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, 2019

 

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: 001-37526

 

Zynerba Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

    

26-0389433
(I.R.S. Employer
Identification Number) 

 

 

 

80 W. Lancaster Avenue, Suite 300
Devon, PA
(Address of principal executive offices)

 

19333
(Zip Code) 

 

(484) 581-7505
(Registrant’s telephone number, including area code)

 

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

 

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, $0.001 par value per share

    

ZYNE

    

The Nasdaq Global Market

 

 

 

 

 

 

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

 

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

 

 

 

 

 

Large accelerated filer ☐

 

    

Accelerated filer ☒

 

 

 

Smaller reporting company ☒ 

Non-accelerated filer ☐ 

 

 

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 ☒

 

As of November 1, 2019, the registrant had 23,198,010 shares of Common Stock, $0.001 par value per share, outstanding.

 

 

 

 

TABLE OF CONTENTS 

 

 

 

 

PART I—FINANCIAL INFORMATION 

5

 

 

 

Item 1. 

Consolidated Financial Statements (Unaudited)

5

 

 

 

 

Consolidated Balance Sheets as of September  30, 2019 and December 31, 2018 (Unaudited)

5

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2019 and 2018 (Unaudited)

6

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September  30, 2019 and 2018 (Unaudited)

7

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2019 and 2018 (Unaudited)

8

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

9

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4. 

Controls and Procedures

27

 

 

 

PART II—OTHER INFORMATION 

27

 

 

 

Item 1. 

Legal Proceedings

27

 

 

 

Item 1A. 

Risk Factors

28

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 3. 

Defaults Upon Senior Securities

28

 

 

 

Item 4. 

Mine Safety Disclosures

28

 

 

 

Item 5. 

Other Information

28

 

 

 

Item 6. 

Exhibits

29

 

 

 

 

Signatures

30

 

 

 

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements made in this Quarterly Report that are not statements of historical or current facts, such as those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning.

 

Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.

 

You should understand that the following important factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

 

·

our estimates regarding expenses, future revenue, capital requirements, tax credits and timing and availability of and the need for additional financing;

·

the results, cost and timing of our preclinical studies and clinical trials, including any delays to such clinical trials relating to enrollment or site initiation, as well as the number of required trials for regulatory approval and the criteria for success in such trials;

·

our dependence on third parties in the conduct of our preclinical studies and clinical trials;

·

legal and regulatory developments in the United States and foreign countries, including any actions or advice that may affect the design, initiation, timing, continuation, progress or outcome of clinical trials or result in the need for additional clinical trials;

·

the difficulties and expenses associated with obtaining and maintaining regulatory approval of our product candidates, and the indication and labeling under any such approval;

·

our plans and ability to develop and commercialize our product candidates;

·

the successful development of our commercialization capabilities, including medical affairs and sales and marketing capabilities, whether alone or with potential future collaborators;

·

the size and growth of the potential markets for our product candidates, the rate and degree of market acceptance of our product candidates and our ability to serve those markets;

·

the coverage and reimbursement status for our product candidates from third-party payors;

·

the success of competing therapies and products that are or become available;

·

our ability to limit our exposure under product liability lawsuits;

·

our ability to obtain and maintain intellectual property protection for our product candidates;

·

recently enacted and future legislation regarding the healthcare system, including changes to the Patient Protection and Affordable Care Act;

·

our ability to obtain and maintain third-party manufacturing for our product candidates on commercially reasonable terms;

·

delays, interruptions or failures in the manufacture and supply of our product candidates;

·

the performance of third parties upon which we depend, including third-party contract research organizations, or CROs, contract manufacturing organizations, or CMOs, contractor laboratories and independent contractors;

·

our ability to recruit or retain key scientific, commercial or management personnel or to retain our executive officers;

·

our ability to maintain proper functionality and security of our internal computer and information systems and prevent or avoid cyberattacks, malicious intrusion, breakdown, destruction, loss of data privacy or other significant disruption; and

·

the other risks, uncertainties and factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, or our 2018 Annual Report, under the caption “Item 1A. Risk Factors”.

 

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Form 10-Q (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any

3

obligation, to publicly update or revise any forward-looking statements, even if experience or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.

4

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements (Unaudited) 

 

ZYNERBA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2019

    

2018

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

77,547,530

 

$

59,763,773

 

Incentive and tax receivables

 

 

13,446,981

 

 

3,444,620

 

Prepaid expenses and other current assets

 

 

2,831,340

 

 

3,747,087

 

Total current assets

 

 

93,825,851

 

 

66,955,480

 

Property and equipment, net

 

 

339,213

 

 

371,963

 

Right-of-use assets

 

 

152,166

 

 

 —

 

Total assets

 

$

94,317,230

 

$

67,327,443

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

3,302,459

 

$

4,461,567

 

Accrued expenses

 

 

5,842,262

 

 

5,264,215

 

Lease liabilities

 

 

159,267

 

 

 —

 

Total current liabilities

 

 

9,303,988

 

 

9,725,782

 

Total liabilities

 

 

9,303,988

 

 

9,725,782

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding

 

 

 —

 

 

 —

 

Common stock, $0.001 par value; 200,000,000 shares authorized; 23,198,010 shares issued and outstanding at September 30, 2019 and 17,626,873 shares issued and outstanding at December 31, 2018

 

 

23,198

 

 

17,627

 

Additional paid-in capital

 

 

225,110,677

 

 

175,476,075

 

Accumulated deficit

 

 

(140,120,633)

 

 

(117,892,041)

 

Total stockholders' equity

 

 

85,013,242

 

 

57,601,661

 

Total liabilities and stockholders' equity

 

$

94,317,230

 

$

67,327,443

 

 

See accompanying notes to unaudited consolidated financial statements.

5

ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended 

 

 

September 30,

 

September 30,

 

    

2019

  

2018

    

2019

  

2018

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

(1,604,399)

 

$

4,859,902

 

$

12,926,096

 

$

22,368,881

General and administrative

 

 

3,530,617

 

 

3,125,780

 

 

9,977,550

 

 

9,982,743

Total operating expenses

 

 

1,926,218

 

 

7,985,682

 

 

22,903,646

 

 

32,351,624

Loss from operations

 

 

(1,926,218)

 

 

(7,985,682)

 

 

(22,903,646)

 

 

(32,351,624)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

436,846

 

 

278,214

 

 

1,226,998

 

 

639,702

Foreign exchange loss

 

 

(457,018)

 

 

(99,897)

 

 

(551,944)

 

 

(409,010)

Total other income (expense)

 

 

(20,172)

 

 

178,317

 

 

675,054

 

 

230,692

Net loss

 

$

(1,946,390)

 

$

(7,807,365)

 

$

(22,228,592)

 

$

(32,120,932)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share basic and diluted

 

$

(0.08)

 

$

(0.47)

 

$

(1.03)

 

$

(2.21)

Basic and diluted weighted average shares outstanding

 

 

23,186,410

 

 

16,587,353

 

 

21,598,764

 

 

14,531,272

 

See accompanying notes to unaudited consolidated financial statements.

 

6

ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Common stock

 

Additional

 

Accumulated

 

stockholders'

 

Shares

   

Amount

 

paid-in capital

 

deficit

 

equity

Balance at December 31, 2018

17,626,873

 

$

17,627

 

$

175,476,075

 

$

(117,892,041)

 

$

57,601,661

Issuance of common stock, net of issuance costs

3,439,523

 

 

3,439

 

 

18,076,359

 

 

 —

 

 

18,079,798

Issuance of restricted stock

8,600

 

 

 9

 

 

(9)

 

 

 —

 

 

 —

Stock-based compensation expense

 —

 

 

 —

 

 

1,496,292

 

 

 —

 

 

1,496,292

Net loss

 —

 

 

 —

 

 

 —

 

 

(9,147,017)

 

 

(9,147,017)

Balance at March 31, 2019

21,074,996

 

 

21,075

 

 

195,048,717

 

 

(127,039,058)

 

 

68,030,734

Issuance of common stock, net of issuance costs

2,082,031

 

 

2,082

 

 

27,014,371

 

 

 —

 

 

27,016,453

Exercise of stock options

40,983

 

 

41

 

 

189,659

 

 

 —

 

 

189,700

Stock-based compensation expense

 —

 

 

 —

 

 

1,481,705

 

 

 —

 

 

1,481,705

Net loss

 —

 

 

 —

 

 

 —

 

 

(11,135,185)

 

 

(11,135,185)

Balance at June 30, 2019

23,198,010

 

 

23,198

 

 

223,734,452

 

 

(138,174,243)

 

 

85,583,407

Stock-based compensation expense

 —

 

 

 —

 

 

1,376,225

 

 

 —

 

 

1,376,225

Net loss

 —

 

 

 —

 

 

 —

 

 

(1,946,390)

 

 

(1,946,390)

Balance at September 30, 2019

23,198,010

 

$

23,198

 

$

225,110,677

 

$

(140,120,633)

 

$

85,013,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Common stock

 

Additional

 

Accumulated

 

stockholders'

 

Shares

    

Amount

    

paid-in capital

    

deficit

    

equity

Balance at December 31, 2017

13,553,873

 

$

13,554

 

$

138,916,900

 

$

(77,980,866)

 

$

60,949,588

Issuance of restricted stock

7,500

 

 

 7

 

 

(7)

 

 

 —

 

 

 —

Stock-based compensation expense

 —

 

 

 —

 

 

1,687,024

 

 

 —

 

 

1,687,024

Net loss

 —

 

 

 —

 

 

 —

 

 

(12,306,334)

 

 

(12,306,334)

Balance at March 31, 2018

13,561,373

 

 

13,561

 

 

140,603,917

 

 

(90,287,200)

 

 

50,330,278

Stock-based compensation expense

 —

 

 

 —

 

 

1,755,859

 

 

 —

 

 

1,755,859

Net loss

 —

 

 

 —

 

 

 —

 

 

(12,007,233)

 

 

(12,007,233)

Balance at June 30, 2018

13,561,373

 

 

13,561

 

 

142,359,776

 

 

(102,294,433)

 

 

40,078,904

Issuance of common stock, net of issuance costs

4,062,500

 

 

4,062

 

 

29,933,443

 

 

 —

 

 

29,937,505

Stock-based compensation expense

 —

 

 

 —

 

 

1,584,230

 

 

 —

 

 

1,584,230

Net loss

 —

 

 

 —

 

 

 —

 

 

(7,807,365)

 

 

(7,807,365)

Balance at September 30, 2018

17,623,873

 

$

17,623

 

$

173,877,449

 

$

(110,101,798)

 

$

63,793,274

 

 

See accompanying notes to unaudited consolidated financial statements.

7

ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

    

2019

    

2018

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(22,228,592)

 

$

(32,120,932)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

98,207

 

 

73,195

 

Stock-based compensation

 

 

4,354,222

 

 

5,027,113

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Incentive and tax receivables

 

 

(10,002,361)

 

 

888,409

 

Prepaid expenses and other assets

 

 

1,046,133

 

 

(1,017,128)

 

Deferred grant revenue

 

 

 —

 

 

(662,000)

 

Right-of-use assets

 

 

(5,723)

 

 

 —

 

Accounts payable

 

 

(1,163,454)

 

 

121,583

 

Accrued expenses

 

 

548,454

 

 

1,500,251

 

Net cash used in operating activities

 

 

(27,353,114)

 

 

(26,189,509)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(81,051)

 

 

(157,409)

 

Net cash used in investing activities

 

 

(81,051)

 

 

(157,409)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from the issuance of common stock, net of offering costs

 

 

45,096,251

 

 

30,014,017

 

Payment of deferred financing costs

 

 

(68,029)

 

 

 —

 

Proceeds from the exercise of stock options

 

 

189,700

 

 

 —

 

Net cash provided by financing activities

 

 

45,217,922

 

 

30,014,017

 

Net increase in cash and cash equivalents

 

 

17,783,757

 

 

3,667,099

 

Cash and cash equivalents at beginning of period

 

 

59,763,773

 

 

62,510,277

 

Cash and cash equivalents at end of period

 

$

77,547,530

 

$

66,177,376

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Deferred financing costs included in accounts payable and accrued expenses

 

$

62,357

 

$

76,512

 

Changes in property and equipment acquired but not paid

 

$

15,594

 

$

 —

 

Reclassification of deferred rent liability to right-of-use assets upon adoption of ASC 842

 

$

12,824

 

$

 —

 

Right-of-use assets and lease liability recorded upon adoption of ASC 842

 

$

325,683

 

$

 —

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

8

Table of Contents

ZYNERBA PHARMACEUTICALS, NC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business and Liquidity

 

Zynerba Pharmaceuticals, Inc., together with its subsidiary, Zynerba Pharmaceuticals Pty Ltd (“Zynerba”, the “Company”, “we”), is a clinical stage specialty pharmaceutical company focused on the development of pharmaceutically-produced transdermal cannabinoid therapies for rare and near-rare neuropsychiatric disorders, including Fragile X syndrome, autism spectrum disorder, 22q11.2 deletion syndrome, and a heterogeneous group of rare and ultra-rare epilepsies known as developmental and epileptic encephalopathies. The Company was incorporated on January 31, 2007 under the laws of the State of Delaware as AllTranz, Inc. and changed its name to Zynerba Pharmaceuticals, Inc. in August 2014.

 

The Company has incurred losses and negative cash flows from operations since inception and has an accumulated deficit of $140.1 million as of September 30, 2019. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant revenue from its product candidates currently in development. The Company's primary source of liquidity has been the issuance of equity securities.

 

On August 30, 2019, the Company entered into a Controlled Equity Offering Sales AgreementSM (the “2019 Sales Agreement”) with Cantor Fitzgerald & Co., Canaccord Genuity, LLC, H.C. Wainwright & Co. LLC and Ladenburg Thalmann & Co. Inc., as sales agents (the “Agents”), pursuant to which the Company may sell, from time to time, up to $75.0 million of its common stock. As of November 1, 2019, there have been no sales of common stock under the 2019 Sales Agreement.

 

In June 2017, the Company entered into an Open Market Sales Agreement (the “Sales Agreement”) with Jefferies LLC, (“Jefferies”) pursuant to which the Company sold $50.0 million of its common stock. In the first quarter of 2019, the Company sold and issued 3,439,523 shares of common stock under the Sales Agreement with Jefferies in the open market at a weighted average selling price of $5.44 per share, resulting in gross proceeds of $18.7 million. Net proceeds received after deducting commissions and offering expenses were $18.1 million. In the second quarter of 2019, the Company sold and issued 2,082,031 shares of common stock under the Sales Agreement with Jefferies in the open market at a weighted average selling price of $13.50 per share, resulting in gross proceeds of $28.1 million. Net proceeds received after deducting commissions and offering expenses were $27.0 million. The last sale under the Sales Agreement was made on May 16, 2019. From June 2017 through May 16, 2019, the Company has cumulative gross proceeds of $50.0 million from shares sold in the open market under the Sales Agreement, which has terminated pursuant to its terms.

 

In July 2018, the Company completed a follow-on public offering, selling 4,062,500 shares of its common stock at an offering price of $8.00 per share, resulting in gross proceeds of $32.5 million. Net proceeds received after deducting underwriting discounts and commissions and offering expenses were $29.9 million. 

 

In July 2019, the Australian government’s Department of Industry, Innovation and Science (“AusIndustry”) responded to an Advance Overseas Finding (“AOF”) application submitted by Zynerba that will allow certain research and development expenses incurred with respect to the Company’s product candidate Zygel™ outside of Australia to be eligible for the Australian research and development tax incentive program. As a result of this finding, the Company is eligible to receive a cash refund from the Australian Taxation Office for the qualifying research and development costs expended outside of Australia in 2018, 2019 and 2020.  During the three months ended September 30, 2019, the Company recorded $8.3 million as an Incentive and Tax Receivable and recorded a corresponding credit to research and development expense for amounts expected to be received through the AOF for the period January 1, 2018 through September 30, 2019. Although the AOF approval extends into 2020, management believes that substantially all qualifying amounts have been recorded as of September 30, 2019.

 

Management believes that current cash and cash equivalents and the proceeds anticipated from the AOF are sufficient to fund operations and capital requirements into the second half of 2021. Substantial additional financings will be needed by the Company to fund its operations, to complete clinical development of and to commercially develop its product candidates. There is no assurance that such financing will be available when needed or on acceptable terms. 

 

The Company is subject to those risks associated with any clinical stage pharmaceutical company that has substantial expenditures for research and development. There can be no assurance that the Company's research and development

9

Table of Contents

ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

projects will be successful, that products developed will obtain necessary regulatory approval, or that any approved product will be commercially viable. In addition, the Company operates in an environment of rapid technological change and is largely dependent on the services of its employees and consultants.

 

(2) Summary of Significant Accounting Policies

 

a. Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The interim unaudited consolidated financial statements have been prepared on the same basis as the consolidated financial statements as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Annual Report”), filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the consolidated financial statements) considered necessary to present fairly the Company's financial position as of September 30, 2019 its results of operations for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018. Operating results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2018 Annual Report.

 

b. Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from such estimates.

 

c. Incentive and Tax Receivables

 

The Company’s subsidiary, Zynerba Pharmaceuticals Pty Ltd (the “Subsidiary”), is incorporated in Australia. The Subsidiary is eligible to participate in an Australian research and development tax incentive program.  As part of this program, the Subsidiary is eligible to receive a cash refund from the Australian Taxation Office for a percentage of the research and development costs expended by the Subsidiary in Australia. The cash refund is available to eligible companies with an annual aggregate revenue of less than $20.0 million (Australian dollars) during the reimbursable period. The Company’s estimate of the amount of cash refund it expects to receive related to the Australian research and development tax incentive program is included in “Incentive and tax receivables” in the accompanying consolidated balance sheets. As of September 30, 2019, the Company’s estimate of the amount of cash refund it expects to receive in 2019 for 2018 eligible spending as part of this incentive program was $3.1  million and was recorded as a current asset. The Company’s estimate of the amount of cash refund it expects to receive in 2020 for 2019 eligible spending through September 30, 2019 was $2.1 million and was recorded as a current asset.

 

In July 2019, AusIndustry responded to an AOF application submitted by Zynerba that will allow certain research and development expenses incurred with respect to Zygel outside of Australia to be eligible for the Australian research and development tax incentive program. As a result of this finding, the Company is eligible to receive a cash refund from the Australian Taxation Office for the qualifying research and development costs expended outside of Australia in 2018, 2019 and 2020. During the three months ended September 30, 2019, the Company recorded $8.3 million as an incentive and tax receivable and recorded a corresponding credit to research and development expense for amounts expected to be received through the AOF for the period January 1, 2018 through September 30, 2019. As of September 30, 2019, incentive and tax receivables included $8.0 million related to the AOF. The reduction of $0.3 million was due to unrealized foreign currency losses related to the remeasurement of the Subsidiary’s assets and liabilities.

 

In addition, the Subsidiary incurs Goods and Services Tax (“GST”) on services provided by Australian vendors. As an Australian entity, the Subsidiary is entitled to a refund of the GST paid. The Company’s estimate of the amount of cash

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

refund it expects to receive related to GST incurred is included in “Incentive and tax receivables” in the accompanying consolidated balance sheets. As of September 30, 2019, incentive and tax receivables included $0.3 million for refundable GST on expenses incurred with Australian vendors during the three months ended September 30, 2019. 

 

Incentive and tax receivables consisted of the following as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

September 30,

    

December 31,

 

 

2019

 

2018

Research and development incentive for the period 1/1/18 - 12/31/18

 

$

3,026,622

 

$

3,149,546

Research and development incentive (non-AOF) for the period 1/1/19 - 09/30/19

 

 

2,118,304

 

 

 —

Research and development incentive (AOF) for the period 1/1/18 - 09/30/19

 

 

7,992,022

 

 

 —

Goods and services tax

 

 

310,033

 

 

295,074

Total incentive and tax receivables

 

$

13,446,981

 

$

3,444,620

 

d. Research and Development

 

Research and development costs are expensed as incurred and are primarily comprised of external research and development expenses incurred under arrangements with third parties, such as contract research organizations, contract manufacturing organizations, consultants and employee-related expenses including salaries and benefits. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that the Company considers in preparing these estimates include the number of patients enrolled in studies, milestones achieved and other criteria related to the efforts of its vendors. These estimates will be subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company will record net prepaid or accrued expenses related to these costs. Research and development expenses are recorded net of expected refunds of eligible research and development costs paid pursuant to the Australian research and development tax incentive program and GST incurred on services provided by Australian vendors. For the nine months ended September 30, 2019 and 2018, the Company incurred research and development expenses of $12.9 million and $22.4 million, respectively, which were net of $10.5 million and $2.8 million, respectively, associated with the Australian research and development tax incentive program.

 

e. Net Loss Per Share

 

Basic net loss per share is determined using the weighted average number of shares of common stock outstanding during each period. Diluted net income per share includes the effect, if any, from the potential exercise or conversion of securities, such as restricted stock and stock options, which would result in the issuance of incremental shares of common stock. Basic and dilutive computations of net loss per share are the same in periods in which a net loss exists as the dilutive effects of restricted stock and stock options would be anti-dilutive.

 

The following potentially dilutive securities outstanding as of September 30, 2019 and 2018 have been excluded from the computation of diluted weighted average shares outstanding, as their effects on net loss per share for the periods presented would be anti-dilutive:

 

 

 

 

 

 

 

 

September 30,

 

 

2019

 

2018

 

Stock options

 

3,990,623

 

3,158,531

 

Unvested restricted stock

 

11,600

 

7,500

 

 

 

4,002,223

 

3,166,031

 

 

f. Recently Adopted Accounting Pronouncements

 

In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), Accounting Standards Codification 842 (“ASC 842”), which amends a number of aspects of lease accounting and requires entities to recognize right-of-use assets and lease liabilities on the balance sheet for leases with lease terms of more than 12 months. ASC 842 became effective on January 1, 2019. In July 2018, the FASB issued

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which offered a transition option to entities adopting ASC 842. Under ASU 2018-11, entities can elect to apply ASC 842 using a modified-retrospective adoption approach resulting in a cumulative effect adjustment, if any, to retained earnings at the beginning of the year in which the new lease standard is adopted, rather than adjustments to the earliest comparative period presented in their financial statements.

 

As of January 1, 2019, the Company adopted ASC 842 using the modified-retrospective method and recognized right-of-use assets and corresponding lease liability of $325,683, which represented the present value of the remaining lease payments of $350,507, discounted using the Company’s incremental borrowing rate of 11.17%. In addition, the Company eliminated its deferred rent liability and recorded an adjustment to decrease its right-of-use assets by $12,824. The adoption of the standard did not have an impact on the Company’s consolidated statements of cash flows and had no impact on the Company’s consolidated statement of operations

 

 

(3) Fair Value Measurements

 

The Company measures certain assets and liabilities at fair value in accordance with Accounting Standards

Codification 820 (“ASC 820”), Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creates a fair value hierarchy that serves to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:

 

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.

 

Level 3 — Valuations based on unobservable inputs and models that are supported by little or no market activity.

 

In accordance with the fair value hierarchy described above, the following table sets forth the Company's financial assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement

 

 

 

Carrying amount

 

as of September 30, 2019

 

 

    

as of September 30, 2019

    

Level 1

    

Level 2

   

Level 3

 

Cash equivalents (money market accounts)

 

$

77,413,227

 

$

77,413,227

 

$

 —

 

$

 —

 

 

    

$

77,413,227

   

$

77,413,227

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement

 

 

 

Carrying amount

 

as of December 31, 2018

 

 

    

as of December 31, 2018

    

Level 1

    

Level 2

    

Level 3

 

Cash equivalents (money market accounts)

 

$

59,554,458

 

$

59,554,458

 

$

 —

 

$

 —

 

 

 

$

59,554,458

 

$

59,554,458

 

$

 —

 

$

 —

 

 

 

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4) Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2019

 

2018

 

Prepaid development expenses

 

$

1,125,195

 

$

2,671,815

 

Prepaid insurance

 

 

1,175,259

 

 

393,451

 

Deferred financing costs

 

 

130,386

 

 

255,754

 

Other current assets

 

 

400,500

 

 

426,067

 

Total prepaid expenses and other current assets

 

$

2,831,340

 

$

3,747,087

 

 

 

(5) Property and Equipment

 

Property and equipment consisted of the following as of September 30, 2019 and December 31, 2018:  

 

 

 

 

 

 

 

 

 

 

 

 

    

Estimated

    

 

 

    

 

 

 

 

 

useful life

 

September 30,

 

December 31,

 

 

 

(in years)

 

2019

 

2018

 

Equipment

 

2-5

 

$

257,309

 

$

178,001

 

Computer equipment

 

3-5

 

 

30,319

 

 

30,319

 

Furniture and fixtures

 

3-5

 

 

313,137

 

 

300,407

 

Leasehold improvements

 

various

 

 

68,881

 

 

68,881

 

Construction in process

 

 

 

 

30,434

 

 

57,015

 

Total cost

 

 

 

 

700,080

 

 

634,623

 

Less accumulated depreciation

 

 

 

 

(360,867)

 

 

(262,660)

 

Property and equipment, net

 

 

 

$

339,213

 

$

371,963

 

 

Depreciation expense was $36,027 and $25,043 for the three months ended September 30, 2019 and 2018, respectively, and $98,207 and $73,195 for the nine months ended September 30, 2019 and 2018, respectively.

 

(6) Accrued Expenses

 

Accrued expenses consisted of the following as of September 30, 2019 and December 31, 2018:  

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2019

 

2018

 

Accrued compensation

 

$

1,894,724

 

$

2,188,801

 

Accrued research and development

 

 

3,487,224

 

 

1,928,305

 

Grants payable

 

 

 —

 

 

747,926

 

Other

 

 

460,314

 

 

399,183

 

Total accrued expenses

 

$

5,842,262

 

$

5,264,215

 

 

 

(7) Common Stock

 

On August 30, 2019, the Company entered into the 2019 Sales Agreement with the Agents pursuant to which the Company may sell, from time to time, up to $75.0 million of its common stock. As of November 1, 2019, there have been no sales of common stock under the 2019 Sales Agreement.

 

In June 2017, the Company entered into the Sales Agreement with Jefferies pursuant to which the Company sold $50.0 million of its common stock. In the first quarter of 2019, the Company sold and issued 3,439,523 shares of common stock under the Sales Agreement with Jefferies in the open market at a weighted average selling price of $5.44 per share, resulting in gross proceeds of $18.7 million. Net proceeds received after deducting commissions and offering expenses were $18.1 million. In the second quarter of 2019, the Company sold and issued 2,082,031 shares of common stock under the Sales Agreement with Jefferies in the open market at a weighted average selling price of $13.50 per share,

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

resulting in gross proceeds of $28.1 million. Net proceeds received after deducting commissions and offering expenses were $27.0 million. The last sale under the Sales Agreement was made on May 16, 2019. From June 2017 through May 16, 2019, the Company has cumulative gross proceeds of $50.0 million from shares sold in the open market under the Sales Agreement, which has terminated pursuant to its terms.

 

In July 2018, the Company completed a follow-on public offering, selling 4,062,500 shares of its common stock at an offering price of $8.00 per share, resulting in gross proceeds of $32.5 million. Net proceeds received after deducting underwriting discounts and commissions and offering expenses were $29.9 million.

 

(8) Stock-Based Compensation

 

The Company maintains the Amended and Restated 2014 Omnibus Incentive Compensation Plan, as amended (the “2014 Plan”), which allows for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units, performance units and other stock‑based awards to employees, officers, non-employee directors, consultants, and advisors. In addition, the 2014 Plan provides selected executive employees with the opportunity to receive bonus awards that are considered qualified performance‑based compensation. The 2014 Plan is subject to automatic annual increases in the number of shares authorized for issuance under the 2014 Plan on the first trading day of January each year equal to the lesser of 1.5 million shares or 10% of the number of shares of common stock outstanding on the last trading day of December of the preceding year. As of January 1, 2019, the number of shares of common stock that may be issued under the 2014 Plan was automatically increased by 1.5 million shares, increasing the number of shares of common stock available for issuance under the 2014 Plan to 6,304,869 shares. As of September 30, 2019, 1,765,870 shares were available for future issuance under the 2014 Plan.

 

Options issued under the 2014 Plan have a contractual life of 10 years and may be exercisable in cash or as otherwise determined by the board of directors. The Company has granted options to employees and non‑employee directors. Stock options granted to employees vest 25% upon the first anniversary of the grant date and the balance of unvested options vests in quarterly installments over the remaining three years. Stock options granted annually to non-employee directors vest on the earlier of the one-year anniversary of the grant date, or the date of the Company’s next annual stockholders’ meeting that occurs after the grant date. The Company’s non-employee director compensation policy enables directors to receive stock options in lieu of quarterly cash payments. Any option granted to the directors in lieu of cash compensation vests in full on the grant date. The Company records forfeitures as they occur.

 

During 2018, the Company granted 83,280 performance-based stock options to certain employees. These performance options have a 10-year life and an exercise price equal to the fair value of the Company’s stock at the grant date. During 2019, the Company granted 5,000 performance-based restricted stock awards. Vesting of the performance-based options and restricted stock awards is dependent on meeting certain performance conditions, which relate to the Company’s research and development progress, which were established by the Company’s board of directors. The Company’s board of directors determines if the performance conditions have been met. Stock-based compensation expense for these performance-based grants are recorded when management estimates that the vesting of these shares is probable based on the status of the Company’s research and development programs and other relevant factors. For the nine months ended September 30, 2019,  none of the performance-based metrics were deemed probable of achievement. Any change in these estimates will result in a cumulative adjustment in the period in which the estimate is changed, so that as of the end of a period, the cumulative compensation expense recognized for an award or grant equals the amount that would be recognized on a straight-line basis as if the current estimates had been utilized since the beginning of the service period. As of September 30, 2019, the aggregate estimated grant date fair values of options and restricted stock awards for which the satisfaction of the related-performance conditions have not been deemed probable were  $663,484 and $24,850, respectively.

 

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the nine months ended September 30, 2019 and 2018, the Company recorded stock-based compensation expense related to its stock option grants and restricted stock awards, as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Option Grants

 

Restricted stock awards

 

Total

 

    

2019

    

2018

 

2019

 

2018

 

2019

 

    

2018

Research and development

 

$

1,893,441

   

$

2,096,710

 

$

22,137

 

$

171,073

 

$

1,915,578

 

$

2,267,783

General and administrative

 

 

2,438,644

   

 

2,712,517

 

 

 —

 

 

46,813

 

 

2,438,644

 

 

2,759,330

 

 

$

4,332,085

 

$

4,809,227

 

$

22,137

 

$

217,886

 

$

4,354,222

 

$

5,027,113

 

The following table summarizes the stock option activity for the nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

    

Weighted-

 

 

 

 

 

 

 

Average

 

Average

 

Aggregate

 

 

Number

 

Exercise

 

Contractual

 

Intrinsic

 

 

of Shares

 

Price

 

Life (in Years)

   

Value

Outstanding as of December 31, 2018

 

3,152,267

 

$

12.16

 

 

 

 

 

Granted

 

931,089

 

 

6.02

 

 

 

 

 

Exercised

 

(40,983)

 

 

4.63

 

 

 

 

 

Cancelled / Forfeited

 

(51,750)

 

 

10.87

 

 

 

 

 

Outstanding as of September 30, 2019

 

3,990,623

 

 

10.82

 

7.44

 

$

4,523,563

Exercisable as of September 30, 2019

 

2,351,847

 

 

11.91

 

6.50

 

$

1,822,175

Vested and expected to vest as of September 30, 2019

 

3,907,343

 

$

10.81

 

 

 

 

 

 

The weighted-average grant date fair values of options granted during the nine months ended September 30, 2019 and 2018 was $4.19 and $7.94, respectively.

 

The fair values of stock options granted were calculated using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

2019

 

2018

Weighted-average risk-free interest rate

 

2.38%

 

2.51%

Expected term of options (in years)

 

6.16

 

6.13

Expected stock price volatility

 

80.00%

 

78.00%

Expected dividend yield

 

0%

 

0%

 

 

As of September 30, 2019, excluding performance-based stock options that have not been deemed probable, there was $8.6 million of unrecognized stock-based compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.26 years.

 

The following table summarizes the restricted stock award activity under the 2014 Plan for the nine months ended September 30, 2019:

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

 

 

Grant Date

 

    

Shares

    

Fair Value

Unvested as of December 31, 2018

 

10,500

 

$

11.86

Granted

 

8,600

 

 

4.42

Vested

 

(7,500)

 

 

13.46

Unvested as of September 30, 2019

 

11,600

 

$

5.31

 

As of September 30, 2019, excluding performance-based restricted stock awards that have not been deemed probable, there was $8,640 of unrecognized stock-based compensation expense related to unvested restricted stock awards, which is expected to be recognized over a weighted-average period of 1.32 years. The Company expects that all 6,600 of the unvested, non-performance based, restricted stock awards will vest.

15

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

(9) Operating Lease Obligations

The Company adopted ASC 842 prospectively using the modified-retrospective method and elected the package of transition practical expedients that does not require reassessment of: (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and nonlease components, which consist principally of common area maintenance charges, and to exclude leases with an initial term of 12 months or less.

The Company leases its headquarters where it occupies 10,877 square feet of office space pursuant to a five-year lease that expires on May 31, 2020. The Company’s lease contains variable lease costs that do not depend on a rate or index and consist primarily of common area maintenance, taxes, and insurance charges. As the implicit rate was not readily determinable for the Company’s lease, the Company used an estimated incremental borrowing rate, or discount rate, to determine the initial present value of the lease payments. The discount rate for the lease was calculated using a synthetic credit rating model.

As of January 1, 2019, the Company recognized a lease liability of $325,683 and right-of-use assets of $312,859, which was recorded net of a pre-existing deferred rent liability of $12,824. As of September 30, 2019, the Company’s right-of-use asset, net of amortization, was $152,166.

 

Other operating lease information as of September 30, 2019:

 

 

 

 

 

Weighted-average remaining lease term - operating leases

 

0.7

years

Weighted-average discount rate - operating leases

 

11.17

%

 

The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of September 30, 2019:

 

 

 

 

 

Year ended:

 

    

 

December 31, 2019 (remaining months)

 

$

62,253

December 31, 2020

 

 

103,757

Total minimum lease payments

 

 

166,010

Less: imputed lease interest

 

 

(6,743)

Total lease liabilities

 

$

159,267

 

Lease expense for the nine months ended September 30, 2019 was comprised of the following:

 

 

 

 

 

Operating lease expense

 

$

178,773

Variable lease expense

 

 

44,023

Total lease expense

 

$

222,796

 

Cash payments related to operating leases for the nine months ended September 30, 2019 was $184,496.

 

 

 

16

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

 

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and the audited consolidated financial statements and notes thereto for the year ended December 31, 2018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our 2018 Annual Report.  The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of many factors.  We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report, including those set forth under “Cautionary Note Regarding Forward-looking Statements” and “Risk Factors” in this Quarterly Report and our 2018 Annual Report.

 

Overview

 

Company Overview 

 

Zynerba Pharmaceuticals is the leader in pharmaceutically-produced transdermal cannabinoid therapies for rare and near-rare neuropsychiatric disorders. We are committed to improving the lives of patients and their families living with severe, chronic health conditions including Fragile X syndrome, or FXS, autism spectrum disorder, or ASD, 22q11.2 deletion syndrome, or 22q, and a heterogeneous group of rare and ultra-rare epilepsies known as developmental and epileptic encephalopathies, or DEE.

 

We are currently evaluating ZygelTM, a patent-protected transdermal cannabidiol, or CBD, gel for the treatment of FXS, DEE, ASD and 22q. In 2017, we completed three Phase 2 clinical trials for Zygel and two of those studies have open-label extensions that are ongoing. In April 2018, we initiated an open-label Phase 2 clinical trial evaluating Zygel in children and adolescent patients with DEE.  In September 2019, we completed the first six months of dosing for that study and announced positive top-line results. In July 2018, we initiated what we believe will be a pivotal clinical trial evaluating Zygel in children and adolescent patients with FXS. In March 2019, we initiated an open-label Phase 2 clinical trial evaluating Zygel in children and adolescent patients with ASD and in May 2019, we initiated an open-label Phase 2 clinical trial evaluating Zygel in children and adolescent patients with 22q.

 

Cannabinoids are a class of compounds derived from Cannabis plants. The two primary cannabinoids contained in Cannabis are CBD and Tetrahydrocannabinol, or THC. Clinical and preclinical data suggest that CBD has positive effects on treating behavioral symptoms of FXS, ASD, 22q and seizures in patients with epilepsy.

 

Zygel 

 

Zygel is the first and only pharmaceutically-produced CBD formulated as a permeation‑enhanced gel for transdermal delivery, and the formulation is patent protected through 2030. Two additional patents, directed to methods of treating FXS with synthetic or purified CBD and methods of treating ASD with synthetic CBD, respectively, will expire in 2038. CBD is the primary non‑euphoric component of Cannabis.  

 

In preclinical animal studies, Zygel’s permeation enhancer increased delivery of CBD through the layers of the skin and into the circulatory system. These preclinical studies suggest increased bioavailability, consistent plasma levels and the avoidance of first‑pass liver metabolism of CBD when delivered transdermally. In addition, an in vitro study published in Cannabis and Cannabinoid Research in April 2016 demonstrated that CBD is degraded to THC (the major psychoactive cannabinoid in Cannabis) in an acidic environment such as the stomach. As a result, we believe such degradation may lead to increased psychoactive effects if CBD is delivered orally and may be avoided with the transdermal delivery of Zygel, which maintains CBD in a neutral pH.

 

Zygel, which is being developed as a clear gel with once- or twice-daily dosing and is targeting treatment of behavioral symptoms of FXS, ASD and 22q and reduction in seizures in patients with DEE. We have been granted orphan drug designation from the U.S. Food and Drug Administration, or FDA,  for the use of CBD for the treatment of FXS. In May 2019, we received Fast Track designation from the FDA for treatment of behavioral symptoms associated with FXS. The FDA’s Fast Track program is designed to facilitate the development of drugs intended to treat serious conditions and fill unmet medical needs, and can lead to expedited review by FDA in order to get new important drugs to the patient earlier.

17

In our Phase 1 program, Zygel was demonstrated to be safe and well tolerated, provided a favorable CBD pharmacokinetic profile, and no THC was detected in plasma or urine. As of June 2018, the Zygel safety database across all clinical studies conducted by us includes data from 570 volunteers and patients. Across these clinical studies, Zygel has been well tolerated and consistent with previously reported data.

 

In April 2018, we initiated the exploratory Phase 2 BELIEVE 1 (Open Label Study to Assess the Safety and Efficacy of Zygel Administered as a Transdermal Gel to Children and Adolescents with Developmental and Epileptic Encephalopathy) clinical trial, a six-month open label multi-dose clinical trial designed to evaluate the efficacy and safety of Zygel in children and adolescents (three to 17 years) with DEE as classified by the International League Against Epilepsy (ILAE) (Scheffer et al. 2017). Forty-eight patients with confirmed DEE were dosed in this clinical trial. Patients received weight-based initial doses of 250 mg or 500 mg daily and during the maintenance phase patients received up to 1000 mg daily of Zygel.

 

In September 2019, we reported positive top-line data from the BELIEVE 1 trial. All 48 patients enrolled in the trial were included in the safety data for the trial. Forty-six patients were included in the modified intent-to-treat population (mITT). Of the 46 patients in the mITT population, 33 (72%) had focal impaired-awareness seizures (FIAS; previously known as complex partial seizures) and/or convulsive seizures (focal to bilateral tonic-clonic seizures and generalized tonic-clonic seizures) at baseline. These patients experienced a mean baseline seizure count of 64 FIAS and/or convulsive seizures, and a median baseline seizure count of 8.2 FIAS and/or convulsive seizures. Compared to baseline seizure frequency, these patients experienced a ≥44% median reduction in these seizures from month two onwards using monthly seizure frequency.

 

CID:IMAGE001.JPG@01D5881C.430AA2D0

 

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Fifty-five percent (55%) of patients with FIAS and/or convulsive seizures experienced a ≥50% median reduction in seizures at month six of treatment with Zygel.

 

CID:IMAGE002.JPG@01D5881C.430AA2D0

 

Caregivers also reported improvements in alertness, awareness or energy in 58% of patients.

 

In the trial, Zygel was well tolerated, and the safety profile was consistent with previously released data from Zygel clinical trials. One patient discontinued the study as a result of an application site reaction, and seven discontinued as a result of withdrawal of consent or perceived lack of efficacy. Children with DEE are medically fragile, and as such adverse events, whether unrelated or related to study drug, that occur during the trial period are common and expected. Through six months of therapy, 60% of patients experienced a treatment related adverse event. Most treatment related adverse events were mild to moderate. The most common treatment related adverse events (in >5% of patients) are application site dryness (8.3%), application site pain (8.3%), and somnolence (8.3%). Ten patients experienced a serious adverse event (SAE), eight of which were deemed to be unrelated to study drug.  Two SAE’s were deemed possibly related to study drug, including one case of lower respiratory tract infection and one case of status epilepticus, both of which are common events in this patient population. There were no patient deaths during the study.     

 

In July 2018, we initiated the pivotal CONNECT-FX (Clinical study of Cannabidiol (CBD) in Children and Adolescents with Fragile X) clinical trial, a multi-national randomized, double-blind, placebo-controlled, 14-week study that will assess the efficacy and safety of Zygel in children and adolescents ages three through 17 years who have full mutation of the FMR1 gene. Approximately 200 male and female patients with FXS will be enrolled at approximately 20 clinical sites in the United States, Australia, and New Zealand. The study is being conducted in the United States under an Investigational New Drug (IND) application opened with the FDA. Patients will be randomized 1:1 to either trial drug or placebo. Randomization will be stratified by gender, weight, and investigator geographic region. Enrolled patients will receive weight-based doses of 250 mg or 500 mg daily. The primary endpoint is the change from baseline to the end of the treatment period in the Aberrant Behavior Checklist-Community FXS Specific (ABC-CFXS) Social Avoidance subscale. Key secondary endpoints are the change from baseline to the end of the treatment period in the ABC-CFXS Irritability subscale score, the ABC-CFXS Socially Unresponsive/Lethargic subscale score, and improvement in Clinical Global Impression - Improvement (CGI-I) at the end of the treatment period. Based on discussions with the FDA, we will anchor the CGI-I scale to behavioral symptoms of FXS. Consistent with recent guidance from the FDA on capturing the voice of the patient in drug development, additional qualitative data on the clinical relevance of various FXS behaviors to caregivers and patients will be collected. If we obtain positive results from this trial, we plan to request a meeting with the FDA to determine the acceptability of these data as the basis for an NDA filing. We expect to report top line results from the CONNECT-FX trial in the first half of 2020.

 

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In March 2019, we initiated the Phase 2 BRIGHT (An Open-Label Tolerability and Efficacy Study of ZYN002 Administered as a Transdermal Gel to Children and Adolescents with Autism Spectrum Disorder) trial, a 14-week open label clinical trial designed to assess the safety, tolerability and efficacy of Zygel for the treatment of behavioral symptoms of ASD. We expect to enroll approximately 36 male and female patients (age four to 17 years) and to report top line data from this study in the first half of 2020.

 

In May 2019, we initiated the open-label Phase 2 INSPIRE (Assessing the Impact of Zygel [Transdermal CBD Gel] on Pediatric Behavioral and Emotional Symptoms of 22q11.2 Deletion Syndrome) trial, a 14-week open label clinical trial designed to assess the safety, tolerability and efficacy of Zygel for treatment of behavioral symptoms of 22q. We expect to enroll approximately 20 male and female patients (age six to 17 years) and to report top line data from this study in the first half of 2020.

 

Zygel Clinical Development Timelines 

 

Our key development programs and expected timelines for the development of Zygel are shown in the chart below:

 

CID:IMAGE007.JPG@01D5840F.502D4E60

 

We have never been profitable and have incurred net losses since inception. Our net losses were $22.2 million and $32.1 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, our accumulated deficit was $140.1 million. We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.

 

Financial Operations Overview

 

The following discussion sets forth certain components of our consolidated statements of operations as well as factors that impact those items.

 

Revenue 

 

Historically, our revenue consisted of state and federal research grants and fees received from research services for third-party product development. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. 

 

20

Research and Development Expenses 

 

Our research and development expenses relating to our product candidates consisted of the following:

 

·

expenses associated with preclinical development and clinical trials;

 

·

personnel-related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation;

 

·

payments to third‑party CROs or CMOs, contractor laboratories and independent contractors; and

 

·

depreciation, maintenance and other facility-related expenses.

 

We expense all research and development costs as incurred. Clinical development expenses for our product candidates are a significant component of our current research and development expenses. Generally speaking, expenses associated with clinical trials will increase as our clinical trials progress. Product candidates in later stage clinical development generally have higher research and development expenses than those in earlier stages of development, primarily due to increased size and duration of the clinical trials. We track and record information regarding external research and development expenses for each grant, study or trial that we conduct. We use third-party CROs, CMOs, contractor laboratories and independent contractors in preclinical studies and clinical trials. We recognize the expenses associated with third parties performing these services for us in our preclinical studies and clinical trials based on the percentage of each study completed at the end of each reporting period.

 

Our Australian subsidiary, Zynerba Pharmaceuticals Pty Ltd, or the Subsidiary, is incorporated in Australia and is eligible to participate in an Australian research and development tax incentive program.  As part of this program, the Subsidiary is eligible to receive a cash refund from the Australian Taxation Office for a percentage of the research and development costs expended by the Subsidiary in Australia. In July 2019, the Australian government’s Department of Industry, Innovation and Science, or AusIndustry, responded to an Advance Overseas Finding, or AOF, application submitted by Zynerba that will allow certain research and development expenses incurred with respect to Zygel™ outside of Australia to be eligible for the Australian research and development tax incentive program. As a result of this finding, we are eligible to receive a cash refund from the Australian Taxation Office for the qualifying research and development costs expended outside of Australia in 2018, 2019 and 2020. During the three months ending September 30, 2019, we recorded an $8.3 million credit to research and development expenses for amounts expected to be received through the AOF for the period January 1, 2018 through September 30, 2019. Although the AOF approval extends into 2020, management believes that substantially all qualifying amounts have been recorded as of September 30, 2019.

 

For the nine months ended September 30, 2019 and 2018, we incurred research and development expenses of $12.9 million and $22.4 million, respectively, which were net of $10.5 million and $2.8 million, respectively, associated with the Australian research and development tax incentive program. 

 

The following table summarizes research and development expenses for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

Research and development expenses - before R&D incentive

 

$

7,381,241

 

$

5,569,430

 

$

23,380,269

 

$

25,212,001

Research and development incentive (non-AOF)

 

 

(715,631)

 

 

(709,528)

 

 

(2,184,164)

 

 

(2,843,120)

Research and development expenses (before impact of AOF)

 

 

6,665,610

 

 

4,859,902

 

 

21,196,105

 

 

22,368,881

AOF - cumulative change in estimate for the period 1/1/18 through 9/30/19

 

 

(8,270,009)

 

 

 —

 

 

(8,270,009)

 

 

 —

Total research and development expenses

 

$

(1,604,399)

 

$

4,859,902

 

$

12,926,096

 

$

22,368,881

 

Excluding the reduction of research and development expenses from the AOF, we expect research and development expenses to slightly increase in 2019 as compared to 2018, as we continue to advance our clinical trials. These expenditures are subject to numerous uncertainties regarding timing and cost to completion. Completion of our

21

preclinical development and clinical trials may take several years or more and the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

 

·

the number of sites included in the clinical trials;

 

·

the length of time required to enroll suitable patients;

 

·

the size of patient populations participating in the clinical trials;

 

·

the duration of patient follow-ups;

 

·

the development stage of the product candidates; and

 

·

the efficacy and safety profile of the product candidates.

 

Due to the early stages of our research and development, we are unable to determine the duration or completion costs of our development of our product candidates. As a result of the difficulties of forecasting research and development costs of our product candidates as well as the other uncertainties discussed above, we are unable to determine when and to what extent we will generate revenue from the commercialization and sale of an approved product candidate.

 

General and Administrative Expenses 

 

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance, legal, human resource, investor relations and commercial functions. Our general and administrative expenses also include facility and related costs not included in research and development expenses, professional fees for legal services, including patent-related expenses, consulting, tax and accounting services, insurance, market research and general corporate expenses. We expect that our general and administrative expenses will increase for the next several years as we increase our headcount with the continued development and potential commercialization of our product candidates.

 

Interest Income

 

Interest income primarily consists of interest earned on balances maintained in our money market bank account. 

 

Foreign Exchange (Loss) Gain

 

Foreign exchange (loss) gain relates to the effect of exchange rates on transactions incurred by the Subsidiary.

 

Critical Accounting Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We define our critical accounting policies as those that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. Critical accounting estimates and the accounting policies critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements are discussed in our 2018 Annual Report under Part II, Item 7, “Critical Accounting Policies and Use of

22

Estimates”. During the nine months ended September 30, 2019, there have been no material changes to the critical accounting estimates or critical accounting policies discussed in our 2018 Annual Report.

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2019 and 2018

 

Research and Development Expenses

 

Excluding the $8.3 million reduction in research and development expenses for amounts expected to be received through the AOF for the period from January 1, 2018 through September 30, 2019, research and development expenses increased by $1.8 million, or 37%, to $6.7 million for the three months ended September 30, 2019 from $4.9 million for the three months ended September 30, 2018.  The increase was primarily related to an increase in clinical trial and manufacturing costs related to our Zygel program.

 

General and Administrative Expenses

 

General and administrative expenses increased by $0.4 million, or 13%, to $3.5 million for the three months ended September 30, 2019 from $3.1 million for the three months ended September 30, 2018.  The increase was primarily related to an increase in pre-commercialization expense for our product candidates, an increase in directors and officers liability insurance expense and higher employee-related costs.

 

Other Income (Expense)

 

During the three months ended September 30, 2019 and 2018, we recognized $0.4 million and $0.3 million, respectively, in interest income. The increase in interest income was primarily related to a higher amount of invested cash resulting from the receipt of $45.1 million in net proceeds from the sale of our shares of common stock under the Sales Agreement with Jefferies during the first half of 2019. During the three months ended September 30, 2019 and 2018, we recognized foreign currency losses of $0.5 million and $0.1 million, respectively. Foreign currency gains and losses are due primarily to the remeasurement of the Subsidiary’s assets and liabilities, which are denominated in the local currency to the subsidiary’s functional currency, which is the U.S. dollar. 

 

Comparison of the Nine Months Ended September 30, 2019 and 2018

 

Research and Development Expenses

 

Excluding the $8.3 million reduction in research and development expenses for amounts expected to be received through the AOF for the period from January 1, 2018 through September 30, 2019, research and development expenses decreased by $1.2 million, or 5%, to $21.2 million for the nine months ended September 30, 2019 from $22.4 million for the nine months ended September 30, 2018.  The decrease was primarily related to a  decrease in non-clinical trial costs related to our Zygel program and decreases in employee-related costs and stock-based compensation expense; partially offset by an increase in clinical trial costs related to our Zygel program.

 

General and Administrative Expenses

 

We incurred general and administrative expenses of $10.0 million for both the nine months ended September 30, 2019 and 2018. Higher employee-related costs and an increase in directors and officers liability insurance expense were offset by decreases in stock-based compensation expense and lower costs associated with the recruiting of new employees.

 

Other Income (Expense)

 

During the nine months ended September 30, 2019 and 2018, we recognized $1.2 million and $0.6 million, respectively, in interest income. The increase in interest income was related both to a higher average interest rate earned on our investments and to a  higher amount of invested cash resulting from the receipt of $45.1 million in net proceeds from the sale of our shares of common stock under the Sales Agreement with Jefferies during the first half of 2019. During the nine months ended September 30, 2019 and 2018, we recognized foreign currency losses of $0.6 million and $0.4 million, respectively. Foreign currency gains and losses are due primarily to the remeasurement of the Subsidiary’s

23

assets and liabilities that are denominated in the local currency to the subsidiary’s functional currency, which is the U.S. dollar. 

 

Liquidity and Capital Resources

 

Since our inception in 2007, we have devoted most of our cash resources to research and development and general and administrative activities. We have financed our operations primarily with the proceeds from the sale of equity securities (most notably our IPO in 2015, sales under our “at-the-market” offering in 2016, 2017 and 2019, and our follow-on public offerings in the first quarter of 2017 and the third quarter of 2018, of which our 2018 and 2019 transactions are described below under Equity Financings) and convertible promissory notes, state and federal grants and research services.

 

To date, we have not generated any revenue from the sale of products, and we do not anticipate generating any revenue from the sales of products for the foreseeable future. We have incurred losses and generated negative cash flows from operations since inception. As of September 30, 2019, our principal sources of liquidity were our cash and cash equivalents of  $77.5 million. Our working capital was  $84.5 million as of September 30, 2019.

 

Management believes that current cash and cash equivalents and the proceeds anticipated from the AOF are sufficient to fund operations and capital requirements beyond the expected NDA submission and potential approval of Zygel for the treatment of FXS and into the second half of 2021.   Substantial additional financings will be needed to fund our operations and to complete clinical development of and to commercially develop our product candidates. There is no assurance that such financing will be available when needed or on acceptable terms.

 

Equity Financings

 

On August 30, 2019, we entered into a Controlled Equity Offering Sales AgreementSM, or the 2019 Sales Agreement, with Cantor Fitzgerald & Co., Canaccord Genuity, LLC, H.C. Wainwright & Co. LLC and Ladenburg Thalmann & Co. Inc., as sales agents pursuant to which we may sell, from time to time, up to $75.0 million of our common stock. As of November 1, 2019, there have been no sales of common stock under the 2019 Sales Agreement.

 

In June 2017, we entered into an Open Market Sales Agreement, or Sales Agreement, with Jefferies LLC, or Jefferies, pursuant to which we sold $50.0 million of our common stock. In the first quarter of 2019, we sold and issued 3,439,523 shares of common stock under the Sales Agreement with Jefferies in the open market at a weighted average selling price of $5.44 per share, resulting in gross proceeds of $18.7 million. Net proceeds received after deducting commissions and offering expenses were $18.1 million. In the second quarter of 2019, we sold and issued 2,082,031 shares of common stock under the Sales Agreement with Jefferies in the open market at a weighted average selling price of $13.50 per share, resulting in gross proceeds of $28.1 million. Net proceeds received after deducting commissions and offering expenses were $27.0 million. The last sale under the Sales Agreement was made on May 16, 2019. From June 2017 through May 16, 2019, we have cumulative gross proceeds of $50.0 million from shares sold in the open market under the Sales Agreement, which has terminated pursuant to its terms.

 

In July 2018, we completed a follow-on public offering, selling 4,062,500 shares of our common stock at an offering price of $8.00 per share, resulting in gross proceeds of $32.5 million. Net proceeds received after deducting underwriting discounts and commissions and offering expenses were $29.9 million.

 

Debt

 

We had no debt outstanding as of September 30, 2019 or December 31, 2018.

 

Future Capital Requirements

 

During the nine months ended September 30, 2019, net cash used in operating activities was $27.4 million, and our accumulated deficit as of September 30, 2019 was $140.1 million. Our expectations regarding future cash requirements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make in the future. To the extent that we enter into any of those types of transactions, we may need to raise substantial additional capital.

 

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We expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of our product candidates. If we obtain marketing approval for any of our product candidates, we will incur significant sales, marketing and manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems and personnel, including personnel to support our planned product commercialization efforts. We also expect to continue to incur significant costs to comply with corporate governance, internal controls and similar requirements associated with operating as a public reporting company.

 

Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:

 

·

the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates;

 

·

the clinical development plans we establish for these product candidates;

 

·

the number and characteristics of product candidates that we may develop or in-license;

 

·

the terms of any collaboration agreements we may choose to execute;

 

·

the outcome, timing and cost of meeting regulatory requirements established by the United States Drug Enforcement Agency, the FDA, the European Medicines Agency or other comparable foreign regulatory authorities;

 

·

the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

 

·

the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;

 

·

costs and timing of the implementation of commercial scale manufacturing activities; and

 

·

the cost of establishing, or outsourcing, sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to independently commercialize our products.

 

To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to finance our cash needs through public or private equity offerings, debt financings, collaboration and licensing arrangements or other financing alternatives. We have no committed external sources of funds. Additional equity or debt financing or collaboration and licensing arrangements may not be available on acceptable terms, if at all.

 

If we raise additional funds by issuing equity securities, our stockholders will experience dilution.

 

Cash Flows

 

The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2019

    

2018

 

Statement of Cash Flows Data:

 

 

 

 

 

 

 

Total net cash (used in) provided by:

 

 

 

 

 

 

 

Operating activities

 

$

(27,353,114)

 

$

(26,189,509)

 

Investing activities

 

 

(81,051)

 

 

(157,409)

 

Financing activities

 

 

45,217,922

 

 

30,014,017

 

Net increase in cash and cash equivalents

 

$

17,783,757

 

$

3,667,099

 

 

25

Operating Activities

 

For the nine months ended September 30, 2019, cash used in operating activities was $27.4 million compared to $26.2 million for the nine months ended September 30, 2018. The increase from the comparable 2018 period was primarily the result of the timing of accounts payable and accrued expenses.

 

Excluding the cash anticipated to be received from the July 2019 AOF application,  we expect cash used in operating activities to slightly increase in 2019 as compared to 2018, as we continue to advance our clinical trials.

 

Investing Activities

 

For the nine months ended September 30, 2019, cash used in investing activities represented the cost of expenditures made for manufacturing equipment. For the nine months ended September 30, 2018, cash used in investing activities represented the cost of expenditures made for manufacturing equipment and furniture and fixtures and leasehold improvements associated with our corporate headquarters. 

 

Financing Activities

 

Cash provided by financing activities for the nine months ended September 30, 2019 consisted primarily of $45.1 million in net proceeds from sales of our shares of common stock under the Sales Agreement with Jefferies.  Cash provided by financing activities for the nine months ended September 30, 2018 consisted primarily of $29.9 million in net proceeds from sales of our shares of common stock under a follow-on public offering.

 

Contractual Obligations 

 

Other than the changes related to the adoption of the new lease accounting standard as described in Note 9 of our Notes to Unaudited Consolidated Financial Statements, there were no material changes in our contractual obligations since December 31, 2018. Our material contractual obligations consist of commitments under operating lease agreements and the related amounts of our obligations as of December 31, 2018 were disclosed in “Contractual Obligations” in Part II, Item 7 in our 2018 Annual Report.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, except for operating leases, or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

 

Recent Accounting Pronouncements

 

For descriptions of recently issued accounting pronouncements, see “Note 2 – Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements” of our Notes to Unaudited Consolidated Financial Statements included above in Part I of this report.

 

JOBS Act

 

We are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act of 2012, or JOBS Act. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an "emerging growth company." As an "emerging growth company," we have elected not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable.

 

Subject to certain conditions set forth in the JOBS Act, as an "emerging growth company," we are not required to, among other things, (i) provide an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial

26

statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.  These exemptions will apply until December 31, 2020 or until we no longer meet the requirements for being an “emerging growth company,” whichever occurs first.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes nor do we engage in any hedging activities. As of September 30, 2019, we had cash and cash equivalents of  $77.5 million, consisting primarily of cash and money market account balances. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an immediate 10% increase in interest rates would have any significant impact on the realized value of our investments. Accordingly, we do not believe we are exposed to material market risk with respect to our cash and cash equivalents.

 

We have engaged third parties to manufacture our product candidates in Australia and Canada and to conduct clinical trials for our product candidates in Australia and New Zealand. Manufacturing and research costs related to these operations are paid for in a combination of U.S. dollars and local currencies, limiting our foreign currency exchange rate risk. Accordingly, we do not believe our foreign currency exchange rate risk is significant due to the limited extent of our operations in foreign currencies; however, if we conduct clinical trials and seek to manufacture a more significant portion of our product candidates outside of the United States in the future, we could incur significant foreign currency exchange rate risk.  

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms, promulgated by the Securities and Exchange Commission. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

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

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On October 23, 2019, a putative class action complaint was filed against the Company and certain of its current officers in the United States District Court for the Eastern District of Pennsylvania. This action was purportedly brought on behalf of a putative class of Zynerba investors who purchased the Company’s publicly traded securities between March 11, 2019 and September 17, 2019. The Complaint alleges that Defendants made certain material misstatements and omissions relating to product candidate Zygel (“ZYN002”) in alleged violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act.  Specifically, plaintiff claims that Defendants made false statements or failed to disclose that: (i) Zygel was proving

27

unsafe and not well-tolerated in the BELIEVE 1 clinical trial; (ii) that the foregoing created a foreseeable, heightened risk that Zynerba would fail to secure the necessary regulatory approvals for commercializing Zygel for the treatment of developmental and epileptic encephalopathies in children and adolescents, and (iii) as a result the Company’s public statements and public filings were materially false and misleading to investors.

 

We believe that the claims asserted are without merit, and we intend to defend these actions vigorously. The lawsuit is in the early stages and, at this time, no assessment can be made as to its likely outcome or whether the outcome will be material to us.

 

Item 1A. Risk Factors.

 

We are subject to securities class action litigation, which is expensive, can divert management attention, and, if resolved unfavorably, could expose us to significant liabilities. 

 

On October 23, 2019, a putative class action complaint was filed against the Company and certain of its current officers in the United States District Court for the Eastern District of Pennsylvania. This action was brought on behalf of a putative class of Zynerba investors who purchased the Company’s publicly traded securities between March 11, 2019 and September 17, 2019. The Complaint alleges that Defendants made certain material misstatements and omissions relating to product candidate Zygel, ZYN002, in alleged violation of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act.   We believe that the lawsuit is without merit and intend to vigorously defend against it.  The lawsuit is in the early stages and, at this time, no assessment can be made as to its likely outcome or whether the outcome will be material to us. This litigation could result in substantial costs and a diversion of management’s resources and attention.  In addition, any adverse determination could expose us to significant liabilities, which could have a material adverse effect on our business, financial condition, and results of operations.

 

You should also carefully consider the risk factors described in our December 31, 2018 Annual Report, under the caption “Item 1A. “Risk Factors.”  There have been no material changes to the risk factors disclosed in our 2018 Annual Report. 

 

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

 

Recent Sales of Unregistered Securities

 

None.

 

Purchase of Equity Securities

 

We did not purchase any of our registered equity securities during the period covered by this Quarterly Report on Form 10-Q.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

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Item 6. Exhibits.

 

The following exhibits are being filed herewith:

 

EXHIBIT INDEX 

 

Exhibit No.

    

Exhibit

10.1

 

Controlled Equity OfferingSM Sales Agreement, dated August 30, 2019, by and among the registrant, Cantor Fitzgerald & Co., Canaccord Genuity LLC, H.C. Wainwright & Co., LLC, and Ladenburg Thalmann & Co. Inc. Incorporated herein by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K (File No. 001-37526) filed on August 30, 2019.

10.2

 

Amendment to the Employment Agreement, dated August 30, 2019, by and between the registrant and Armando Anido. Incorporated herein by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K (File No. 001-37526) filed on August 30, 2019.

10.3

 

Amendment to the Employment Agreement, dated August 30, 2019, by and between the registrant and James E. Fickenscher. Incorporated herein by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K (File No. 001-37526) filed on August 30, 2019.

10.4

 

Amendment to the Employment Agreement, dated August 30, 2019, by and between the registrant and Terri B. Sebree. Incorporated herein by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K (File No. 001-37526) filed on August 30, 2019.

10.5

 

Amendment to the Employment Agreement, dated August 30, 2019, by and between the registrant and Suzanne M. Hanlon (filed herewith).

10.6

 

Amendment to the Employment Agreement, dated August 30, 2019, by and between the registrant and Brian Rosenberger (filed herewith).

31.1

 

 

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2

 

 

Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1

 

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.2

 

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101 INS

 

XBRL Instance Document (filed herewith).

101 SCH

 

XBRL Taxonomy Extension Schema Document (filed herewith).

101 CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

101 DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

101 LAB

 

XBRL Taxonomy Extension Label Linkbase Document (filed herewith).

101 PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

 

29

SIGNATURES

 

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

 

 

 

 

 

ZYNERBA PHARMACEUTICALS, INC.

 

 

 

Date: November 6, 2019

By:

/s/ ARMANDO ANIDO

 

 

Armando Anido

 

 

Chief Executive Officer

 

 

(Principal executive officer)

 

 

 

Date: November 6, 2019

By:

/s/ JAMES E. FICKENSCHER

 

 

James E. Fickenscher

 

 

Chief Financial Officer

 

 

(Principal financial and accounting officer)

 

30

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