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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 March 31, 2020
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________             
Commission file number: 001-34962 
___________________________________________
ZOGENIX, INC.
(Exact Name of Registrant as Specified in its Charter)
____________________________________________ 
Delaware
20-5300780
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
5959 Horton Street, Suite 500
Emeryville, California 94608
(Address of Principal Executive Offices and Zip Code)
510-550-8300
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.001 per shareZGNXThe Nasdaq Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes   ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of April 30, 2020 was 55,340,691.




ZOGENIX, INC.
Form 10-Q
For the Quarterly Period Ended March 31, 2020
TABLE OF CONTENTS
 
Page
Financial Statements




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Zogenix, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except par value)

March 31, 2020December 31, 2019
Assets:
Current assets:
Cash and cash equivalents$269,975  $62,070  
Marketable securities150,218  189,085  
Other receivable19,741    
Prepaid expenses and other current assets13,647  11,084  
Acquisition holdback placed in escrow25,000  25,000  
Total current assets478,581  287,239  
Property and equipment, net9,560  9,424  
Operating lease right-of-use assets8,546  7,774  
Indefinite-lived intangible assets102,500  102,500  
Goodwill6,234  6,234  
Other noncurrent assets1,485  1,079  
Total assets$606,906  $414,250  
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable$7,887  $7,979  
Accrued and other current liabilities25,803  30,117  
Acquisition holdback liability24,444  24,444  
Deferred revenue, current5,696  5,927  
Current portion of operating lease liabilities1,383  1,322  
Current portion of contingent consideration23,600  25,600  
Total current liabilities88,813  95,389  
Deferred revenue, noncurrent6,407  7,425  
Operating lease liabilities, net of current portion11,454  10,752  
Contingent consideration, net of current portion32,300  38,200  
Deferred income taxes17,425  17,425  
Total liabilities156,399  169,191  
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding
    
Common stock, $0.001 par value; 100,000 shares authorized; and 55,341 and 45,272 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
55  45  
Additional paid-in capital1,591,497  1,360,092  
Accumulated deficit(1,141,257) (1,115,457) 
Accumulated other comprehensive income212  379  
Total stockholders’ equity450,507  245,059  
Total liabilities and stockholders’ equity$606,906  $414,250  
See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q1 2020 Form 10-Q | 1


Zogenix, Inc.

Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
Three Months Ended March 31,
20202019
Collaboration revenue$1,249  $  
Operating expenses:
Research and development33,240  24,352  
Selling, general and administrative21,318  10,918  
Acquired in-process research and development expense
1,500    
Change in fair value of contingent consideration(7,900) 3,000  
Total operating expenses48,158  38,270  
Loss from operations(46,909) (38,270) 
Other income (expense):
Interest income1,088  3,156  
Other income (expense), net20,021  (88) 
Total other income21,109  3,068  
Net loss$(25,800) $(35,202) 
Net loss per share, basic and diluted$(0.54) $(0.83) 
Weighted average number of shares used in the calculation of basic and diluted net loss per common share
48,185  42,236  
See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q1 2020 Form 10-Q | 2


Zogenix, Inc.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
Three Months Ended March 31,
20202019
Net loss$(25,800) $(35,202) 
Other comprehensive (loss) income, net of tax:
Change in unrealized (losses) gains related to marketable securities(172) 370  
Foreign currency translation adjustments
5    
Total other comprehensive (loss) income(167) 370  
Comprehensive loss$(25,967) $(34,832) 
See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q1 2020 Form 10-Q | 3


Zogenix, Inc.

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(in thousands)

Three Months Ended March 31, 2020
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201945,272  $45  $1,360,092  $379  $(1,115,457) $245,059  
Net loss—  —  —  —  (25,800) (25,800) 
Other comprehensive loss—  —  —  (167) —  (167) 
Issuance of common stock, net of offering costs9,798  10  221,698  —  —  221,708  
Issuance of common stock under employee equity plans297  —  3,882  —  —  3,882  
Shares repurchased for tax withholdings related to net share settlement of employee equity awards
(26) —  (569) —  —  (569) 
Stock-based compensation—  —  6,394  —  —  6,394  
Balance at March 31, 202055,341  $55  $1,591,497  $212  $(1,141,257) $450,507  


Three Months Ended March 31, 2019
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201842,078  $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 plans380  —  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, 201942,446  $42  $1,227,620  $373  $(731,156) $496,879  

See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q1 2020 Form 10-Q | 4


Zogenix, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Three Months Ended March 31,
20202019
Cash flow from operating activities:
Net loss$(25,800) $(35,202) 
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation6,394  4,223  
Depreciation and amortization357  191  
Noncash lease expense339  —  
Net accretion and amortization of investments in marketable securities(215) (1,703) 
Change in fair value of warrant liabilities(162) 303  
Acquired in-process research and development expense
1,500    
Change in fair value of contingent consideration(7,900) 3,000  
Changes in operating assets and liabilities:
Accounts receivable  (15,500) 
Other receivable(19,741)   
Prepaid expenses, escrow holdback and other current assets(722) 5,270  
Other assets(405) (6,580) 
Accounts payable, accrued and other liabilities(4,435) (7,096) 
Operating lease liability(452) 12,767  
Deferred revenue(1,249) 15,500  
Net cash used in operating activities(52,491) (24,827) 
Cash flows from investing activities:
Cash paid for in-process research and development asset(1,500)   
Purchases of marketable securities(15,695) (145,826) 
Proceeds from maturities of marketable securities54,605  171,225  
Purchases of property and equipment(193) (4,535) 
Net cash provided by investing activities37,217  20,864  
Cash flows from financing activities:
Payment of contingent consideration  (10,000) 
Proceeds from issuance of common stock under equity incentive plans2,040  4,379  
Taxes paid related to net share settlement of equity awards(569) (582) 
Proceeds from issuance of common stock, net of issuance costs221,708    
Net cash provided by (used in) financing activities223,179  (6,203) 
Net decrease in cash and cash equivalents207,905  (10,166) 
Cash and cash equivalents, beginning of the period62,070  68,454  
Cash and cash equivalents, end of the period$269,975  $58,288  
See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q1 2020 Form 10-Q | 5


Zogenix, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Note 1 – Organization, Basis of Presentation and Liquidity
Zogenix, Inc. and subsidiaries (the Company, we, us or our) is a global pharmaceutical company committed to developing and commercializing transformative therapies to improve the lives of patients and their families living with rare diseases. We are primarily focused on developing and commercializing two therapeutic product candidates: Fintepla, a low-dose fenfluramine investigational therapy for two pediatric epilepsy disorders, Dravet syndrome and Lennox-Gastaut Syndrome (LGS); and MT1621, an investigational deoxynucleoside substrate enhancement therapy for the treatment of thymidine kinase 2 deficiency (TK2d), an inherited mitochondrial DNA depletion disorder that predominantly affects children and is often fatal.
We operate in one business segment—the research, development and commercialization of pharmaceutical products and our headquarters are located in Emeryville, California.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Zogenix, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The results of operations for any interim period are not necessarily indicative of results of operations for any future period. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and related notes included in our 2019 Annual Report on Form 10-K (2019 Form 10-K), which was filed with the SEC on March 2, 2020.
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.
Future Funding Requirements
As of March 31, 2020, our cash, cash equivalents and marketable securities totaled $420.2 million. Excluding gains from two discrete business divestitures, we have incurred significant net losses and negative cash flows from operating activities since inception resulting in an accumulated deficit of $1.1 billion as of March 31, 2020. 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, we are obligated to make future milestone payments that are contingent upon the successful achievement of certain regulatory and sales-based milestone events related to Fintepla and certain regulatory milestone events related to MT1621. Historically, we have relied primarily on the proceeds from equity offerings to finance our operations. Until such time, if ever, we can generate a sufficient amount of revenue to finance our cash requirements, we may need to continue to rely on additional financing to achieve our business objectives. 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.
Zogenix, Inc. | Q1 2020 Form 10-Q | 6


Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from those estimates.
Significant Accounting Policies
The significant accounting policies and estimates used in the preparation of the accompanying condensed consolidated financial statements are described in Note 2, Summary of Significant Accounting Policies of notes to the consolidated financial statements in our 2019 Form 10-K. There have been no material changes in our significant accounting policies during the three months ended March 31, 2020 other than the recently adopted accounting pronouncements set forth below.
Impact of COVID-19 Pandemic
In March 2020, the World Health Organization declared the global novel coronavirus disease (COVID-19) outbreak a pandemic. To date, our operations have not been significantly impacted by the COVID-19 outbreak. However, we cannot predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on our financial condition and operations, including ongoing and planned clinical trials, the timelines for receiving feedback or approvals from regulatory authorities, and a potential product launch in the midst of a pandemic.
Management is monitoring the potential impact of the COVID-19 pandemic, if any, on the carrying value of our indefinite-lived in-process research and development (IPR&D) intangible asset, goodwill, long-lived assets and right-of-use assets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets. If the financial markets and/or the overall economy are impacted for an extended period, our business, results of operations and financial condition may be adversely affected.
Income Taxes
On March 27, 2020, The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law which lifts certain limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (Tax Act). The CARES Act, among other provisions, retroactively and temporarily (for taxable years beginning before January 1, 2021) suspends application of the 80%-of-income limitation on the use of net operating losses, which was enacted as part of the Tax Act. It also provides that net operating losses arising in any taxable year beginning after December 31, 2017, and before January 1, 2021 are generally eligible to be carried back up to five years. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three months ended March 31, 2020 or to our net deferred tax assets as of March 31, 2020. Given our history of losses, we do not expect the provisions of the CARES Act to have a material impact on our annual effective tax rate or condensed consolidated financial statements in 2020; however, we will continue to evaluate the impact of tax legislation and will update our disclosures as additional information and interpretive guidance becomes available.
Recently Adopted Accounting Pronouncements
Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments revises the measurement of credit losses for most financial instruments measured at amortized cost, including trade receivables, from an incurred loss methodology to an expected loss methodology which results in earlier recognition of credit losses. Under the incurred loss model, a loss is not recognized until it is probable that the loss-causing event has already occurred. The standard introduces a forward-looking expected credit loss model that requires an estimate of the expected credit losses over the life of the instrument by considering all relevant information including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. In addition, the standard also modifies the impairment model for available-for-sale debt securities, which are measured at fair value, by eliminating the consideration for the length of time fair value has been less than amortized cost when assessing credit loss for a debt security and provides for reversals of credit losses through income upon credit improvement. The standard became effective for us beginning January 1, 2020. Based on the composition of our investment portfolio, which reflects our primary investment objective of capital
Zogenix, Inc. | Q1 2020 Form 10-Q | 7


preservation, the adoption of this standard did not have a material impact on our condensed consolidated financial statements or related disclosures.
ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value for a reporting unit is determined in the same manner as the amount of goodwill recognized in a business acquisition of the reporting unit. Under the standard, an entity shall recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The standard became effective for us beginning January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements or related disclosures; however, any prospective goodwill impairment losses recognized will be measured in accordance with the updated guidance.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement modifies the disclosure requirements in Topic 820 by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This standard became effective for us beginning January 1, 2020 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements. For the new disclosures regarding our Level 3 fair value measurements, see Note 5, Fair Value Measurements to these condensed consolidated financial statements.
ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) removes certain exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU is effective for us for all interim and annual periods beginning January 1, 2021, with early adoption permitted. We early adopted ASU 2019-12 beginning January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.
The only aspect of ASU 2019-12 that is currently applicable to us is the removal of the exception related to intraperiod tax allocation. Beginning in 2020, we will apply the general methodology regarding the intraperiod allocation of tax expense. After the adoption of ASU 2019-12, in periods where we have a loss from continuing operations, we will determine the amount of taxes attributable to continuing operations without regard to the tax effect of other items, including changes in unrealized gains related to marketable securities.
Recent Accounting Pronouncements
We have reviewed recently issued accounting pronouncements and concluded they are either not applicable to our business or no material effect is expected on our condensed consolidated financial statements as a result of future adoption.
Note 3 – Collaborative Arrangement
In March 2019, we entered into an agreement (Shinyaku Agreement) with Nippon Shinyaku Co., Ltd. (Shinyaku) for the exclusive distribution of Fintepla in Japan for the treatment of Dravet syndrome and LGS. As part of the Shinyaku Agreement, we are responsible for completing the global clinical development and all regulatory approval activities for Fintepla to support the submission of new drug applications in Japan for Dravet syndrome and LGS. Upon regulatory approval of Fintepla in Japan, Shinyaku will act as our exclusive distributor for Fintepla and will be responsible for the commercialization activities including the promotion, marketing, sale and distribution of Fintepla in Japan. Upon regulatory approval of Fintepla in Japan, Shinyaku will also act as our exclusive distributor for commercial shipment and distribution of Fintepla in Japan. If we pursue global development of Fintepla for indications other than Dravet syndrome or LGS, Shinyaku has the option to participate in the development for such indications in Japan, subject to cost sharing requirements pursuant to the agreement. Activities under the Shinyaku Agreement will be governed by a joint steering committee (JSC) consisting of three representatives from each party to the agreement. All decisions of the JSC are to be made by a unanimous vote with tie-breaking rights provided to each party for certain matters related to development, regulatory approval and commercialization select distribution activities of Fintepla in that territory.
Zogenix, Inc. | Q1 2020 Form 10-Q | 8


Shinyaku has agreed to support development and regulatory approval of Fintepla in Japan by actively participating in the design of non-clinical, clinical and manufacturing requirements needed for regulatory submission, actively planning and participating in product labeling decisions and discussions with the Japanese Ministry of Health, Labor and Welfare (MHLW) and obtained distribution exclusivity through the payment of an initial fixed consideration. Pursuant to the terms of the agreement, Shinyaku agreed to make aggregate fixed payments of $20.0 million to us in scheduled installments. As of March 31, 2020, we have received $17.0 million with the remaining balance due within the next year. We will be actively running the clinical trials, performing manufacturing validation activities, preparing regulatory filings and holding discussions with MHLW, and negotiating pricing. We and Shinyaku have agreed to proportionally share the Japan specific development costs that may arise outside of the initial development plan and any post-approval clinical study costs in Japan. In addition, we can earn up to $66.0 million from Shinyaku for the achievement of certain regulatory milestones for the treatment of Dravet syndrome and LGS. If regulatory approval of Fintepla is received in Japan, we have agreed to supply Shinyaku with Fintepla upon receipt of purchase orders at our actual manufacturing cost plus a fixed transfer price mark-up, a fixed percentage of Shinyaku's net sales of Fintepla in Japan for such fiscal year, and a net price mark-up based on a percent of the applicable aggregate sales of Fintepla by Shinyaku for such fiscal year. The net price mark-up percentage increases with Shinyaku’s sales of Fintepla annual net sales in Japan and ranges between mid-twenties and is capped at a low thirties of the aggregate annual net sales for an applicable fiscal year. In addition, we can earn up to an additional $42.5 million tied to the achievement of certain net sales milestones by Shinyaku through the term of the agreement, which generally expires in 2045.
The collaborative activities under the Shinyaku Agreement prior to regulatory approval are within the scope of the accounting guidance related to collaborative arrangements as both parties are active participants and are exposed to significant risks and rewards dependent on the success of commercializing Fintepla in Japan. Since Shinyaku is not a customer as it does not obtain an output of our development and regulatory approval activities for Fintepla as they were not provided a license to our intellectual property or the ability to manufacture the product, and we do not consider performing development and regulatory approval services to be a part of our ongoing activities. Shinyaku will only become a customer and subject to revenue from contracts from customers accounting guidance after regulatory approval of Fintepla in Japan occurs and Shinyaku places purchase orders with us. To date, Shinyaku has not provided us with any purchase orders and thus no revenue has been recognized for the supply of Fintepla.
We considered the revenue from contracts with customers guidance by analogy in determining the unit of account, and the recognition and measurement of such unit of account for collaborative activities under the Shinyaku Agreement and concluded that there are two development programs akin to performance obligations related to collaborative activities for development and regulatory approval efforts for Dravet and LGS. We are the principal as it relates to the collaborative development and regulatory approval activities primarily because we are responsible for the acceptability of the results of the work of the third-party vendors that are used to assist us in performing such activities. Therefore, such collaboration revenue is presented on a gross basis in our condensed consolidated statements of operations apart from research and development expenses incurred.
Since Shinyaku was not provided a license to our intellectual property or the ability to manufacture Fintepla, Shinyaku will only become a customer, and payments made under the Shinyaku Agreement will only be subject to the accounting guidance related to revenue from contracts from customers, after regulatory approval of Fintepla in Japan occurs and Shinyaku places purchase orders with us.
The initial collaboration consideration consisted solely of the fixed consideration payments of $20.0 million and was allocated on a relative standalone selling price basis to the two identified development programs akin to performance obligations related to collaborative activities for development and regulatory approval efforts for Dravet syndrome and LGS. Analogizing to the revenue from contracts with customers variable consideration guidance, all potential regulatory milestone payment consideration will be included in the collaboration consideration if and when it is probable that a significant reversal in the amount of cumulative collaboration consideration recognized will not occur when the uncertainty associated with the variable collaboration consideration is subsequently resolved. At contract inception and through March 31, 2020, this consideration was fully constrained as the achievement of the events tied to these regulatory milestone payments was highly dependent on factors outside our control.
Collaboration revenue is being recognized over time as the collaborative activities related to each development program are rendered. We determined an input method is a reasonable representative depiction of the performance of the collaborative activities under the Shinyaku Agreement. The method of measuring progress towards completion incorporates actual internal and external costs incurred, relative to total internal and external costs expected to be incurred over an estimated period to satisfy the collaborative activities. The period over which total costs are estimated reflects our estimate of the period over which it will perform the collaborative activities for each development program. Changes in estimates of total internal and external costs expected to be incurred are recognized in the period of change as a cumulative catch-up adjustment to collaboration revenue.
Zogenix, Inc. | Q1 2020 Form 10-Q | 9


For the three months ended March 31, 2020, we recognized collaboration revenue of $1.2 million. As of March 31, 2020, $12.1 million related to this agreement was recorded as deferred revenue, which is classified as either current or net of current portion in the accompanying condensed consolidated balance sheets based on the period over which the collaboration revenue is expected to be recognized. We expect to recognize collaboration revenue related to these collaborative activities through the end of 2023.
Note 4 – Cash, Cash Equivalents and Marketable Securities
The following tables summarize the amortized cost and the estimated fair value of our cash, cash equivalents and marketable securities as of March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Current assets:
Cash$11,271  $—  $—  $11,271  
Cash equivalents:
Money market funds224,070  —  —  224,070  
Commercial paper34,634  —  —  34,634  
Total cash and cash equivalents269,975  —  —  269,975  
Marketable securities:
Commercial paper39,528      39,528  
Corporate debt securities70,543  273  (66) 70,750  
Certificate of deposits39,940      39,940  
Total marketable securities150,011  273  (66) 150,218  
Total cash, cash equivalents and marketable securities
$419,986  $273  $(66) $420,193  

December 31, 2019
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Current assets:
Cash$43,058  $—  $—  $43,058  
Cash equivalents:
Money market funds11,527  —  —  11,527  
Commercial paper7,485  —  —  7,485  
Total cash and cash equivalents62,070  —  —  62,070  
Marketable securities:
Commercial paper73,366      73,366  
Corporate debt securities74,038  381  (2) 74,417  
Certificate of deposits41,302      41,302  
Total marketable securities188,706  381  (2) 189,085  
Total cash, cash equivalents and marketable securities
$250,776  $381  $(2) $251,155  

Zogenix, Inc. | Q1 2020 Form 10-Q | 10


The following table summarizes the cost and fair value of marketable securities based on stated effective maturities as of March 31, 2020 (in thousands):
Amortized Cost
Fair Value
Due within one year$127,968  $128,147  
Due between one and two years22,043  22,071  
Total$150,011  $150,218  
We regularly review our available-for-sale marketable securities in an unrealized loss position and evaluate the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. For all marketable securities that have been in a continuous loss position as of March 31, 2020, we have the ability and intent to hold until maturity or recovery. We determined the gross unrealized losses were caused by market fluctuations. There have been no specific facts or circumstances that have arisen to indicate that there has been any significant deterioration in the creditworthiness of the issuers of these securities. As such, we determined no allowance for credit losses was deemed necessary.
Accrued interest receivable is recorded in “Prepaid expenses and other current assets” on our condensed consolidated balance sheets and was $0.7 million and $0.6 million as of March 31, 2020 and December 31, 2019, respectively.
See Note 5 for further information regarding the fair value of our financial instruments.
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Note 5 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy has been established under GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1:
Observable inputs such as quoted prices in active markets;
Level 2:
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Our financial instruments consist primarily of cash and cash equivalents, marketable securities, other current assets, accounts payable and accrued liabilities, contingent consideration liabilities and our outstanding common stock warrant liabilities. Certain cash equivalents, marketable securities, contingent consideration liabilities and common stock warrant liabilities are reported at their respective fair values on our condensed consolidated balance sheets. The remaining financial instruments are carried at cost which approximates their respective fair values because of the short-term nature of these financial instruments. See Note 4 for further information regarding the amortized cost of our financial assets.
The following tables summarize assets and liabilities recognized or disclosed at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (in thousands):

March 31, 2020
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Commercial paper$  $34,634  $  $34,634  
Money market funds224,070    224,070  
Marketable securities:
Commercial paper  39,528    39,528  
Corporate debt securities  70,750    70,750  
Certificate of deposits  39,940    39,940  
Total assets (1)$224,070  $184,852  $  $408,922  
Liabilities:
Common stock warrant liabilities$  $  $36  $36  
Contingent consideration liabilities    55,900  55,900  
Total liabilities$  $  $55,936  $55,936  
December 31, 2019
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
Money market funds$11,527  $  $  $11,527  
Commercial paper  7,485    $7,485  
Marketable securities:
Commercial paper  73,366    73,366  
Corporate debt securities  74,417    74,417  
Certificate of deposits  41,302    41,302  
Total assets (1)$11,527  $196,570  $  $208,097  
Liabilities:
Common stock warrant liabilities$  $  $198  $198  
Contingent consideration liabilities    63,800  63,800  
Total liabilities$  $  $63,998  $63,998  
(1)Fair value is determined by taking into consideration valuations obtained from third-party pricing services. The third-party pricing services utilize industry standard valuation models, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.
Contingent Consideration Liability
Pursuant to the terms of the Brabant purchase agreement in 2014 in which we acquired worldwide development and commercialization rights to Fintepla, we are obligated to make future milestone payments that are contingent upon the successful achievement of certain regulatory and sales-based milestone events related to Fintepla. The potential amount of future payments that we may be required to make is between zero, if none of the remaining milestones are achieved, to a maximum of $75.0 million.
The following table provides a reconciliation of our contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended March 31,
20202019
Balance at beginning of period$63,800  $78,200  
Change in fair value(7,900) 3,000  
Settlements  (10,000) 
Balance at end of period$55,900  $71,200  
The decrease in fair value of our contingent consideration for the three months ended March 31, 2020 was primarily due to changes to our probability-weighted estimates for achieving regulatory/commercial milestones and the use of a higher discount rate to reflect an increase in credit-adjusted interest rates. The increase in fair value of our contingent consideration for the three months ended March 31, 2019 was 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.
The following table summarizes the significant unobservable inputs used in the fair value measurement of our contingent consideration liabilities as of March 31, 2020.
Fair Value
as of
March 31, 2020
(in thousands)
Valuation TechniqueUnobservable InputRangeWeighted
Average (1)
$55,900Discounted cash flowDiscount rate
6.5% — 14.8%
9.8%
Probability of payment
0% — 85.1%
85.1%
Projected year of payment2020 — 20302022
(1)Unobservable inputs were weighted by the relative fair value of the contingent consideration liability. For projected year of payment, the amount represents the median of the inputs and is not a weighted average.
The weighted average discount rate was calculated based on the relative fair value of our contingent consideration obligations. Significant increases or decreases in projected revenues, probabilities of payment, discount rates or the time until payment is made would have resulted in a significantly lower or higher fair value measurement as of March 31, 2020.
Note 6 – Accrued and Other Current Liabilities
The following table provides details of accrued and other current liabilities (in thousands):

March 31, 2020December 31, 2019
Accrued clinical trial expenses$14,215  $18,666  
Accrued compensation4,930  7,179  
Other accrued liabilities6,622  4,074  
Common stock warrant liabilities36  198  
Total accrued and other current liabilities$25,803  $30,117  

Note 7 – Leases
We have operating leases consisting of office space for our Emeryville, California headquarters and for our various subsidiaries. In March 2020, our operating lease for our former headquarters in San Diego, California and the co-terminus sublease arrangement with our sublessee expired in accordance with the terms of the leases. In February 2020, we entered into a lease for office space in Maidenhead, United Kingdom, for a five-year term with aggregate lease payments of approximately $1.5 million. Operating lease assets represent our right to use an underlying asset for the lease term. Operating lease liabilities represent the present value of lease payments over the lease term, discounted using an estimate of our secured incremental borrowing rate.
The components of lease costs, which were included in our condensed consolidated statements of operations, were as follows (in thousands):
Three Months Ended March 31,
20202019
Lease costs
Operating lease cost$567  $499  
Short-term lease cost (1)157  328  
Sublease income(115) (145) 
Total$609  $682  
(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 three months ended March 31, 2020 and 2019 was $0.6 million and $0.3 million, respectively. The amounts were included in net cash used in operating activities in our condensed consolidated statements of cash flows. Right-of-use assets obtained in exchange for new operating lease liabilities were $1.2 million for the three months ended March 31, 2020.
Zogenix, Inc. | Q1 2020 Form 10-Q | 14


Maturities of operating lease liabilities as of March 31, 2020 and December 31, 2019 were as follows (in thousands):
March 31, 2020December 31, 2019
2020 (remaining 9 months and 12 months, respectively)$1,533  $1,986  
20212,292  1,957  
20222,230  1,894  
20232,287  1,951  
20242,300  2,010  
Thereafter5,103  5,101  
Total lease payments15,745  14,899  
Less imputed interest(2,908) (2,825) 
Total operating lease liabilities$12,837  $12,074  

March 31, 2020December 31, 2019
Current portion of operating lease liabilities$1,383  $1,322  
Operating lease liabilities, net of current portion11,454  10,752  
Total lease liabilities$12,837  $12,074  
As of March 31, 2020, the weighted average remaining lease term was 6.8 years and the weighted average discount rate, weighted based on the remaining balance of lease payments, was 6.2%.
Note 8 – Stockholders’ Equity and Stock-Based Compensation
Sale of Common Stock
In March 2020, we completed an underwritten public offering of 9,798,000 shares of our common stock at an offering price of $23.50 per share, including 1,278,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares. Net proceeds realized from the offering amounted to approximately $221.7 million, after deducting commissions and other offering expenses.
Equity Incentive Plans
We have issued stock-based awards from various equity incentive and stock purchase plans, as more fully described in Note 12, Stock-Based Compensation to the consolidated financial statements in our 2019 Form 10-K.
Stock Options
The following is a summary of stock option activity for the three months ended March 31, 2020 (in thousands, except per share data):
Shares
Weighted-
Average
Exercise
Price per Share
Outstanding at December 31, 20194,253  $29.59  
Granted
841  30.11  
Exercised
(230) 16.87  
Canceled
(65) 37.07  
Outstanding at March 31, 20204,799  $30.19  

Restricted Stock Units
The following is a summary of restricted stock unit activity for the three months ended March 31, 2020 (in thousands, except per share data):
Zogenix, Inc. | Q1 2020 Form 10-Q | 15


Shares
Weighted- Average Fair Value per Share at Grant Date
Outstanding at December 31, 2019439  $36.97  
Granted
216