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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)

Delaware20-5300780
(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 November 6, 2020 was 55,673,131.




ZOGENIX, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 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)

September 30, 2020December 31, 2019
Assets:
Current assets:
Cash and cash equivalents$297,460 $62,070 
Marketable securities227,707 189,085 
Accounts receivable, net1,309  
Inventory1,010  
Prepaid expenses and other current assets12,905 11,084 
Acquisition holdback placed in escrow25,000 25,000 
Total current assets565,391 287,239 
Property and equipment, net9,050 9,424 
Operating lease right-of-use assets8,002 7,774 
Intangible asset, net100,529 102,500 
Goodwill6,234 6,234 
Other noncurrent assets2,840 1,079 
Total assets$692,046 $414,250 
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable$7,223 $7,979 
Accrued and other current liabilities31,882 30,117 
Acquisition holdback liability24,444 24,444 
Deferred revenue, current4,900 5,927 
Current portion of operating lease liabilities1,654 1,322 
Current portion of contingent consideration22,200 25,600 
Total current liabilities92,303 95,389 
Deferred revenue, noncurrent6,331 7,425 
Operating lease liabilities, net of current portion10,660 10,752 
Contingent consideration, net of current portion32,700 38,200 
Convertible senior notes127,960  
Deferred tax liability 17,425 
Total liabilities269,954 169,191 
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 55,673 and 45,272 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
56 45 
Additional paid-in capital1,676,408 1,360,092 
Accumulated deficit(1,254,670)(1,115,457)
Accumulated other comprehensive income298 379 
Total stockholders’ equity422,092 245,059 
Total liabilities and stockholders’ equity$692,046 $414,250 
See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q3 2020 Form 10-Q | 1


Zogenix, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues:
Net product sales$1,520 $ $1,520 $ 
Collaboration revenue1,340 630 3,621 1,699 
Total revenues2,860 630 5,141 1,699 
Costs and expenses:
Cost of product sales (excluding amortization of intangible asset)140  140  
Research and development34,425 28,372 102,038 79,820 
Selling, general and administrative24,583 15,762 70,332 42,139 
Amortization of intangible asset1,971  1,971  
Acquired in-process research and development and acquisition-related costs1,500 249,437 4,500 249,437 
Change in fair value of contingent consideration1,800 400 6,100 2,700 
Total costs and expenses64,419 293,971 185,081 374,096 
Loss from operations(61,559)(293,341)(179,940)(372,397)
Other income, net934 481 20,798 433 
Interest income, net536 2,382 2,504 8,521 
Loss before income taxes(60,089)(290,478)(156,638)(363,443)
Income tax benefit  (17,425) 
Net loss$(60,089)$(290,478)$(139,213)$(363,443)
Net loss per share, basic and diluted$(1.08)$(6.75)$(2.62)$(8.54)
Weighted average number of shares used in the calculation of basic and diluted net loss per common share
55,548 43,029 53,039 42,577 
See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q3 2020 Form 10-Q | 2


Zogenix, Inc.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net loss$(60,089)$(290,478)$(139,213)$(363,443)
Other comprehensive (loss) income, net of tax:
Available-for-sale marketable securities:
Change in unrealized gains related to marketable securities
(249)18 23 741 
Reclassification adjustments for realization of gain on sale of marketable securities included in net loss(6)(322)(6)(322)
Foreign currency translation adjustments
(69) (98) 
Total other comprehensive (loss) income(324)(304)(81)419 
Comprehensive loss$(60,413)$(290,782)$(139,294)$(363,024)
See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q3 2020 Form 10-Q | 3


Zogenix, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(in thousands)

Nine Months Ended September 30, 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 
Net loss— — — — (53,324)(53,324)
Other comprehensive income— — — 410 — 410 
Issuance of common stock under employee equity plans153 — 616 — — 616 
Shares repurchased for tax withholdings related to net share settlement of employee equity awards
(49)— (1,369)— — (1,369)
Stock-based compensation— — 8,303 — — 8,303 
Balance at June 30, 202055,445 $55 $1,599,047 $622 $(1,194,581)$405,143 
Net loss— — — — (60,089)(60,089)
Other comprehensive loss— — — (324)— (324)
Issuance of common stock, net of offering costs202 1 4,865 — — 4,866 
Equity component of convertible senior notes— — 65,482 — — 65,482 
Issuance of common stock under employee equity plans35 — 91 — — 91 
Shares repurchased for tax withholdings related to net share settlement of employee equity awards
(9)— (218)— — (218)
Stock-based compensation— — 7,141 — — 7,141 
Balance at September 30, 202055,673 $56 $1,676,408 $298 $(1,254,670)$422,092 


Nine Months Ended September 30, 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 
Net loss— — — — (37,763)(37,763)
Other comprehensive income— — — 353 — 353 
Issuance of common stock under employee equity plans52 — 888 — — 888 
Stock-based compensation— — 5,358 — — 5,358 
Balance at June 30, 201942,498 $42 $1,233,866 $726 $(768,919)$465,715 
Net loss—  — — (290,478)(290,478)
Other comprehensive loss—  — (304)— (304)
Issuance of common stock, net of offering costs1,595 2 68,122 — — 68,124 
Issuance of common stock under employee equity plans163  2,238 — — 2,238 
Shares repurchased for tax withholdings related to net share settlement of employee equity awards(5)— (138)— — (138)
Stock-based compensation—  5,435 — — 5,435 
Balance at September 30, 201944,251 $44 $1,309,523 $422 $(1,059,397)$250,592 

See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q3 2020 Form 10-Q | 4


Zogenix, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine Months Ended September 30,
20202019
Cash flow from operating activities:
Net loss$(139,213)$(363,443)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation21,838 15,016 
Depreciation and amortization3,106 910 
Deferred income taxes(17,425) 
Noncash lease expense883  
Net accretion and amortization of investments in marketable securities(519)(4,495)
Realized gain on sale of available-for-sale marketable securities(6)(322)
Change in fair value of warrant liabilities(189)(241)
Acquired in-process research and development expense4,500 249,437 
Change in fair value of contingent consideration6,100 2,700 
Changes in operating assets and liabilities:
Accounts receivable(1,309) 
Inventory(1,010) 
Prepaid expenses and other current assets(3,321)(18,056)
Other assets(1,761)(5,225)
Accounts payable, accrued and other liabilities541 20,863 
Operating lease liability(975)12,172 
Deferred revenue(621)13,801 
Net cash used in operating activities(129,381)(76,883)
Cash flow from investing activities:
Cash paid for in-process research and development assets(4,500)(175,732)
Purchases of marketable securities(283,208)(308,202)
Proceeds from maturities of marketable securities232,142 364,345 
Proceeds from sales of marketable securities12,987 172,960 
Purchases of property and equipment(657)(9,584)
Net cash (used in) provided by investing activities(43,236)43,787 
Cash flow from financing activities:
Payment of contingent consideration(15,000)(10,000)
Proceeds from issuance of common stock under equity incentive plans4,589 8,399 
Taxes paid related to net share settlement of equity awards(2,157)(658)
Net proceeds from issuance of convertible senior notes194,000  
Proceeds from issuance of common stock, net of issuance costs226,575  
Net cash provided by (used in) financing activities408,007 (2,259)
Net increase (decrease) in cash and cash equivalents235,390 (35,355)
Cash and cash equivalents, beginning of the period62,070 68,454 
Cash and cash equivalents, end of the period297,460 33,099 
See accompanying notes to the unaudited condensed consolidated financial statements.
Zogenix, Inc. | Q3 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 commercial-stage biopharmaceutical company committed to developing and commercializing therapies with the potential to transform the lives of patients and their families living with rare diseases. Our first rare disease therapy, Fintepla (fenfluramine) oral solution, C-IV has been approved by the U.S. Food and Drug Administration (FDA) and is under review in Europe for the treatment of seizures associated with Dravet syndrome, a rare, severe childhood onset epilepsy. In addition, the company has two late-stage development programs underway: one for Fintepla for the treatment of seizures associated with Lennox-Gastaut syndrome, a rare childhood-onset epilepsy and another for MT1621, an investigational novel substrate enhancement therapy for the treatment of TK2 deficiency, a rare genetic disorder.
We operate in one business segment—the research, development and commercialization of pharmaceutical products, and our headquarters are located in Emeryville, California.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Zogenix, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation. The results of operations for any interim period are not necessarily indicative of results of operations for any future period. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and related notes included in our 2019 Annual Report on Form 10-K (2019 Form 10-K), which was filed with the SEC on March 2, 2020.
Liquidity
As of September 30, 2020, our cash, cash equivalents and marketable securities totaled $525.2 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 $1.3 billion as of September 30, 2020. We expect to continue to incur significant operating losses and negative cash flows from operations to support the marketing and commercialization of Fintepla for Dravet syndrome as well as continuing to advance our clinical programs. Additionally, we are obligated to make future milestone payments that are contingent upon the successful achievement of certain development, regulatory and sales-based milestone events related to Fintepla and MT1621. Historically, we have relied primarily on the proceeds from equity and convertible debt offerings to finance our operations. See Note 10 for information related to our recent financing transactions. 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, there is no assurance that such financings could be consummated on acceptable terms or at all. Failure to raise sufficient capital when needed could require us to significantly delay, scale back or discontinue one or more of our product development programs or commercialization efforts or other aspects of our business plans, and our operating results and financial condition would be adversely affected.
Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from those estimates.
Significant Accounting Policies
The significant accounting policies and estimates used in the preparation of the accompanying condensed consolidated financial statements are described in Note 2, Summary of Significant Accounting Policies to the consolidated financial
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statements in our 2019 Form 10-K. There have been no material changes in our significant accounting policies during the nine months ended September 30, 2020, other than as set forth below.
Revenue Recognition for Net Product Sales
We began to record revenues from product sales to our exclusive specialty distributor, our sole Customer, in the third quarter of 2020, subsequent to the approval of Fintepla by the FDA in June 2020. Prior to the third quarter of 2020, our revenues were derived from our collaboration agreement with Nippon Shinyaku Co., Ltd. (Shinyaku).
We recognize revenue when control of the promised good or service is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We determine revenue recognition through the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when collectability of the consideration to which we are entitled in exchange for the goods or services we transfer to the customer is determined to be probable. At contract inception, once the contract is determined to be within the scope of the revenue from contracts with customers accounting standard, we assess whether the goods or services promised within each contract are distinct and, therefore, represent a separate performance obligation. Goods and services that are determined not to be distinct are combined with other promised goods and services until a distinct bundle is identified. We then allocate the transaction price (the amount of consideration we expect to be entitled to from a customer in exchange for the promised goods or services) to each performance obligation and recognize the associated revenue when (or as) each performance obligation is satisfied. Our estimate of the transaction price for each contract includes all variable consideration to which we expect to be entitled. See Note 3 for a detailed discussion of our revenue recognition policy for product sales and our consideration of the transaction price related to variable consideration.
Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. We expense incremental costs of obtaining a contract, as and when incurred, if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial.
Cost of Product Sales (Excluding Amortization of Intangible Asset)
Cost of product sales (excluding amortization of intangible asset) includes the cost of producing and distributing inventories that are related to product revenues during the respective period (including salary-related and stock-based compensation expenses for employees involved with production and distribution, freight and indirect overhead costs) and third-party royalties payable on our net product revenues. Cost of product sales may also include costs related to excess or obsolete inventory adjustment charges, abnormal costs, unabsorbed manufacturing and overhead costs, and manufacturing variances.
During the three and nine months ended September 30, 2020, most of the cost of product sales had a zero-cost basis. Prior to receiving FDA approval for Fintepla, we recorded all manufacturing product costs as research and development expense.
Account Receivables, Net
We record accounts receivable, net of certain fees paid to our Customer for distribution services rendered to us that are not distinct from sales of product to that Customer, prompt payment discounts and chargebacks based on contractual terms. As of September 30, 2020, we determined an allowance for credit losses was not recorded based upon our review of contractual payment terms, the short-duration we expect the accounts receivable to be outstanding, the fact each order placed for Fintepla by our Customer is for immediate shipment to their customer, and our assessment of the creditworthiness of our Customer, among other factors. We have standard payment terms that generally require payment within approximately 30 days. Accounts receivable, net excludes receivables from our collaboration agreement with Shinyaku, if any, which are recorded within current assets on our condensed consolidated balance sheets.
We are also subject to credit risk from our accounts receivable related to our product sales. Estimates of our allowance for credit losses consider a number of factors including existing contractual payment terms, individual customer circumstances, historical payment patterns of our customers, a review of the local economic environment and its potential impact on expected future customer payment patterns.
Concentration of Credit Risk
As is common in the pharmaceutical industry for products treating rare diseases, Fintepla is distributed through an exclusive arrangement with a single specialty distributor, our sole Customer. As a result, our accounts receivable is exposed to concentration of credit risk as 100% of the accounts receivable is due from this Customer.
Zogenix, Inc. | Q3 2020 Form 10-Q | 7


Inventory
Inventory is recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventory costs include third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process, and indirect overhead costs. We primarily use actual costs to determine the cost basis for our inventory. We periodically review our inventories to identify obsolete, slow moving, excess or otherwise unsaleable items. If obsolete, slow moving, excess or unsaleable items are observed and there are no alternate uses for the inventory, we record a write-down to net realizable value. The determination of net realizable value requires judgment including consideration of many factors, such as estimates of future product demand, product net selling prices, current and future market conditions and potential product obsolescence, among others.
Prior to regulatory approval, we expense costs associated with the manufacture of our product candidates to research and development expense unless we are reasonably certain such costs have future commercial use and net realizable value. Since we consider attaining regulatory approval of a product candidate to be highly uncertain and difficult to predict, we expect only in rare instances will pre-launch inventory be capitalized, if at all.
Finite-Lived Intangible Assets
Purchased finite-lived intangible assets are initially recognized at fair value and subject to amortization over its estimated useful life. Our finite-lived intangible assets are amortized using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used. If that pattern cannot be reliably determined, the intangible assets are amortized using the straight-line method over their estimated useful lives and are tested for impairment along with other long-lived assets. At September 30, 2020, our finite-lived intangible assets consisted of Fintepla product rights (see Note 7).
Long-Lived Assets
Long-lived assets, including right-of-use operating lease assets and our finite-lived intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets (group) may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets (asset group) to their carrying amount. If the carrying value of the assets (asset group) exceeds its undiscounted cash flows, we then compare the fair value of the assets (asset group) to their carrying value to determine the impairment loss. The impairment loss will be allocated to the carrying values of the long-lived assets (asset group), but not below their individual fair values.
If we determine that events and circumstances warrant a revision to the remaining period of amortization, a long-lived asset’s remaining useful life shall be changed, and the remaining carrying amount of the long-lived asset shall be depreciated or amortized prospectively over that revised remaining useful life.
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, other than closing our offices, initiating new remote work policies and delaying the initiation of an exploratory Phase 2 basket study by two quarters, our operations have not been significantly impacted by the COVID-19 pandemic. We cannot predict the specific extent, duration, or full impact that the COVID-19 pandemic will have on our financial condition and operations, including ongoing and planned clinical trials, the timelines for receiving feedback or approvals from regulatory authorities, and product launch in the midst of a pandemic.
As of September 30, 2020, the COVID-19 pandemic has not impacted the carrying value of our finite-lived intangible asset, goodwill, long-lived assets and right-of-use assets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets. If the financial markets and/or the overall economy are impacted for an extended period, our business, results of operations and financial condition may be adversely affected.
Income Taxes
On March 18, 2020, the Families First Coronavirus Response Act (FFCR Act) and on March 27, 2020, The Coronavirus Aid, Relief and Economic Security Act (CARES Act) were signed into law in response to the COVID-19 pandemic. The FFCR Act and CARES Act, includes provisions related to refundable payroll tax credits, deferment of employer side social security payments, retroactively and temporarily (for taxable years beginning before January 1, 2021) suspending the application of the
Zogenix, Inc. | Q3 2020 Form 10-Q | 8


80%-of-income limitation on the use of net operating losses, which was enacted as part of the Tax Cuts and Jobs Act of 2017. The CARES Act also provides that net operating losses arising in any taxable year beginning after December 31, 2017, and before January 1, 2021 are generally eligible to be carried back up to five years.
On June 29, 2020, Assembly Bill 85 (A.B. 85) was signed into California law. A.B. 85 provides for a three-year suspension of the use of net operating losses for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5.0 million of tax per year. A.B. 85 suspends the use of net operating losses for taxable years 2020, 2021 and 2022 for certain taxpayers with taxable income of $1.0 million or more. The carryover period for any net operating losses that are suspended under this provision will be extended. A.B. 85 also requires that business incentive tax credits including carryovers may not reduce the applicable tax by more than $5.0 million for taxable years 2020, 2021 and 2022.
The enactment of the FFCR Act, CARES Act and A.B. 85 did not result in any material adjustments to our income tax provision for the three and nine months ended September 30, 2020 or to our net deferred tax assets as of September 30, 2020. Given our history of losses, we do not expect the provisions of the FFCR Act, CARES Act and A.B. 85 to have a material impact on our annual effective tax rate or condensed consolidated financial statements in 2020; however, we will continue to evaluate the impact of tax legislation and will update our disclosures as additional information and interpretive guidance becomes available.
Recently Adopted Accounting Pronouncements
Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments revises the measurement of credit losses for most financial instruments measured at amortized cost, including trade receivables, from an incurred loss methodology to an expected loss methodology which results in earlier recognition of credit losses. Under the incurred loss model, a loss is not recognized until it is probable that the loss-causing event has already occurred. The standard introduces a forward-looking expected credit loss model that requires an estimate of the expected credit losses over the life of the instrument by considering all relevant information including historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. In addition, the standard also modifies the impairment model for available-for-sale debt securities, which are measured at fair value, by eliminating the consideration for the length of time fair value has been less than amortized cost when assessing credit loss for a debt security and provides for reversals of credit losses through income upon credit improvement. The standard became effective for us beginning January 1, 2020. Based on the composition of our investment portfolio, which reflects our primary investment objective of capital preservation, the adoption of this standard did not have a material impact on our condensed consolidated financial statements or related disclosures.
ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value for a reporting unit is determined in the same manner as the amount of goodwill 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) (ASU 2019-12) 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
Zogenix, Inc. | Q3 2020 Form 10-Q | 9


on a prospective basis. The adoption of this standard did not have a material impact on our condensed consolidated financial statements and related disclosures.
The only aspect of ASU 2019-12 that is currently applicable to us is the removal of the exception related to intraperiod tax allocation. Beginning January 1, 2020, we have applied the general methodology regarding the intraperiod allocation of tax expense for reporting periods where we have a loss from continuing operations by determining the amount of taxes attributable to continuing operations without regard to the tax effect of other items, including changes in unrealized gains related to marketable securities.
Recently Issued Accounting Pronouncements Not Yet Adopted
ASU 2020-06, Debt — Debt with Conversion and Other Options (subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (subtopic 815-40), or ASU 2020-06, reduces the number of accounting models in ASC 470-20 that require separate accounting for embedded conversion features, which we followed in accounting for the issuance of our convertible senior notes (see Note 9). ASU 2020-06 will be effective for SEC-reporting entities for fiscal years beginning after December 15, 2021 (or, in the case of smaller reporting companies, December 15, 2023), including interim periods within those fiscal years. However, early adoption is permitted in certain circumstances for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. When effective, we expect the elimination of the requirement to separately account for the conversion feature into its equity component by recording amounts as debt discount related to our senior convertible notes will result in a decrease to our interest expense over the expected life of the financial instrument. In addition, interest expense is expected to be closer to the stated coupon rate of the convertible senior notes.
As we intend to settle conversions by paying the conversion value in cash up to the principal amount being converted and any excess in shares, we expect to be eligible to use the treasury stock method to reflect the shares underlying the notes in our diluted earnings per share. Under this method, if the conversion value of the notes exceeds their principal amount for a reporting period, then we will calculate our diluted earnings per share assuming that all the notes were converted and that we issued shares of our common stock to settle the excess. However, if reflecting the notes in diluted earnings per share in this manner is anti-dilutive, or if the conversion value of the notes does not exceed their principal amount for a reporting period, then the shares underlying the notes will not be reflected in our diluted earnings per share. Upon adoption of ASU 2020-06, we also expect to lose the ability to use the treasury stock method, which would cause our diluted earnings per share to decline. For example, ASU 2020-06 eliminates the treasury stock method for convertible instruments that can be settled in whole or in part with equity and instead require application of the “if-converted” method. Under that method, diluted earnings per share would generally be calculated assuming that all the notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. The application of the if-converted method could reduce our reported diluted earnings per share.
Note 3 – Revenues
Net Product Sales
We distribute Fintepla in the United States through an arrangement with a single specialty distributor. Our Customer subsequently resells our product through its related specialty pharmacy provider to patients and health care providers. Separately, we enter into payment arrangements with various third-party payers including pharmacy benefit managers, private healthcare insurers and government healthcare programs who provide coverage and reimbursement for our product provided to a patient.
Revenue from product sales is recorded at the net sales price (transaction price), which includes estimates of consideration payable to our Customer and third-party payers for which reserves are established and that result from government rebates, chargebacks, co-pay assistance, prompt-payment discounts and other allowances that are offered under arrangements between us, our Customer, and third-party payers related to the sales of Fintepla. These reserves are classified as either reductions of accounts receivable (if the amounts are payable to our Customer) or as refund liabilities within current liabilities (if the amounts are payable to a party other than our Customer). Amounts billed or invoiced are included in accounts receivable, net on our condensed consolidated balance sheet. We did not have any contract assets (unbilled receivables) at September 30, 2020, as we generally invoice our Customer before or at the time of revenue recognition. We did not have any contract liabilities at September 30, 2020, as we did not receive payments in advance of fulfilling our performance obligations to our Customer.
We recognize product revenues when our Customer obtains control of our product, which occurs at a point in time and is typically upon delivery to our Customer or, in the case of products that are subject to consignment agreements, when our Customer takes title of the product from our consigned inventory location for shipment directly to a patient or healthcare provider. In the event the variable consideration is constrained, we include an amount to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future reporting period. Depending on the type of variable consideration, we use either the most likely method or expected value method to estimate variable
Zogenix, Inc. | Q3 2020 Form 10-Q | 10


consideration related to Fintepla product sales. We do not have any material constraints on our variable consideration included within the transaction price for Fintepla product sales. The actual amount of consideration ultimately received may differ from our estimates. If actual results in the future vary from estimates, the estimates will be adjusted, which will affect our revenue from net product sales in the period that such variances become known. Each unit of Fintepla that is ordered by our Customer represents a separate performance obligation that is completed when our Customer obtains control of our product. We record product revenues, net of variable consideration, any applicable constraint, and consideration payable to parties other than our Customer at that point in time. We record shipping and handling costs within cost of product sales on our condensed consolidated statements of operations. We classify payments to our Customer or its affiliates for certain services, to the extent that the services we received are distinct from the sale of our product, as selling, general and administrative expenses on our condensed consolidated statements of operations. We have elected to exclude taxes collected from our customers (we currently have one) and remitted to governmental authorities from the measurement of the transaction price.
We sell Fintepla to our Customer at wholesale acquisition cost, and calculate product revenue from Fintepla sales, net of variable consideration and consideration payable to parties other than our Customer. Variable consideration and consideration payable to parties other than our Customer consists of estimates related to the following categories:
Trade Discounts and Allowances: We provide our Customer with discounts for prompt payment and we also pay fees to our Customer for distribution services rendered that are not distinct from product sales. We expect our Customer to earn these discounts and fees, and accordingly we deduct these discounts and fees in full from our gross product revenue and accounts receivable at the time we recognize the related revenue.
Government Rebates: Fintepla is eligible for purchase by, or qualifies for reimbursement from, Medicaid and other government programs that are eligible for rebates on the price they pay for Fintepla. To determine the appropriate amount to reserve for these rebates, we identify the government-funded health insurer of patients who receive Fintepla as sold by our Customer through its related specialty pharmacy, apply the applicable government discount to these sales, and estimate the portion of total rebates that we anticipate will be claimed.
Other Rebates and Chargebacks: We may contract with various third-party payers for coverage and reimbursement of Fintepla. We estimate the rebates and chargebacks that we expect to be obligated to provide to such third-party payers based upon the terms of the applicable arrangement or negotiations with such third-party payers and our visibility regarding the payer mix.
Patient Assistance Program: We provide financial assistance to eligible patients whose insurance policies have high deductibles or co-payments and deduct our estimate of the amount of such assistance from gross product revenue.
Product Returns: We do not provide contractual return rights to our Customer, except in instances where the product is damaged or defective, which we expect to be rare.
During the three and nine months ended September 30, 2020, we recorded net product sales of $1.5 million, which consisted of commercial sales of Fintepla in the United States.
Collaboration Revenue
In March 2019, we entered into an agreement (Shinyaku Agreement) with Nippon Shinyaku Co., Ltd. (Shinyaku) for the exclusive distribution of Fintepla in Japan for the treatment of Dravet syndrome and LGS. As part of the Shinyaku Agreement, we are responsible for completing the global clinical development and all regulatory approval activities for Fintepla to support the submission of new drug applications in Japan for Dravet syndrome and LGS. Upon regulatory approval of Fintepla in Japan, Shinyaku will act as our exclusive distributor for Fintepla and will be responsible for the commercialization activities including the promotion, marketing, sale and distribution of Fintepla in Japan. Upon regulatory approval of Fintepla in Japan, Shinyaku will also act as our exclusive distributor for commercial shipment and distribution of Fintepla in Japan. If we pursue global development of Fintepla for indications other than Dravet syndrome or LGS, Shinyaku has the option to participate in the development for such indications in Japan, subject to cost sharing requirements pursuant to the agreement. Activities under the Shinyaku Agreement will be governed by a joint steering committee (JSC) consisting of three representatives from each party to the agreement. All decisions of the JSC are to be made by a unanimous vote with tie-breaking rights provided to each party for certain matters related to development, regulatory approval and commercialization select distribution activities of Fintepla in that territory.
Shinyaku has agreed to support development and regulatory approval of Fintepla in Japan by actively participating in the design of non-clinical, clinical and manufacturing requirements needed for regulatory submission, actively planning and participating in product labeling decisions and discussions with the Japanese Ministry of Health, Labor and Welfare (MHLW) and obtained distribution exclusivity through the payment of an initial fixed consideration. Pursuant to the terms of the agreement, Shinyaku agreed to make aggregate fixed payments of $20.0 million to us in scheduled installments. As of
Zogenix, Inc. | Q3 2020 Form 10-Q | 11


September 30, 2020, we have received $17.0 million with the remaining balance due within the next year. We will be actively running the clinical trials, performing manufacturing validation activities, preparing regulatory filings and holding discussions with MHLW, and negotiating pricing. We and Shinyaku have agreed to proportionally share the Japan specific development costs that may arise outside of the initial development plan and any post-approval clinical study costs in Japan. In addition, we can earn up to $66.0 million from Shinyaku for the achievement of certain regulatory milestones for the treatment of Dravet 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 September 30, 2020, this consideration was fully constrained as the achievement of the events tied to these regulatory milestone payments was highly dependent on factors outside our control.
Collaboration revenue is being recognized over time as the collaborative activities related to each development program are rendered. We determined an input method is a reasonable representative depiction of the performance of the collaborative activities under the Shinyaku Agreement. The method of measuring progress towards completion incorporates actual internal and external costs incurred, relative to total internal and external costs expected to be incurred over an estimated period to satisfy the collaborative activities. The period over which total costs are estimated reflects our estimate of the period over which it will perform the collaborative activities for each development program. Changes in estimates of total internal and external costs expected to be incurred are recognized in the period of change as a cumulative catch-up adjustment to collaboration revenue.
For the three and nine months ended September 30, 2020, we recognized collaboration revenue of $1.3 million and $3.6 million, respectively. As of September 30, 2020, the deferred revenue balance of $11.2 million included a $1.5 million installment receivable recorded within other current assets related to the $20.0 million fixed consideration under the arrangement. We classified deferred revenue 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.
Zogenix, Inc. | Q3 2020 Form 10-Q | 12


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 September 30, 2020 and December 31, 2019 (in thousands):
September 30, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
Current assets:
Cash$219,469 $— $— $219,469 
Cash equivalents:
U.S. Treasuries13,799 — — 13,799 
Money market funds39,536 — — 39,536 
Certificate of deposits3,008 — — 3,008 
Commercial paper21,648 — — 21,648 
Total cash and cash equivalents297,460 — — 297,460 
Marketable securities:
U.S. Treasuries27,894 2  27,896 
Commercial paper101,951   101,951 
U.S. Government-sponsored enterprises debt securities6,200 19  6,219 
Corporate debt securities49,980 377  50,357 
Certificate of deposits41,284   41,284 
Total marketable securities227,309 398  227,707 
Total cash, cash equivalents and marketable securities
$524,769 $398 $ $525,167 
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 

The following table summarizes the cost and fair value of marketable securities based on stated effective maturities as of September 30, 2020 (in thousands):
Amortized Cost
Fair Value
Due within one year$216,609 $216,962 
Due between one and two years10,700 10,745 
Total$227,309 $227,707 
Zogenix, Inc. | Q3 2020 Form 10-Q | 13


We regularly review our available-for-sale marketable securities in an unrealized loss position and evaluate the current expected credit loss by considering factors such as historical experience, market data, issuer-specific factors, and current economic conditions. As of September 30, 2020, no assessment of expected credit losses was necessary as we did not have any individual security in an unrealized loss position.
Accrued interest receivable on available-for-sale marketable securities are recorded within “Prepaid expenses and other current assets” on our condensed consolidated balance sheets and was $0.6 million and $0.6 million at September 30, 2020 and December 31, 2019, respectively.
See Note 5 for further information regarding the fair value of our financial instruments.
Note 5 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level valuation hierarchy has been established under GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1:Observable inputs such as quoted prices in active markets;
Level 2:Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Our financial instruments consist primarily of cash and cash equivalents, marketable securities, other current assets, accounts payable and accrued liabilities, convertible debt, 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 September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020
Level 1Level 2Level 3Total
Assets:
Cash equivalents:
U.S. Treasuries$ $13,799 $ $13,799 
Money market funds39,536   39,536 
Certificate of deposits 3,008  3,008 
Commercial paper 21,648  21,648 
Marketable securities:
U.S. Treasuries 27,896  27,896 
Commercial paper 101,951  101,951 
U.S. Government-sponsored enterprises debt securities 6,219  6,219 
Corporate debt securities 50,357  50,357 
Certificate of deposits 41,284  41,284 
Total assets(1)
$39,536 $266,162 $ $305,698 
Liabilities:
Common stock warrant liabilities$ $ $9 $9 
Contingent consideration liabilities  54,900 54,900 
Total liabilities$ $ $54,909 $54,909 
Zogenix, Inc. | Q3 2020 Form 10-Q | 14


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. As of September 30, 2020, the potential amount of future payments that we may be required to make is between zero, if none of the remaining milestones are achieved, to a maximum of $60.0 million.
The following table provides a reconciliation of our contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Balance at beginning of period$53,100 $70,500 $63,800 $78,200 
Change in fair value1,800 400 6,100 2,700 
Settlements  (15,000)(10,000)
Balance at end of period$54,900 $70,900 $54,900 $70,900 
For the nine months ended September 30, 2020, the $6.1 million increase to the estimated fair value of our contingent consideration liability was primarily due to updated assumptions used regarding the probability of success for achieving certain regulatory and sales-based milestone events in light of FDA approval of Fintepla in June 2020. The change in fair value for the three and nine months ended September 30, 2019 and the three months ended September 30, 2020 was attributable to immaterial adjustments to certain assumptions and estimates used in the remeasurement to fair value and changes in the discount rate used as a result of market interest rate changes.
The following table summarizes the significant unobservable inputs used in the fair value measurement of our contingent consideration liabilities as of September 30, 2020.
Zogenix, Inc. | Q3 2020 Form 10-Q | 15


Fair Value as of
September 30, 2020
(in thousands)
Valuation TechniqueUnobservable InputRange
Weighted
Average(1)
$54,900Discounted cash flowDiscount rate
3.6% — 10.1%
5.5%
Probability of payment
0% — 94.3%
94.3%
Projected year of payment2021 — 20302022
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(1)Unobservable inputs were weighted by the relative fair value of the contingent consideration liability.
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 September 30, 2020.
Convertible Senior Notes
As of September 30, 2020, the estimated fair value of our Convertible Senior Notes was approximately $199.7 million and was determined based on a binomial lattice model with Level 2 inputs.
Note 6 – Balance Sheet Details
Inventory
The following table provides details of our inventory balance (in thousands):
September 30, 2020
Raw materials$391 
Work in process