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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021

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 August 5, 2021, the registrant had 41,251,537 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 June 30, 2021 and December 31, 2020 (Unaudited)

5

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)

6

Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2021 and 2020 (Unaudited)

7

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 (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

26

Item 4.

Controls and Procedures

26

PART II—OTHER INFORMATION

26

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

27

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 on Form 10-Q, or 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 expectations, projections and estimates regarding expenses, future revenue, capital requirements, incentive and other tax credit eligibility, collectability 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;
that the results of our preclinical studies and earlier clinical trials of our product candidates may not be predictive of future results and we may not have favorable results in our ongoing or planned 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 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, shareholder class action lawsuits or other litigation;
our ability to obtain and maintain intellectual property protection for our product candidates;
legislative changes and recently proposed changes regarding the healthcare system, including changes and proposed 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;
the timing and outcome of current and future legal proceedings;
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;

3

the timing and outcome of the Australian Taxation Office’s, or ATO, review regarding our eligibility to receive certain tax credits;
the extent to which health epidemics and other outbreaks of communicable diseases, including the ongoing COVID-19 pandemic, could disrupt our operations or materially and adversely affect our business and financial conditions; and
the other risks, uncertainties and factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, or our 2020 Annual Report, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, 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 Quarterly Report (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any 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)

June 30,

December 31,

 

    

2021

    

2020

 

Assets

Current assets:

Cash and cash equivalents

$

85,780,711

$

59,157,187

Incentive and tax receivables

 

8,906,379

 

9,042,586

Prepaid expenses and other current assets

 

1,767,989

 

5,166,401

Total current assets

 

96,455,079

 

73,366,174

Property and equipment, net

 

509,623

 

585,403

Incentive and tax receivables

 

552,922

 

Right-of-use assets

 

678,280

 

105,199

Total assets

$

98,195,904

$

74,056,776

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

1,819,761

$

2,522,716

Accrued expenses

 

8,002,290

 

11,280,843

Lease liabilities

 

206,211

 

109,689

Total current liabilities

 

10,028,262

 

13,913,248

Lease liabilities, long-term

468,385

Total liabilities

10,496,647

13,913,248

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; 41,251,537 shares issued and outstanding at June 30, 2021 and 29,975,264 shares issued and outstanding at December 31, 2020

 

41,252

 

29,975

Additional paid-in capital

 

307,742,167

 

262,286,008

Accumulated deficit

 

(220,084,162)

 

(202,172,455)

Total stockholders' equity

 

87,699,257

 

60,143,528

Total liabilities and stockholders' equity

$

98,195,904

$

74,056,776

See accompanying notes to unaudited consolidated financial statements.

5

ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three months ended June 30,

Six months ended June 30,

    

2021

    

2020

    

2021

    

2020

Operating expenses:

Research and development

$

5,451,948

$

17,349,841

$

10,060,958

$

24,232,634

General and administrative

 

4,386,546

 

4,492,034

 

7,662,343

 

8,408,603

Total operating expenses

 

9,838,494

 

21,841,875

 

17,723,301

 

32,641,237

Loss from operations

 

(9,838,494)

 

(21,841,875)

 

(17,723,301)

 

(32,641,237)

Other income (expense):

Interest income

 

5,943

 

26,601

 

11,576

 

228,285

Foreign exchange (loss) gain

(117,528)

1,482,513

(199,982)

(257,638)

Total other expense

(111,585)

1,509,114

(188,406)

(29,353)

Net loss

$

(9,950,079)

$

(20,332,761)

$

(17,911,707)

$

(32,670,590)

Net loss per share basic and diluted

$

(0.25)

$

(0.78)

$

(0.47)

$

(1.32)

Basic and diluted weighted average shares outstanding

 

40,065,715

 

26,100,264

 

38,344,145

 

24,749,851

See accompanying notes to unaudited consolidated financial statements.

6

ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

Six months ended June 30, 2021

Total

Common stock

Additional

Accumulated

stockholders'

Shares

    

Amount

    

paid-in capital

    

deficit

    

equity

Balance at December 31, 2020

29,975,264

$

29,975

$

262,286,008

$

(202,172,455)

$

60,143,528

Issuance of common stock, net of issuance costs

10,244,326

10,245

42,210,099

42,220,344

Issuance of restricted stock

1,018,822

 

1,019

 

(1,019)

 

 

Exercise of stock options

13,125

13

47,893

47,906

Stock-based compensation expense

1,264,837

1,264,837

Net loss

(7,961,628)

 

(7,961,628)

Balance at March 31, 2021

41,251,537

41,252

305,807,818

(210,134,083)

95,714,987

Stock-based compensation expense

1,934,349

1,934,349

Net loss

(9,950,079)

 

(9,950,079)

Balance at June 30, 2021

41,251,537

$

41,252

$

307,742,167

$

(220,084,162)

$

87,699,257

Six months ended June 30, 2020

Total

Common stock

Additional

Accumulated

stockholders'

Shares

    

Amount

    

paid-in capital

    

deficit

    

equity

Balance at December 31, 2019

23,211,391

$

23,211

$

226,409,156

$

(150,835,624)

$

75,596,743

Issuance of common stock, net of issuance costs

356,000

356

1,581,694

1,582,050

Issuance of restricted stock

5,000

 

5

 

(5)

 

 

Stock-based compensation expense

1,323,352

1,323,352

Net loss

(12,337,829)

 

(12,337,829)

Balance at March 31, 2020

23,572,391

23,572

229,314,197

(163,173,453)

66,164,316

Issuance of common stock, net of issuance costs

5,682,784

5,683

27,240,793

27,246,476

Stock-based compensation expense

1,347,433

1,347,433

Net loss

(20,332,761)

 

(20,332,761)

Balance at June 30, 2020

29,255,175

$

29,255

$

257,902,423

$

(183,506,214)

$

74,425,464

See accompanying notes to unaudited consolidated financial statements.

7

ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six months ended June 30,

    

2021

    

2020

    

Cash flows from operating activities:

Net loss

$

(17,911,707)

$

(32,670,590)

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

Depreciation

 

123,350

 

89,463

Stock-based compensation

3,199,186

2,670,785

Changes in operating assets and liabilities:

Incentive and tax receivables

 

(416,715)

 

6,810,905

Prepaid expenses and other assets

 

3,536,027

 

381,064

Right-of-use assets and liabilities

(8,173)

2,360

Accounts payable

 

(794,987)

 

(789,142)

Accrued expenses

 

(3,303,778)

 

1,846,301

Net cash used in operating activities

 

(15,576,797)

 

(21,658,854)

Cash flows from investing activities:

Purchases of property and equipment

 

(47,570)

 

(360,838)

Net cash used in investing activities

 

(47,570)

 

(360,838)

Cash flows from financing activities:

Proceeds from the issuance of common stock

 

43,193,660

 

29,766,385

Payment of financing fees and expenses

 

(993,675)

 

(803,895)

Proceeds from the exercise of stock options

 

47,906

 

Net cash provided by financing activities

 

42,247,891

 

28,962,490

Net increase in cash and cash equivalents

 

26,623,524

 

6,942,798

Cash and cash equivalents at beginning of period

 

59,157,187

 

70,063,242

Cash and cash equivalents at end of period

$

85,780,711

$

77,006,040

Supplemental disclosures of cash flow information:

Financing costs included in accounts payable and accrued expenses at end of period

$

134,532

$

4,029

Property and equipment acquired but unpaid at end of period

$

$

22,764

See accompanying notes to unaudited consolidated financial statements

8

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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,” or “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 has incurred losses and negative cash flows from operations since inception and has an accumulated deficit of $220.1 million as of June 30, 2021. 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 May 11, 2021, the Company entered into a Controlled Equity OfferingSM Sales Agreement (the “2021 Sales Agreement”) with Cantor Fitzgerald & Co., Canaccord Genuity, LLC, H.C. Wainwright & Co. LLC and Ladenburg Thalmann & Co. Inc., as sales agents (the “2021 Sales Agents”), pursuant to which the Company may sell, from time to time, up to $75.0 million of its common stock. As of August 5, 2021, there have been no sales of common stock under the 2021 Sales Agreement.

In August 2019, the Company entered into a Controlled Equity OfferingSM Sales Agreement (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 “2019 Sales Agents”), pursuant to which the Company sold $75.0 million of its common stock. In the first quarter of 2021, the Company sold and issued 10,244,326 shares of common stock under the 2019 Sales Agreement in the open market at a weighted average selling price of $4.22 per share, resulting in gross proceeds of $43.2 million. Net proceeds after deducting commissions and offering expenses were $42.2 million. In 2020, the Company sold and issued 6,596,873 shares of common stock in the open market at a weighted-average selling price of $4.81 per share, for gross proceeds of $31.7 million and net proceeds, after deducting commissions and offering expenses, of $30.7 million. The last sale under the 2019 Sales Agreement was made on February 9, 2021. From August 2019 through February 9, 2021, the Company received cumulative gross proceeds of $75.0 million from shares sold in the open market under the 2019 Sales Agreement, which was terminated pursuant to its terms.

Management believes that the Company’s cash and cash equivalents as of June 30, 2021 are sufficient to fund operations and capital requirements well into the first half of 2024. Substantial additional financings will be needed by the Company to fund its operations, and to complete clinical development of and to commercially develop its product candidates. The Company’s ability to raise sufficient additional financing depends on many factors beyond its control, including the current volatility in the capital markets as a result of the COVID-19 pandemic. 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 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, 2020 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, the

9

Table of Contents

ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 June 30, 2021 its results of operations for the three and six months ended June 30, 2021 and 2020 and cash flows for the six months ended June 30, 2021 and 2020. 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 2020 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 (“ATO”) 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 estimates the amount of cash refund it expects to receive related to the Australian research and development tax incentive program and records the incentives when it is probable (1) the Company will comply with relevant conditions of the program and (2) the incentive will be received.

Certain research and development expenses incurred with respect to the Company’s lead product candidate Zygel outside of Australia may also be eligible for the Australian research and development tax incentive program. To receive a cash refund with respect to such expenses incurred outside of Australia, the expenses must have been for eligible research and development activities, as determined by AusIndustry, and the expenditures must have a scientific link to the Australian activities, be unable to be conducted in Australia and be less than the expenditures for activities conducted in Australia, as determined by the ATO. In December 2018, the Company submitted an Advance Overseas Finding (“AOF”) application to AusIndustry for a determination that a portion of the Company’s activities outside of Australia are eligible research and development activities, which was approved by AusIndustry in July 2019.

 

As a result of this finding, the Company believes it is eligible to receive a cash refund from the ATO for qualifying expenditures related to its research and development activities outside of Australia in 2018, 2019 and 2020. During the year ended December 31, 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 June 30, 2021, incentive and tax receivables included $8.9 million related to the AOF. The increase of $0.6 million was due to unrealized foreign currency gains related to the remeasurement of the Subsidiary’s assets and liabilities.

The Company evaluates its eligibility under tax incentive programs as of each balance sheet date based on the most current and relevant data available. If the Company is deemed to be ineligible or unable to receive the Australian research and development tax credit, or the Australian government significantly reduces or eliminates the tax credit, the actual cash refund the Company receives may materially differ from its estimates. In June 2020, the ATO informed the Company that it may not qualify for the AOF program based on their interpretation of certain eligibility requirements. Although the Company continues to believe that it complies with the relevant conditions of the AOF program that were in place when the Company received its original approval from AusIndustry, the Company determined it was no longer probable that the AOF claim would be received. As a result, during the three months ended June 30, 2020, the Company recorded a full reserve against the AOF receivable.

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

10

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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 June 30, 2021, incentive and tax receivables included $0.3 million for refundable GST on expenses incurred with Australian vendors during the three months ended June 30, 2021.

Current incentive and tax receivables consisted of the following as of June 30, 2021 and December 31, 2020:

    

June 30,

    

December 31,

2021

2020

Research and development incentive (non-AOF) for the period 1/1/18 - 12/31/18

$

3,366,787

$

3,425,791

Research and development incentive (non-AOF) for the period 1/1/19 - 12/31/19

3,137,078

3,192,056

Research and development incentive (non-AOF) for the period 1/1/20 - 12/31/20

2,090,371

2,127,005

Research and development incentive (AOF) for the period 1/1/18 - 12/31/19

8,890,254

9,046,058

Goods and services tax

312,143

297,734

Total incentive and tax receivables before reserve for AOF

17,796,633

18,088,644

Reserve for research and development incentive (AOF) for the period 1/1/18 - 12/31/19

(8,890,254)

(9,046,058)

Total incentive and tax receivables - current assets

$

8,906,379

$

9,042,586

As of June 30, 2021, the Company’s estimate of the amount of cash refund it expects to receive in 2021 for 2020, 2019 and 2018 eligible spending as part of this incentive program was $8.6 million and was recorded as a current asset. The Company’s estimate of the amount of cash refund it expects to receive in 2022 for 2021 eligible spending through June 30, 2021 was $0.6 million and was recorded as a non-current asset.

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.

The following table summarizes research and development expenses for the three and six months ended June 30, 2021 and 2020:

Three months ended June 30,

 

Six months ended June 30,

2021

2020

 

2021

2020

Research and development expenses - before R&D incentive

$

5,672,810

$

9,863,223

$

10,622,323

$

17,349,081

Research and development incentive (non-AOF)

(220,862)

(621,077)

(561,365)

(1,224,142)

Research and development expenses (before impact of AOF)

5,451,948

9,242,146

10,060,958

16,124,939

Amounts reserved against AOF refund

 

 

8,107,695

 

 

8,107,695

Total research and development expenses

$

5,451,948

$

17,349,841

$

10,060,958

$

24,232,634

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

11

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 June 30, 2021 and 2020 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:

June 30,

2021

2020

Stock options

 

5,255,538

 

4,710,201

 

Unvested restricted stock

 

1,185,822

 

11,800

 

 

6,441,360

 

4,722,001

 

f. Recent Accounting Pronouncements

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flow.

(3) Fair Value Measurements

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

Codification (“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 June 30, 2021 and December 31, 2020:

 

Fair Value Measurement

 

Carrying amount

as of June 30, 2021

 

    

as of June 30, 2021

    

Level 1

    

Level 2

    

Level 3

 

Cash equivalents (money market accounts)

$

85,249,760

$

85,249,760

$

$

    

$

85,249,760

    

$

85,249,760

$

$

  

 

Fair Value Measurement

 

Carrying amount

as of December 31, 2020

 

    

as of December 31, 2020

    

Level 1

    

Level 2

    

Level 3

 

Cash equivalents (money market accounts)

$

59,010,328

$

59,010,328

$

$

$

59,010,328

$

59,010,328

$

$

12

Table of Contents

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 June 30, 2021 and December 31, 2020:

    

June 30,

    

December 31,

 

2021

2020

 

Prepaid development expenses

$

940,191

$

866,498

Prepaid insurance

 

255,916

 

1,639,687

Insurance litigation settlement receivable

2,389,250

Other current assets

 

571,882

 

270,966

Total prepaid expenses and other current assets

$

1,767,989

$

5,166,401

(5) Property and Equipment

Property and equipment consisted of the following as of June 30, 2021 and December 31, 2020:

    

Estimated

    

    

 

useful life

June 30,

December 31,

 

(in years)

2021

2020

 

Equipment

 

2-5

$

740,543

 

$

729,489

Computer equipment

 

3-5

 

30,319

 

 

30,319

Furniture and fixtures

 

3-5

 

311,356

 

 

311,355

Leasehold improvements

 

various

 

68,881

 

 

68,881

Construction in process

 

 

79,342

 

 

42,827

Total cost

 

1,230,441

 

 

1,182,871

Less accumulated depreciation

 

(720,818)

 

 

(597,468)

Property and equipment, net

$

509,623

 

$

585,403

Depreciation expense was $123,350 and $89,463 for the six months ended June 30, 2021 and 2020, respectively.

(6) Accrued Expenses

Accrued expenses consisted of the following as of June 30, 2021 and December 31, 2020:

    

June 30,

    

December 31,

 

2021

2020

 

Accrued compensation

$

1,639,032

$

1,928,865

Accrued research and development

 

5,615,941

 

4,999,881

Accrued litigation settlement expenses

 

121,406

 

4,000,000

Other

 

625,911

 

352,097

Total accrued expenses

$

8,002,290

$

11,280,843

(7) Common Stock

On May 11, 2021, the Company entered into the 2021 Sales Agreement with the 2021 Sales Agents, pursuant to which the Company may sell, from time to time, up to $75.0 million of its common stock. As of August 5, 2021, there have been no sales of common stock under the 2021 Sales Agreement.

In August 2019, the Company entered into the 2019 Sales Agreement with the 2019 Sales Agents pursuant to which the Company sold $75.0 million of its common stock. In the first quarter of 2021, the Company sold and issued 10,244,326 shares of common stock under the 2019 Sales Agreement in the open market at a weighted average selling price of $4.22 per share, resulting in gross proceeds of $43.2 million. Net proceeds after deducting commissions and offering expenses were $42.2 million. In 2020, the Company sold and issued 6,596,873 shares of common stock in the open market at a weighted-average selling price of $4.81 per share, for gross proceeds of $31.7 million and net proceeds, after deducting commissions and offering expenses, of $30.7 million. The last sale under the 2019 Sales Agreement was made on

13

Table of Contents

ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

February 9, 2021. From August 2019 through February 9, 2021, the Company received cumulative gross proceeds of $75.0 million from shares sold in the open market under the 2019 Sales Agreement, which was terminated pursuant to its terms.

(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, 2021, 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 total number of shares of common stock available for issuance under the 2014 Plan to 9,304,869 shares. As of June 30, 2021, 2,302,008 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 primarily 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 the six months ended June 30, 2021, the Company granted 506,911 time-based restricted stock awards to employees with two-year cliff vesting. In addition, during the six months ended June 30, 2021, the Company granted 506,911 performance-based restricted stock awards to employees. Vesting of the performance-based 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. During the three months ended June 30, 2021, the performance-based conditions were deemed probable of achievement and the Company recorded $0.8 million in stock-based compensation expense related to these performance-based grants. As of June 30, 2021, there was $1.1 million of unrecognized stock-based compensation expense related to these performance-based awards, which will be expensed over the estimated service period related to each performance condition.

During the third quarter of 2020, the Company granted 194,000 restricted stock awards that contain both performance-based and service-based conditions. These awards vest on the earlier of: (a) meeting the performance condition or (b) service provided for one-year from the grant date. Awards with both performance and service conditions are being expensed over the service period, with an acceleration of the remaining compensation expense if the performance-based criteria is met before the end of the service condition.

14

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the six months ended June 30, 2021 and 2020, 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

    

2021

    

2020

    

2021

    

2020

2021

    

2020

Research and development

$

815,289

$

1,029,415

$

809,988

$

15,961

$

1,625,277

$

1,045,376

General and administrative

931,352

 

1,625,409

 

642,557

 

 

1,573,909

 

1,625,409

$

1,746,641

$

2,654,824

$

1,452,545

$

15,961

$

3,199,186

$

2,670,785

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2021:

    

    

Weighted-

    

Weighted-

 

Average

Average

Aggregate

Number

Exercise

Contractual

Intrinsic

of Shares

Price

Life (in Years)

   

Value

Outstanding as of December 31, 2020

 

4,546,484

$

9.76

Granted

786,117

3.65

Exercised

(13,125)

3.65

Forfeited

(63,938)

15.84

Outstanding as of June 30, 2021

 

5,255,538

8.79

 

6.73

$

3,175,029

Exercisable as of June 30, 2021

 

3,518,924

10.71

 

5.74

$

1,313,759

Vested and expected to vest as of June 30, 2021

 

3,518,924

$

10.71

The weighted-average grant date fair values of options granted during the six months ended June 30, 2021 and 2020 were $2.81 and $3.58, respectively.

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

Six months ended June 30,

    

2021

    

2020

Weighted-average risk-free interest rate

 

0.37%

1.27%

Expected term of options (in years)

 

6.25

6.18

Expected stock price volatility

 

95.60%

82.00%

Expected dividend yield

 

0%

0%

As of June 30, 2021, there was $5.5 million of unrecognized stock-based compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.55 years. During the six months ended June 30, 2021, the Company received $47,906 in cash from the exercise of employee stock options.

The following table summarizes the Company’s restricted stock award activity under the 2014 Plan for the six months ended June 30, 2021:

Weighted

Average

Aggregate

Grant Date

Intrinsic

    

Shares

    

Fair Value

Value

Unvested as of December 31, 2020

173,800

$

3.64

Granted

1,018,822

3.59

Vested

(6,800)

5.16

Unvested as of June 30, 2021

1,185,822

$

3.58

$

6,272,998

Vested and expected to vest as of June 30, 2021

 

1,180,822

$

3.58

$

6,246,548

As of June 30, 2021, there was $2.6 million of unrecognized stock-based compensation expense related to unvested restricted stock awards, which is expected to be recognized over a weighted-average period of 1.21 years. The Company expects that 1,180,822 of the unvested 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. On March 1, 2021, the Company extended its lease for three additional years until May 31, 2024. 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 March 1, 2021, the effective date of the lease modification, the Company remeasured the lease liability for the remaining portion of the lease and adjusted the lease liability to $755,085 and right-of-use assets to $752,391, which was recorded net of a deferred rent liability of $2,694. As of June 30, 2021, the Company’s right-of-use asset, net of amortization, was $678,280.

Other operating lease information as of June 30, 2021:

Weighted-average remaining lease term - operating leases

2.9

years

Weighted-average discount rate - operating leases

2.76

%

The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of June 30, 2021:

June 30,

Year ending:

2021

December 31, 2021

$

120,210

December 31, 2022

240,420

December 31, 2023

240,421

December 31, 2024

100,175

Total minimum lease payments

701,226

Less: imputed lease interest

(26,630)

Total lease liabilities

$

674,596

Lease expense for the six months ended June 30, 2021 was comprised of the following:

Six months ended June 30,

2021

    

2020

Operating lease expense

$

123,367

$

128,419

Variable lease expense

 

31,515

 

29,348

Total lease expense

$

154,882

$

157,767

Cash payments related to operating leases were $131,540 and $126,058 for the six months ended June 30, 2021 and 2020, respectively.

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, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our 2020 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 2020 Annual Report.

Overview

Company Overview

We are 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.

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

We are currently developing Zygel, the first and only pharmaceutically-produced cannabidiol formulated as a permeation-enhanced gel for transdermal delivery, which is patent protected through 2030. Five additional patents expiring in 2038 are directed to methods of use relating to Zygel, including methods of treating FXS and ASD.

In preclinical animal studies, Zygel’s permeation enhancer increased delivery of cannabidiol 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 cannabidiol when delivered transdermally. In addition, an in vitro study published in Cannabis and Cannabinoid Research in April 2016 demonstrated that cannabidiol 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 cannabidiol is delivered orally. These effects may be avoided with the transdermal delivery of Zygel, which maintains cannabidiol in a neutral pH. Zygel 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 the reduction of seizures in patients with DEE syndromes. We have been granted orphan drug designations from United States Food and Drug Administration, or FDA, for the use of cannabidiol for the treatment of FXS and for the treatment of 22q. 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 the FDA in order to get new important drugs to the patient earlier.

Our clinical program for Zygel includes clinical trials evaluating Zygel in the treatment of behavioral symptoms of FXS, ASD and 22q and the reduction of seizures and the treatment of associated symptoms in patients with DEE syndromes. As of August 2021, the Zygel safety database across all clinical studies conducted by us includes data from 909 volunteers and patients. Across these clinical studies, Zygel has been well-tolerated and consistent with previously reported data. Following the positive meeting with the FDA on our development program in ASD, we are evaluating and prioritizing our development options for ASD, 22q and DEE and we expect to provide guidance on the path forward in each of these indications by the end of 2021.

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CONNECT-FX Trial (FXS)

In June 2020, we announced results of our pivotal CONNECT-FX clinical trial, a multi-national randomized, double-blind, placebo-controlled, 14-week study designed to assess the efficacy and safety of Zygel in children and adolescents ages three through 17 years who have full mutation of the FMR1 gene. While Zygel did not achieve statistical significance versus placebo in the primary endpoint of improvement in the Social Avoidance subscale of the Aberrant Behavior Checklist – Community FXS (ABC-CFXS), a pre-planned ad hoc analysis of the most severely impacted patients in the trial, as defined by patients having at least 90% methylation (“highly methylated”) of the impacted FMR1 gene, demonstrated that those patients receiving Zygel achieved statistical significance in the primary endpoint of improvement at 12 weeks of treatment in the Social Avoidance subscale of the ABC-CFXS compared to placebo.

RECONNECT Trial (FXS)

In May 2021, following guidance received from the FDA regarding the regulatory path forward for Zygel, we announced that we will be conducting a pivotal, multi-national, confirmatory Phase 3 trial of Zygel in patients with FXS. The trial, which will be called RECONNECT (A Randomized, Double-Blind, Placebo-Controlled, Multiple-Center, Efficacy and Safety Study of ZYN002 Administered as a Transdermal Gel to Children and Adolescents with Fragile X Syndrome), is designed to evaluate the efficacy and safety of Zygel in children and adolescents with FXS. We believe that the results, if positive, from RECONNECT will be sufficient to support the submission of a New Drug Application for Zygel in patients with FXS.

The RECONNECT trial will be an 18-week trial which will enroll approximately 200 children and adolescents of which approximately 160 patients will have complete (100%) methylation of their FMR1 gene and approximately 40 patients will have partial methylation of their FMR1 gene. The primary endpoint for the trial will be the change in the Aberrant Behavior Checklist-Community FXS Specific (ABC-CFXS) Social Avoidance subscale in patients who have complete methylation of their FMR1 gene. All patients, including the cohort of partially methylated patients, will be included in a key secondary endpoint analysis.

We expect to initiate the RECONNECT trial in the third quarter of 2021. All patients will be eligible to enroll in our ongoing open-label extension after completing dosing in this clinical trial.

Phase 2 BRIGHT Trial (ASD)

In May 2020, we reported positive top-line results of the Phase 2 BRIGHT clinical trial, a 14-week, open-label clinical trial designed to assess the safety, tolerability and efficacy of Zygel for the treatment of pediatric and adolescent patients with ASD. Patients treated with Zygel demonstrated statistically significant improvement at week 14 compared to baseline for each ABC-C subscale (Irritability, Inappropriate Speech, Stereotypy, Social Withdrawal, and Hyperactivity). The results of the other efficacy assessments were consistent with the results demonstrated in the ABC-C. During the six months ended June 30, 2021, we discussed data supporting the potential efficacy of Zygel in ASD, including the results of our Phase 2 BRIGHT trial, with the FDA to determine the regulatory path forward. The guidance from the FDA included agreement on utilizing the irritability subscale of the ABC-C as the primary endpoint to support an indication for the treatment of irritability in ASD. This is the same primary endpoint utilized in the previously completed BRIGHT open label Phase 2 trial.

Phase 2 INSPIRE Trial (22q)

In May 2019, we initiated the open-label Phase 2 INSPIRE clinical 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 (ages six through 17 years). Recruitment into the INSPIRE trial has been delayed due to the impact of COVID-19 and resulting significant travel restrictions in Australia. Once enrollment is complete, we will provide a timeframe for disclosing top line results of this trial. In September 2020, we were granted orphan drug designation from the FDA for the use of cannabidiol for the treatment of 22q.

Phase 2 BELIEVE Trial (DEE)

In September 2019, we reported top-line results from the Phase 2 BELIEVE clinical trial, a six-month, open-label, multi-dose clinical trial designed to evaluate the efficacy and safety of Zygel in children and adolescents (ages three through

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17 years) with DEE. Following discussions with the FDA regarding the clinical pathway for Zygel in DEE, we plan to pursue individual syndromes. We are evaluating potential target indications and expect to finalize target syndrome selection for one or more DEE syndromes in 2021.

Operations

We continue to closely monitor the status of the COVID-19 pandemic, including its potential impact on our clinical development plans and timelines going forward. In response to the impact of COVID-19, for our current clinical development programs, we implemented multiple measures consistent with the FDA’s guidance on the conduct of clinical trials of medical products during the COVID-19 pandemic, including remote site monitoring and patient visits using telemedicine where needed, direct to patient drug shipments, and local study-related clinical laboratory collection. Except with respect to our Phase 2 open-label INSPIRE trial, timelines for delivery of top-line results for our clinical trials were not adversely impacted by COVID-19, and we intend to implement similar measures, as necessary, for our planned clinical trials in 2021.

We have never been profitable and have incurred net losses since inception. Our net losses were $17.9 million and $32.7 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, our accumulated deficit was $220.1 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.

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, 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, or ATO, 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. We estimate the amount of cash refund we expect to receive related to the Australian research and development

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tax incentive program and record the incentives when it is probable (1) we will comply with relevant conditions of the program and (2) the incentive will be received.

Certain research and development expenses incurred with respect to Zygel outside of Australia may also be eligible for the Australian research and development tax incentive program. To receive a cash refund with respect to such expenses incurred outside of Australia, the expenses must have been for eligible research and development activities, as determined by AusIndustry, and the expenditures must have a scientific link to the Australian activities, be unable to be conducted in Australia and be less than the expenditures for activities conducted in Australia, as determined by the ATO. In December 2018, the Subsidiary submitted an AOF application to AusIndustry for a determination that its activities are eligible research and development activities, which was approved by AusIndustry in July 2019. 

 

As a result of this finding, we believe the Subsidiary is eligible to receive a cash refund from the ATO for qualifying expenditures related to its research and development activities outside of Australia in 2018, 2019 and 2020. During the year ended December 31, 2019, we 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 June 30, 2021, incentive and tax receivables included $8.9 million related to the AOF. The increase of $0.6 million was due to unrealized foreign currency gains related to the remeasurement of the Subsidiary’s assets and liabilities.

We evaluate the Subsidiary’s eligibility under tax incentive programs as of each balance sheet date based on the most current and relevant data available. If the Subsidiary is deemed to be ineligible or unable to receive the Australian research and development tax credit, or the Australian government significantly reduces or eliminates the tax credit, the actual cash refund we receive may materially differ from our estimates. In June 2020, the ATO informed us that we may not qualify for the AOF program based on their interpretation of certain eligibility requirements. Although we continue to believe that we comply with the relevant conditions of the AOF program that were in place when we received our original approval from AusIndustry, we have determined it is no longer probable that the AOF claim will be received. As a result, during the three months ended June 30, 2020, we recorded a full reserve against the AOF receivable.

The following table summarizes research and development expenses for the three and six months ended June 30, 2021 and 2020:

Three months ended June 30,

 

Six months ended June 30,

2021

2020

 

2021

2020

Research and development expenses - before R&D incentive

$

5,672,810

$

9,863,223

$

10,622,323

$

17,349,081

Research and development incentive (non-AOF)

(220,862)

(621,077)

(561,365)

(1,224,142)

Research and development expenses (before impact of AOF)

5,451,948

9,242,146

10,060,958

16,124,939

Amounts reserved against AOF refund

 

 

8,107,695

 

 

8,107,695

Total research and development expenses

$

5,451,948

$

17,349,841

$

10,060,958

$

24,232,634

We expect research and development expenses to decrease in 2021 as compared to 2020 as we concluded our pivotal CONNECT-FX clinical trial and our BRIGHT clinical trial during 2020. We expect to initiate the RECONNECT pivotal trial in FXS during the third quarter of 2021. These expenditures are subject to numerous uncertainties regarding timing and cost to completion. Completion of our 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;

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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, litigation settlement 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 2020 Annual Report under Part II, Item 7, “Critical Accounting Policies and Use of Estimates.” During the six months ended June 30, 2021, there have been no material changes to the critical accounting estimates or critical accounting policies discussed in our 2020 Annual Report.

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Results of Operations

Comparison of the Three Months Ended June 30, 2021 and 2020

Research and Development Expenses

Three months ended June 30,

2021

2020

Research and development expenses (before impact of AOF)

$

5,451,948

$

9,242,146

Amounts reserved against AOF refund

 

 

8,107,695

Total research and development expenses

$

5,451,948

$

17,349,841

Excluding the $8.1 million increase in research and development expenses for the amounts reserved against the AOF receivable during the three months ended June 30, 2020, research and development expenses decreased by $3.8 million, or 41%, to $5.5 million for the three months ended June 30, 2021 from $9.2 million for the three months ended June 30, 2020. The decrease was primarily related to decreased clinical trial and manufacturing costs associated with our Zygel program following the conclusion of our CONNECT-FX and BRIGHT clinical trials; partially offset by an increase in stock-based compensation expenses and a reduction in the non-AOF Australian research and development incentive.

General and Administrative Expenses

General and administrative expenses decreased by $0.1 million, or 2%, to $4.4 million for the three months ended June 30, 2021 from $4.5 million for the three months ended June 30, 2020. The decrease was primarily related to decreases in pre-commercialization expense for Zygel and a decrease in legal expenses partially offset by an increase in directors and officers liability insurance and an increase in proxy solicitation costs related to our annual meeting.

Other Income (Expense)

During the three months ended June 30, 2021 and 2020, we recognized $5,943 and $26,601, respectively, in interest income. The decrease in interest income was related to lower average interest rates earned on our investments. During the three months ended June 30, 2021 and 2020, we recognized a foreign currency loss of $0.1 million and a foreign currency gain of $1.5 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 Six Months Ended June 30, 2021 and 2020

Research and Development Expenses

Six months ended June 30,

2021

2020

Research and development expenses (before impact of AOF)

$

10,060,958

$

16,124,939

Amounts reserved against AOF refund

 

 

8,107,695

Total research and development expenses

$

10,060,958

$

24,232,634

Excluding the $8.1 million increase in research and development expenses for the amounts reserved against the AOF receivable during the six months ended June 30, 2020, research and development expenses decreased by $6.1 million, or 38%, to $10.1 million for the six months ended June 30, 2021 from $16.1 million for the six months ended June 30, 2020. The decrease was primarily related to decreased clinical trial and manufacturing costs associated with our Zygel program following the conclusion of our CONNECT-FX and BRIGHT clinical trials; partially offset by an increase in stock-based compensation expenses and a reduction in the non-AOF Australian research and development incentive.

General and Administrative Expenses

General and administrative expenses decreased by $0.7 million, or 9%, to $7.7 million for the six months ended June 30, 2021 from $8.4 million for the six months ended June 30, 2020. The decrease was primarily related to decreases in pre-commercialization expense for Zygel, decreased employee-related costs and a decrease in legal expenses partially offset

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by an increase in directors and officers liability insurance and an increase in proxy solicitation costs related to our annual meeting.

Other Income (Expense)

During the six months ended June 30, 2021 and 2020, we recognized $11,576 and $0.2 million, respectively, in interest income. The decrease in interest income was related to lower average interest rates earned on our investments. During the six months ended June 30, 2021 and 2020, we recognized foreign currency losses of $0.2 million and $0.3 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.

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 issuance and sale of equity securities (most notably our initial public offering, our follow-on public offerings and sales under our “at-the-market” offering) 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 June 30, 2021, our principal sources of liquidity were our cash and cash equivalents of $85.8 million. Our working capital was $86.4 million as of June 30, 2021.

Management believes that cash and cash equivalents as of June 30, 2021 are sufficient to fund operations and capital requirements well into the first half of 2024. The economic effects of the COVID-19 pandemic remain fluid and management will continue to closely monitor the situation to ensure our cash and cash equivalents will help us manage the impact of the COVID-19 pandemic on our business and related liquidity needs. 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. Our ability to access the capital markets or otherwise raise such capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.

Equity Financings

On May 11, 2021, we entered into a Controlled Equity OfferingSM Sales Agreement, or the 2021 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 August 5, 2021, there have been no sales of common stock under the 2021 Sales Agreement.

In August 2019, we entered into a Controlled Equity OfferingSM Sales Agreement, 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 sold $75.0 million of our common stock. In the first quarter of 2021, we have sold and issued 10,244,326 shares of our common stock under the 2019 Sales Agreement in the open market at a weighted average selling price of $4.22 per share, resulting in gross proceeds of $43.2 million. Net proceeds after deducting commissions and offering expenses were $42.2 million. In the first quarter of 2020, we sold and issued 356,000 shares of our common stock in the open market at a weighted-average selling price of $5.10 per share, for gross proceeds of $1.8 million and net proceeds, after deducting commissions and offering expenses, of $1.6 million. In 2020, we sold and issued 6,596,873 shares of our common stock in the open market at a weighted-average selling price of $4.81 per share, for gross proceeds of $31.7 million and net proceeds, after deducting commissions and offering expenses, of $30.7 million. The last sale under the 2019 Sales Agreement was made on February 9, 2021. From August 2019 through February 9, 2021, we received cumulative gross proceeds of $75.0 million from shares sold in the open market under the 2019 Sales Agreement, which was terminated pursuant to its terms.

Debt

We had no debt outstanding as of June 30, 2021 or December 31, 2020.

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Future Capital Requirements

During the six months ended June 30, 2021, net cash used in operating activities was $15.6 million, and our accumulated deficit as of June 30, 2021 was $220.1 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.

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;

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;

the extent to which health epidemics and other outbreaks of communicable diseases, including the ongoing COVID-19 pandemic, could disrupt our operations or materially and adversely affect our business and financial conditions; and

the timing and outcome of the ATO’s review regarding our eligibility to receive tax credits related to the AOF.

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, including through our 2021 Sales Agreement, our stockholders will experience dilution.

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Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the six months ended June 30, 2021 and 2020.

Six Months Ended June 30,

 

    

2021

    

2020

 

Statement of Cash Flows Data:

Total net cash (used in) provided by:

Operating activities

$

(15,576,797)

$

(21,658,854)

Investing activities

 

(47,570)

 

(360,838)

Financing activities

 

42,247,891

 

28,962,490

Net increase in cash and cash equivalents

$

26,623,524

$

6,942,798

Operating Activities

For the six months ended June 30, 2021, cash used in operating activities was $15.6 million compared to $21.7 million for the six months ended June 30, 2020. The decrease from the comparable 2020 period was primarily the result of decreased research and development expenses related to clinical trial costs of our Zygel program and decreased general and administrative expenses.

Excluding any cash that may be received from the July 2019 AOF application, we expect cash used in operating activities to decrease in 2021 as compared to 2020, as we concluded our pivotal CONNECT-FX clinical trial and our BRIGHT clinical trial during 2020. We expect to initiate the RECONNECT pivotal trial in FXS during the third quarter of 2021.

Investing Activities

For the six months ended June 30, 2021 and 2020, cash used in investing activities represented the cost of expenditures made for manufacturing equipment.

Financing Activities

Cash provided by financing activities for the six months ended June 30, 2021 consisted primarily of $42.2 million in net proceeds from sales of our shares of common stock under the 2019 Sales Agreement. Cash provided by financing activities for the six months ended June 30, 2020 consisted of $29.0 million in net proceeds from sales of our shares of common stock under the 2019 Sales Agreement.

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 –Recent Accounting Pronouncements” of our Notes to Unaudited Consolidated Financial Statements included above in Part I of this report.

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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 June 30, 2021, we had cash and cash equivalents of $85.8 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, Canada and the United Kingdom and to conduct clinical trials for our product candidates in the United States, 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, however, our financial statements are reported in U.S. dollars and changes in foreign currency exchange rates could significantly affect our financial condition, results of operations, or cash flows. 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 June 30, 2021. 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 June 30, 2021, 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 June 30, 2021 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.

Shareholder Class Action

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, with an amended complaint filed on March 9, 2020. 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 “Shareholder Class Action”). 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 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 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.

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The Company’s motion to dismiss the plaintiffs’ complaint was denied on November 25, 2020. The Company and the individual defendants reached an agreement to settle this action, which was subject to the preliminary and final approval of the court. On May 12, 2021, the court issued an order providing for preliminary approval of the proposed settlement of claims asserted in the Shareholder Class Action (the “Preliminary Approval Order”), subject to final approval following a settlement hearing before the court, currently scheduled for August 31, 2021. Pursuant to the Preliminary Approval Order, during the three months ending June 30, 2021, the Company and its insurance carrier deposited their respective share of the agreed upon settlement amount into a settlement fund escrow account pending final approval of the settlement by the court.

The Company and the individual defendants have denied, and continue to deny, that they have committed any violations of law or breaches of duty as alleged in the Shareholder Class Action and make no admission of liability or any form of wrongdoing.

Derivative Action

On April 24, 2020, a stockholder derivative complaint, captioned Philip Quartararo v. Armando Anido, et al., was filed against the Company, its current and former directors (Armando Anido, John P. Butler, Warren D. Cooper, William J. Federici, Thomas L. Harrison, Daniel L. Kisner, Kenneth I. Moch, and Pamela Stephenson), and its Chief Financial Officer, James E. Fickenscher. (the “Quartararo Action”) in the United States District Court for the District of Delaware.

On December 4, 2020 a stockholder derivative complaint, captioned Dmitry Itkis, derivatively on behalf of Zynerba Pharmaceuticals, Inc. v. Armando Anido, et al. was filed against the Company, its current and former directors (Armando Anido, John P. Butler, Warren D. Cooper, William J. Federici, Thomas L. Harrison, Daniel L. Kisner, Kenneth I. Moch, and Pamela Stephenson), and its Chief Financial Officer, James E. Fickenscher. (the ‘Itkis Action”) in the United States District Court for the District of Delaware. The Quartararo Action and the Itkis action were consolidated in the shareholder derivative action, captioned In Re Zynerba Pharmaceuticals, Inc. Derivative Litigation (the “Derivative Action”) pending in the United States District Court for the District of Delaware. The consolidated complaint generally alleges breach of fiduciary duty, corporate waste and violations of Section 14 (a) of the Exchange Act in connection with the Company’s disclosures around the BELIEVE I clinical trial. The Company and the individual defendants reached an agreement in principle to settle the Derivative Action (the “Stipulation of Settlement”) which was subject to the preliminary and final approval of the court. On May 12, 2021, the court issued an order providing for preliminary approval of the Stipulation of Settlement. On July 15, 2021, following a settlement hearing, the Court issued a final order and judgment (the “Final Order”), pursuant to which the court fully and finally approved the settlement set forth in the Stipulation of Settlement and dismissed the Derivative Action with prejudice. In accordance with the terms of the Stipulation of Settlement, the Company has undertaken to institute specified governance enhancements. Under their terms, the Final Order and the Stipulation of Settlement may not be deemed to be evidence or an admission of liability, fault, breach of duty or wrongdoing on the part of the Company. Attorneys’ fees and service awards, granted in the Final Order to plaintiffs’ counsel and their clients, respectively, will be paid by the Company’s insurance carrier under the terms of their insurance policy.

220 Action

On March 15, 2021, stockholder Roland Davies filed a complaint pursuant to 8 Del. C. § 220 (“§220”) in the Court of Chancery of the State of Delaware seeking to inspect and make copies and extracts of certain books and records of the Company based on claims set forth in the Shareholder Class Action and the Derivative Action (the “220 Action”).

The Company and the individual defendants recently reached an agreement to settle the 220 Action (the “220 Settlement Agreement”), pursuant to which the matter has been dismissed with prejudice by the court. The Company and the individual defendants have denied, and continue to deny, that they committed any violations of law or breaches of duty as alleged in the 220 Action and make no admission of liability or any form of wrongdoing. Under its terms, the 220 Settlement Agreement may not be deemed to be evidence or an admission of liability, fault, breach of duty or wrongdoing on the part of the Company.

Item 1A. Risk Factors.

You should carefully consider the risk factors described in our 2020 Annual Report under the caption “Item 1A. “Risk Factors.” There have been no material changes in our risk factors included in our 2020 Annual Report. The risks

27

described in our 2020 Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

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.

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

3.1

Amended and Restated By-laws of Zynerba Pharmaceuticals, Inc., as amended.

10.1

Controlled Equity Offering SM Sales Agreement, dated May 11, 2021, 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (File No. 001-37526) filed on May 12, 2021.

10.2

Form of Restricted Stock Grant Agreement under Amended and Restated 2014 Omnibus Incentive Compensation Plan.

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

Inline XBRL Document (filed herewith).

101 SCH

Inline XBRL Taxonomy Extension Schema (filed herewith).

101 CAL

Inline XBRL Taxonomy Extension Schema Calculation Linkbase (filed herewith).

101 DEF

Inline XBRL Taxonomy Extension Schema Definition Linkbase (filed herewith).

101 LAB

Inline XBRL Taxonomy Extension Schema Label Linkbase (filed herewith).

101 PRE

Inline XBRL Taxonomy Extension Schema Presentation Linkbase (filed herewith).

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in exhibit 101)

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: August 9, 2021

By:

/s/ ARMANDO ANIDO

Armando Anido

Chief Executive Officer

(Principal Executive Officer)

Date: August 9, 2021

By:

/s/ JAMES E. FICKENSCHER

James E. Fickenscher

Chief Financial Officer

(Principal Financial and Accounting Officer)

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