obtained through our acquisition of Modis. In September 2016, Modis entered into a license agreement (the Columbia Agreement), with Columbia, under which Modis was granted an exclusive worldwide license and sublicense to certain intellectual property rights owned or controlled by Columbia to develop and commercialize MT1621 and certain backup compounds for any application or purpose. These licensed patent rights include patents owned by Columbia and patents jointly owned by Columbia and Vall d’Hebron Research Institute (VHIR). VHIR delegated to Columbia the rights to enter into the Columbia Agreement on VHIR’s behalf.The patent family owned by Columbia is directed to the use of MT1621 to treat TK2d and includes a granted U.S. patent and a pending U.S. patent application. The patent family jointly owned by Columbia and VHIR is directed to the use of MT1621 to treat TK2d and includes an issued European patent and pending applications in the

United States, Europe, Australia, Canada, China, Japan, Korea, Mexico and Russia. There are no patents covering the API in MT1621.

The initial applications covering MT1621 or the methods of treatment using Fintepla were licensed by us and not written by our attorneys. Neither we nor our licensors had control over the drafting and initial prosecution of these applications. Further, the counsel previously handling the Fintepla and MT1621 matters might not have given the same attention to the drafting and prosecution to these applications as we would have if we had been the owners and originators of the applications and had control over the drafting and prosecution. In addition, the former counsel handling these matters may not have been completely familiar with U.S. patent law or the patent law in various countries, possibly resulting in inadequate disclosure, improperly claiming inventions and/or filing of applications at times which do not meet appropriate priority requirements. The named inventors on the pending applications and others involved in the protection of the intellectual property related to Fintepla and MT1621 did not and may still not have sufficient knowledge relating to preferred procedures and the legal requirements related to the protection of intellectual property. They published papers which adversely affected our rights. Although they have been advised with respect to procedures going forward, we cannot directly control their actions. All of these factors and others could result in the inability to obtain the issuance of additional applications in the United States or elsewhere in the world.Even if additional patents issue, such issued patents may later be found invalid or unenforceable or may be modified or revoked in proceedings instituted by third parties before various patent offices or in courts.

The patent positions of pharmaceutical, biopharmaceutical and medical device companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in patents in these fields has emerged to date in the United States. There have been recent changes regarding how patent laws are interpreted, and both the U.S. Patent and Trademark Office (USPTO), and Congress have recently made significant changes to the patent system. There have been three U.S. Supreme Court decisions that now show a trend of the Supreme Court which is distinctly negative on patents. The trend of these decisions along with resulting changes in patentability requirements being implemented by the USPTO could make it increasingly difficult for us to obtain and maintain patents on our products. We cannot accurately predict future changes in the interpretation of patent laws or changes to patent laws which might be enacted into law. Those changes may materially affect our patents, our ability to obtain patents and/or the patents and applications of our collaborators and licensors. The patent situation in these fields outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we own or to which we have a license or third-party patents.

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

•others may be able to make or use compounds that are the same or similar to the pharmaceutical compounds used in our product candidates but that are not covered by the claims of our patents or our in-licensed patents;

•the APIs in Fintepla are, or may soon become, commercially available in generic drug products, and no patent protection will be available without regard to formulation or method of use;

•the APIs in MT1621 are well-known and available commercially from many sources, and no patent protection claiming the APIs as a composition of matter will be available;

•we or our licensors, as the case may be, may not be able to detect infringement against our patents or in-licensed patents, which may be especially difficult for manufacturing processes or formulation patents;

•we or our licensors, as the case may be, might not have been the first to make the inventions covered by our owned or in-licensed issued patents or pending patent applications;

•we or our licensors, as the case may be, might not have been the first to file patent applications for these inventions;

•others may independently develop similar or alternative technologies or duplicate any of our technologies;

•it is possible that our pending patent applications will not result in issued patents;

•it is possible that our owned or in-licensed U.S. patents are not Orange-Book eligible;

•it is possible that there are dominating patents to Fintepla and MT1621 of which we are not aware;

•it is possible that there are prior public disclosures that could invalidate our or our licensors’ patents, as the case may be, or parts of our or their patents;

•it is possible that others may circumvent our owned or in-licensed patents;

•it is possible that there are unpublished applications or patent applications maintained in secrecy that may later issue with claims covering our products or technology similar to ours;

•the claims of our owned or in-licensed issued patents or patent applications, if and when issued, may not cover our system or products or our system of product candidates;

•our owned or in-licensed issued patents may not provide us with any competitive advantages, or may be narrowed in scope, be held invalid or unenforceable as a result of legal administrative challenges by third parties;

•we may not develop additional proprietary technologies for which we can obtain patent protection; or

•the patents of others may have an adverse effect on our business.

We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect, and we have limited control over the protection of trade secrets used by our licensors, collaborators and suppliers. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, state laws in the Unites States vary, and their courts as well as courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. If our confidential or proprietary information is divulged to or acquired by third parties, including our competitors, our competitive position in the marketplace will be harmed and our ability to successfully penetrate our target markets could be severely compromised.

If any of our owned or in-licensed patents are found to be invalid or unenforceable, or if we are otherwise unable to adequately protect our rights, it could have a material adverse impact on our business and our ability to commercialize or license our technology and products.

If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

Our existing license with the Universities and Columbia impose various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate the license, in which event we would not be able to develop or market the affected products. If we lose such license rights, our business, results of operations, financial condition and prospects may be materially adversely affected. We may enter into additional licenses in the future and if we fail to comply with obligations under those agreements, we could suffer similar consequences.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidate and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields relating to Fintepla and MT1621. As the medical device, biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that others may assert that our products or product candidates infringe the patent rights of others. Moreover, it is not always clear to industry participants, including us, which patents cover various types of medical devices, drugs, products or their methods of use. Thus, because of the large number of patents issued and patent applications filed in our fields, there may be a risk that third parties may allege they have patent rights encompassing our products, product candidates, technology or methods.

In addition, there may be issued patents of third parties of which we are currently unaware, that are infringed or are alleged to be infringed by our product candidate or proprietary technologies. Because some patent applications in the United States may be maintained in secrecy until the patents are issued, patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our owned and in-licensed issued patents or our pending applications, or that we or, if applicable, a licensor were the first to invent

the technology. Our competitors may have filed, and may in the future file, patent applications covering our product candidates or technology similar to ours. Any such patent application may have priority over our owned and in-licensed patent applications or patents, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to those owned or in-licensed to us, we or, in the case of in-licensed technology, the licensor may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such proceedings may be decided against us if the other party had independently arrived at the same or similar invention prior to our own or, if applicable, our licensor’s invention, resulting in a loss of our U.S. patent position with respect to such inventions. In addition, if another party has reason to assert a substantial new question of patentability against any of our claims in our owned and in-licensed U.S. patents, the third party can request that the USPTO reexamine the patent claims, which may result in a loss of scope of some claims or a loss of the entire patent. In addition to potential infringement claims, interference and reexamination proceedings, we may become a party to patent opposition proceedings in the European Patent Office, Australian Patent Office or other jurisdictions where either our patents are challenged, or we are challenging the patents of others. The costs of these proceedings could be substantial, and it is possible that our efforts would be unsuccessful. We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product candidates and/or proprietary technologies infringe their intellectual property rights. These lawsuits are costly and could adversely affect our results of operations and divert the attention of managerial and technical personnel. There is a risk that a court would decide that we or our commercialization partners are infringing the third party’s patents and would order us or our partners to stop the activities covered by the patents. In addition, there is a risk that a court will order us or our partners to pay the other party damages for having violated the other party’s patents.

If a third-party’s patent was found to cover our product candidate, proprietary technologies or their uses, we or our collaborators could be enjoined by a court and required to pay damages and could be unable to commercialize our product candidates or use our proprietary technologies unless we or they obtained a license to the patent. A license may not be available to us or our collaborators on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable relief which could prohibit us from making, using or selling our products, technologies or methods pending a trial on the merits, which could be years away.

There is a substantial amount of litigation involving patent and other intellectual property rights in the device, biotechnology and pharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, but not limited to:

•infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

•substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third party’s rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owner’s attorneys’ fees;

•a court order prohibiting us from selling or licensing the product unless the third party licenses its patent rights to us, which it is not required to do;

•if a license is available from a third party, we may have to pay substantial royalties, upfront fees and/or grant cross-licenses to intellectual property rights for our products; and

•redesigning our products or processes so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations or otherwise have a material adverse effect on our business, results of operations, financial condition and prospects.

Risks Relating to the Securities Markets and an Investment in Our Stock

The market price of our common stock has fluctuated and is likely to continue to fluctuate substantially.

The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has recently experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Since the commencement of trading in connection with our initial public offering in November 2010, the publicly traded shares of our common stock have themselves experienced significant price and volume

fluctuations. During the nine months ended September 30, 2019, the price per share for our common stock on the Nasdaq Global Market has ranged from a low sale price of $36.17 to a high sale price of $55.01. This market volatility is likely to continue. These and other factors could reduce the market price of our common stock, regardless of our operating performance. In addition, the trading price of our common stock could change significantly, both over short periods of time and the longer term, due to many factors, including those described elsewhere in this “Risk Factors” section, those disclosed in Part I, Item 1A of our 2018 Annual Report on Form 10-K, and the following:

•FDA or international regulatory actions and whether and when we receive regulatory approval for Fintepla or MT1621;

•the development status of Fintepla or MT1621, including the results from our clinical trials;

•variations in the level of expenses related to Fintepla or MT1621 clinical development programs, including relating to the timing of invoices from, and other billing practices of, our CROs and clinical trial sites;

•changes in operating performance and stock market valuations of other pharmaceutical companies and price and volume fluctuations in the overall stock market;

•deviations from securities analysts’ estimates or the impact of other analyst comments;

•ratings downgrades by any securities analysts who follow our common stock;

•additions or departures of key personnel;

•third-party payor coverage and reimbursement policies;

•developments concerning current or future strategic collaborations, and the timing of payments we may make or receive under these arrangements;

•developments affecting our contract manufacturers, component fabricators and service providers;

•the development and sustainability of an active trading market for our common stock;

•future sales of our common stock by our officers, directors and significant stockholders;

•other events or factors, including those resulting from war, incidents of terrorism, natural disasters, security breaches, system failures or responses to these events;

•changes in accounting principles; and

•discussion of us or our stock price by the financial and scientific press and in online investor communities.

In addition, the stock markets, and in particular the Nasdaq Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many pharmaceutical companies. Stock prices of many pharmaceutical companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors” and those disclosed in Part I, Item 1A of our 2018 Annual Report on Form 10-K, could have a dramatic and material adverse impact on the market price of our common stock.

Our quarterly operating results may fluctuate significantly.

Our quarterly operating results are difficult to predict and may fluctuate significantly from period to period, particularly because the success and costs of our Fintepla and MT1621 development programs are uncertain and therefore our future prospects are uncertain. Our net loss and other operating results will be affected by numerous factors, including:

•variations in the level of development and/or regulatory expenses related to Fintepla and MT1621 development programs;

•results of clinical trials for Fintepla or MT1621;

•any intellectual property infringement lawsuit in which we may become involved;

•the level of underlying demand for any of our product candidates that may receive regulatory approval;

•our ability to control production spending and underutilization of production capacity;

•those of our competitors; and

•our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements.

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict.

Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. From time to time, in addition to the existing Shinyaku Agreement, we may enter into collaborative arrangements with other companies that include development funding and significant upfront and milestone payments and/or royalties, which may become an important source of our revenue. Accordingly, our revenue may depend on development funding and the achievement of development and clinical milestones under current and any potential future collaborative arrangements and sales of our products, if approved. Furthermore, revenues may consist of the recognition of deferred revenue from upfront, nonrefundable payments that we received from Shinyaku or payments we may receive under future collaboration agreements and the timing of recognizing deferred revenue is subject to significant management judgments, including estimating total costs at completion. These upfront and milestone payments may vary significantly from period to period and any such variance could cause a significant fluctuation in our operating results from one period to the next. As a result, any period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one period should not be relied upon as an indication of future performance.

The United Kingdom’s proposed withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business, which could reduce the price of our common stock.

We are a company with worldwide operations, including significant business operations in Europe, and our wholly owned subsidiary Zogenix Europe Limited is incorporated under the laws of England and Wales. Following a national referendum in which a majority of voters in the United Kingdom elected to withdraw from the European Union, the government of the United Kingdom formally initiated the process for withdrawal in March 2017. The terms of any withdrawal are subject to a complex and ongoing negotiation between the United Kingdom and the European Union whose result and timing remain unclear and which has created significant political and economic uncertainty about the future trading relationship between the United Kingdom and the European Union in the event of a withdrawal, particularly in light of the possibility that an immediate, so-called “no deal” withdrawal could occur without a negotiated agreement.

These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings have been and may continue to be subject to increased market volatility. Lack of clarity about future United Kingdom laws and regulations as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal, including financial laws and regulations, tax and free trade agreements, tax and customs laws, intellectual property rights, environmental, health and safety laws and regulations, immigration laws, employment laws and transport laws could increase costs, disrupt supply chains, depress economic activity and restrict our access to capital.

If the United Kingdom and the European Union are unable to negotiate acceptable withdrawal terms, barrier-free access between the United Kingdom and other European Union member states or among the European economic area overall could be diminished or eliminated. Any of these factors could have a material adverse effect on our business, financial condition and results of operations, affect our strategy in the European pharmaceutical market. and reduce the price of our common stock.

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.

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Item 6. Exhibits

EXHIBIT INDEX


Exhibit Number						Exhibit Description

2.1⁽¹⁾						Agreement and Plan of Merger, dated August 23, 2019, by and among the Registrant, Xena Merger Sub, Inc., Modis Therapeutics, Inc. and Shareholder Representative Services, LLC, as the shareholders’ representative

3.1⁽¹⁾⁽²⁾						Fifth Amended and Restated Certificate of Incorporation of the Registrant

3.2⁽⁴⁾⁽⁵⁾						Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Registrant

3.3⁽⁵⁾⁽⁶⁾						Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Registrant

3.4* 3.4⁽⁷⁾						Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Registrant

3.5⁽¹⁾						Amended and Restated Bylaws of the Registrant

4.1⁽²⁾						Form of the Registrant’s Common Stock Certificate

4.5⁽³⁾						Warrant dated July 18, 2011 issued by the Registrant to Healthcare Royalty Partners (formerly Cowen Healthcare Royalty Partners II, L.P.)

10.1*						~~10.1~~⁽⁶)†Exclusive License Agreement by and between the Trustees of Columbia University and Modis Therapeutics, Inc. (as successor-in-interest to Meves Pharmaceuticals, LLC), dated September 26, 2016

10.2*						~~Zogenix, Inc. 2010 Equity Incentive Award Plan~~Supply Agreement, by and between the Registrant and Penn Pharmaceutical Services Limited, trading as PCI Pharma Services, dated July 17, 2019

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

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

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

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

101.INS						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH						Inline XBRL Taxonomy Extension Schema Document.

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

____________________

*Filed herewith.

(1)Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on August 23, 2019.

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

~~(2)~~(3)Incorporated by reference to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 filed on November 4, 2010.

~~(3)~~(4)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on August 12, 2011.

~~(4)~~(5)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 8, 2012.

~~(5)~~(6)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on August 10, 2015.

~~(6)~~(7)Incorporated by reference to the ~~Registrant's Current~~Registrant’s Quarterly Report on Form ~~8-K~~10-Q filed on ~~May 22,~~August 6, 2019.

†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.

3658

SIGNATURES

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



			ZOGENIX, INC.

Date:	~~August 6,~~November 7, 2019	By:	/s/ Stephen J. Farr
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	~~August 6,~~November 7, 2019	By:	/s/ Michael P. Smith
			Executive Vice President, Chief Financial Officer, Treasurer and Secretary
			(Principal Financial and Accounting Officer)


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