SEC Filing | Zynerba Pharmaceuticals Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

◻ 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)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, $0.001 par value per share	ZYNE	The Nasdaq Global Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ⌧Yes ◻ No

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


Large accelerated filer ◻			Accelerated filer ◻
			Smaller reporting company ⌧
Non-accelerated filer ⌧			Emerging growth company ◻

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

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

As of November 9, 2022, the registrant had 47,062,711 shares of common stock, $0.001 par value per share, outstanding.

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TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION		5

Item 1.	Consolidated Financial Statements (Unaudited)	5

	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (Unaudited)	5

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	6

	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)	7

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)	8

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

PART II—OTHER INFORMATION		28

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	29

Item 6.	Exhibits	29

	Signatures	30

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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 developments impacting our industry or the healthcare system broadly, including but not limited to the Inflation Reduction Act of 2022 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;

●

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;

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●

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;

●

our ability to regain and maintain compliance with the continued listing requirements of The Nasdaq Global Market.

●

the extent to which inflation, global instability, including political instability, such as a deterioration in the relationship between the U.S. and China or the conflict between Russia and Ukraine, including any additional resulting sanctions, export controls or other restrictive actions that may be imposed by the U.S. and/or other countries against governmental or other entities in, for example, Russia, may disrupt our business operations and/or our financial condition; and

●

the other risks, uncertainties and factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, or our 2021 Annual Report, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, 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.

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PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

ZYNERBA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30,		December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	55,934,491	$	67,808,000
Incentive and tax receivables		1,378,738		9,580,468
Prepaid expenses and other current assets		3,487,626		2,831,392
Total current assets		60,800,855		80,219,860
Property and equipment, net		419,863		385,833
Incentive and tax receivables		751,815		—
Right-of-use assets		394,205		565,814
Total assets	$	62,366,738	$	81,171,507
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,619,697	$	1,798,813
Accrued expenses		7,598,187		7,896,598
Lease liabilities		213,428		209,068
Total current liabilities		9,431,312		9,904,479
Lease liabilities, long-term		178,672		353,694
Total liabilities		9,609,984		10,258,173
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; 47,062,711 shares issued and outstanding at September 30, 2022 and 41,217,537 shares issued and outstanding at December 31, 2021		47,063		41,218
Additional paid-in capital		319,210,944		310,353,595
Accumulated deficit		(266,501,253)		(239,481,479)
Total stockholders' equity		52,756,754		70,913,334
Total liabilities and stockholders' equity	$	62,366,738	$	81,171,507

See accompanying notes to unaudited consolidated financial statements.

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ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Operating expenses:
Research and development	$	5,039,228	$	6,341,171	$	15,632,150	$	16,402,129
General and administrative		3,453,648		3,869,481		10,933,411		11,531,824
Total operating expenses		8,492,876		10,210,652		26,565,561		27,933,953
Loss from operations		(8,492,876)		(10,210,652)		(26,565,561)		(27,933,953)
Other income (expense):
Interest income		251,855		5,038		439,590		16,614
Foreign exchange loss		(435,128)		(376,637)		(893,803)		(576,619)
Total other income (expense)		(183,273)		(371,599)		(454,213)		(560,005)
Net loss	$	(8,676,149)	$	(10,582,251)	$	(27,019,774)	$	(28,493,958)

Net loss per share basic and diluted	$	(0.20)	$	(0.26)	$	(0.65)	$	(0.73)
Basic and diluted weighted average shares outstanding		43,746,878		40,092,128		41,831,998		38,933,209

See accompanying notes to unaudited consolidated financial statements.

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ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Nine months ended September 30, 2022
								Total
	Common stock			Additional		Accumulated		stockholders'
	Shares	Amount		paid-in capital		deficit		equity
Balance at December 31, 2021	41,217,537	$	41,218	$	310,353,595	$	(239,481,479)	$	70,913,334
Issuance of common stock, net of issuance costs	857,060		857		1,582,916		—		1,583,773
Issuance of restricted stock	1,249,500		1,249		(1,249)		—		—
Stock-based compensation expense	—		—		1,160,482		—		1,160,482
Net loss	—		—		—		(8,490,619)		(8,490,619)
Balance at March 31, 2022	43,324,097		43,324		313,095,744		(247,972,098)		65,166,970
Issuance of common stock, net of issuance costs	488,892		489		818,877		—		819,366
Issuance of restricted stock	123,154		123		(123)		—		—
Stock-based compensation expense	—		—		1,108,543		—		1,108,543
Net loss	—		—		—		(9,853,006)		(9,853,006)
Balance at June 30, 2022	43,936,143		43,936		315,023,041		(257,825,104)		57,241,873
Issuance of common stock, net of issuance costs	2,779,346		2,780		3,147,150		—		3,149,930
Commitment shares issued under an equity purchase agreement	347,222		347		(347)		—		—
Stock-based compensation expense	—		—		1,041,100		—		1,041,100
Net loss	—		—		—		(8,676,149)		(8,676,149)
Balance at September 30, 2022	47,062,711	$	47,063	$	319,210,944	$	(266,501,253)	$	52,756,754




	Nine months ended September 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
Issuance of restricted stock	30,000		30		(30)		—		—
Stock-based compensation expense	—		—		1,569,993		—		1,569,993
Net loss	—		—		—		(10,582,251)		(10,582,251)
Balance at September 30, 2021	41,281,537	$	41,282	$	309,312,130	$	(230,666,413)	$	78,686,999

See accompanying notes to unaudited consolidated financial statements.

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ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine months ended September 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(27,019,774)	$	(28,493,958)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		165,920		185,245
Stock-based compensation		3,310,125		4,769,179
Changes in operating assets and liabilities:
Incentive and tax receivables		7,449,915		(361,104)
Prepaid expenses and other assets		(637,578)		1,424,002
Right-of-use assets and liabilities		947		(7,858)
Accounts payable		(256,554)		113,634
Accrued expenses		(354,500)		(3,252,118)
Net cash used in operating activities		(17,341,499)		(25,622,978)
Cash flows from investing activities:
Purchases of property and equipment		(146,705)		(47,570)
Net cash used in investing activities		(146,705)		(47,570)
Cash flows from financing activities:
Proceeds from the issuance of common stock		6,059,511		43,193,660
Payment of financing fees and expenses		(444,816)		(1,085,707)
Proceeds from the exercise of stock options		—		47,906
Net cash provided by financing activities		5,614,695		42,155,859
Net (decrease) increase in cash and cash equivalents		(11,873,509)		16,485,311
Cash and cash equivalents at beginning of period		67,808,000		59,157,187
Cash and cash equivalents at end of period	$	55,934,491	$	75,642,498

Supplemental disclosures of cash flow information:
Financing costs included in accounts payable and accrued expenses at end of period	$	122,782	$	42,500
Property and equipment acquired but unpaid at end of period	$	53,245	$	—

See accompanying notes to unaudited consolidated financial statements

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business and Liquidity

Zynerba Pharmaceuticals, Inc., together with its subsidiary, Zynerba Pharmaceuticals Pty Ltd (collectively, “Zynerba,” the “Company,” or “we”), is a clinical stage specialty pharmaceutical company focused on the development of pharmaceutically-produced transdermal cannabinoid therapies for orphan neuropsychiatric disorders, including Fragile X syndrome (“FXS”) and chromosome 22q11.2 deletion syndrome (“22q”). We have been granted orphan drug designations from the United States Food and Drug Administration (“FDA”) and the European Commission for the use of cannabidiol for the treatment of FXS. We have also been granted orphan drug designation from the FDA for the treatment of 22q. In addition, we have received Fast Track designation from the FDA for treatment of behavioral symptoms associated with FXS. The Company has decided to prioritize its resources on FXS and 22q, both of which have no approved products. While the data from the Company’s autism spectrum disorder (“ASD”) clinical development program to date are compelling, given the difficult financial market, the Company has decided to defer the start of the Phase 3 development program in ASD that was previously planned for the second half of 2022.

The Company has incurred losses and negative cash flows from operations since inception and has an accumulated deficit of $266.5 million as of September 30, 2022. 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.

Management believes that the Company’s cash and cash equivalents as of September 30, 2022 are sufficient to fund operations and capital requirements into the first quarter of 2024. Top-line results from the confirmatory pivotal Phase 3 RECONNECT trial of Zygel in patients with FXS are expected in the second half of 2023. 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 and ongoing volatility in the capital markets as a result of, among other factors, the COVID-19 pandemic and geopolitical tensions or the outbreak of hostilities or war. 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, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the consolidated financial statements) considered necessary to present fairly the Company's financial position as of September 30, 2022, its results of operations for the three and nine months ended September 30, 2022 and 2021 and cash flows for the nine months ended September 30, 2022 and 2021. 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 2021 Annual Report.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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) 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. 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 December 2018, the Company submitted an Advance Overseas Finding (“AOF”) application to a division of the Australian Government’s Department of Industry, Innovation and Science (“AusIndustry”), for a portion of the Company’s research and development activities incurred outside of Australia, which was approved by AusIndustry in July 2019. 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 December 31, 2019. 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 and, during the three months ended June 30, 2020, the Company determined it was no longer probable that the AOF claim would be received and the Company recorded a full reserve against the AOF receivable.

During the three months ended March 31, 2022, the Company concluded its conversations with the ATO on these matters and made the decision to no longer pursue the AOF claim, resulting in the write off of both the AOF receivable and the corresponding reserve during the period. During the three months ended March 31, 2022, the Company received a payment of $8.0 million from the ATO for the non-AOF research and development incentive for the years ended December 31, 2018, 2019 and 2020.

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 refund it expects to receive related to GST incurred is included in “Incentive and tax receivables” in the accompanying consolidated balance sheets. As of September 30, 2022, incentive and tax receivables included $0.3 million for refundable GST on expenses incurred with Australian vendors during the three months ended September 30, 2022.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Current incentive and tax receivables consisted of the following as of September 30, 2022 and December 31, 2021:


	September 30,		December 31,
	2022		2021
Research and development incentive (non-AOF) for the period 1/1/18 - 12/31/18	$	—	$	3,144,152
Research and development incentive (non-AOF) for the period 1/1/19 - 12/31/19		—		2,914,931
Research and development incentive (non-AOF) for the period 1/1/20 - 12/31/20		—		1,993,038
Research and development incentive (non-AOF) for the period 1/1/21 - 12/31/21		1,095,535		1,226,688
Research and development incentive (AOF) for the period 1/1/18 - 12/31/19		—		8,566,843
Goods and services tax		283,203		301,659
Total incentive and tax receivables before reserve for AOF		1,378,738		18,147,311
Reserve for research and development incentive (AOF) for the period 1/1/18 - 12/31/19		—		(8,566,843)
Total incentive and tax receivables - current assets	$	1,378,738	$	9,580,468

As of September 30, 2022, the Company’s estimate of the amount of cash refund it expects to receive for 2021 eligible spending as part of this incentive program was $1.1 million and was recorded as a current asset. In October 2022, the Company received payment from the ATO for the non-AOF research and development incentive for the year ended December 31, 2021 included in the table above. The Company’s estimate of the amount of cash refund it expects to receive for 2022 eligible spending through September 30, 2022 was $0.8 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 nine months ended September 30, 2022 and 2021:


	Nine months ended September 30,
	2022		2021
Research and development expenses - before R&D incentive	$	16,450,619	$	17,304,684
Research and development incentive		(818,469)		(902,555)
Total research and development expenses	$	15,632,150	$	16,402,129

e. Net Loss Per Share

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

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following potentially dilutive securities outstanding as of September 30, 2022 and 2021 have been excluded from the computation of diluted weighted average shares outstanding, as their effects on net loss per share for the periods presented would be anti-dilutive:


	September 30,
	2022	2021
Stock options	6,276,016	5,300,538
Unvested restricted stock	2,119,512	1,053,822
	8,395,528	6,354,360

f. Recent Accounting Pronouncements

The Company does not expect any recently issued accounting pronouncements to have a significant impact on its future 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 September 30, 2022 and December 31, 2021:



			Fair Value Measurement
	Carrying amount		as of September 30, 2022
	as of September 30, 2022		Level 1		Level 2		Level 3
Cash equivalents (money market accounts)	$	50,368,948	$	50,368,948	$	—	$	—
	$	50,368,948	$	50,368,948	$	—	$	—



			Fair Value Measurement
	Carrying amount		as of December 31, 2021
	as of December 31, 2021		Level 1		Level 2		Level 3
Cash equivalents (money market accounts)	$	67,709,279	$	67,709,279	$	—	$	—
	$	67,709,279	$	67,709,279	$	—	$	—

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(4) Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of September 30, 2022 and December 31, 2021:


	September 30,		December 31,
	2022		2021
Prepaid development expenses	$	634,106	$	543,897
Prepaid insurance		2,186,026		1,952,867
Deferred financing costs		156,271		137,615
Other current assets		511,223		197,013
Total prepaid expenses and other current assets	$	3,487,626	$	2,831,392

(5) Property and Equipment

Property and equipment consisted of the following as of September 30, 2022 and December 31, 2021:


	Estimated
	useful life	September 30,		December 31,
	(in years)	2022		2021
Equipment	2-5	$	740,543	$	740,543
Computer equipment	3-5		30,319		30,319
Furniture and fixtures	3-5		311,356		311,356
Leasehold improvements	various		68,881		68,881
Construction in process			279,292		79,342
Total cost			1,430,391		1,230,441
Less accumulated depreciation			(1,010,528)		(844,608)
Property and equipment, net		$	419,863	$	385,833

Depreciation expense was $165,920 and $185,245 for the nine months ended September 30, 2022 and 2021 respectively.

(6) Accrued Expenses

Accrued expenses consisted of the following as of September 30, 2022 and December 31, 2021:


	September 30,		December 31,
	2022		2021
Accrued compensation	$	2,006,537	$	2,412,291
Accrued research and development		4,731,308		5,125,010
Other		860,342		359,297
Total accrued expenses	$	7,598,187	$	7,896,598

(7) Common Stock

a. At The Market Financing

On May 11, 2021, the Company entered into a Controlled Equity Offering^SM 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 (collectively, the “2021 Sales Agents”), pursuant to which, under a prospectus filed by the Company in May 2022, the Company may sell, from time to time, up to $75.0 million of its common stock. During the nine months ended September 30, 2022, the Company sold and issued 3,925,298 shares of common stock under the 2021 Sales Agreement in the open market at a weighted average selling price of $1.49 per share, resulting in gross proceeds of $5.8 million. Net proceeds after deducting commissions and offering expenses were $5.4 million.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In August 2019, the Company entered into a Controlled Equity Offering^SM 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 (collectively, 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. As of February 9, 2021, the Company had utilized the entire $75.0 million under the 2019 Sales Agreement.

b. Equity Purchase Agreement

On July 21, 2022 (the “Effective Date”), the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) pursuant to which Lincoln Park committed to purchase up to $20.0 million of the Company’s common stock. Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $20.0 million of the Company’s common stock. Such sales of common stock will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 36-month period commencing on the Effective Date. The number of shares the Company may sell to Lincoln Park on any single business day in a regular purchase is 150,000, but that amount may be increased up to 300,000 shares, depending upon the market price of the Company’s common stock at the time of sale and subject to a maximum limit of $2.0 million per regular purchase. The purchase price per share for each such regular purchase will be based on prevailing market prices of the Company’s common stock immediately preceding the time of sale as computed under the Purchase Agreement. In addition to regular purchases, the Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional accelerated purchases.

Pursuant to the terms of the Purchase Agreement, the Company issued 347,222 shares of its common stock to Lincoln Park as consideration for its commitment to purchase shares of the Company’s common stock under the Purchase Agreement.

During the three months ended September 30, 2022, the Company sold and issued 200,000 shares of common stock under the Purchase Agreement at a weighted average selling price of $1.15 per share, resulting in gross of $0.2 million and net proceeds, after deducting offering expenses, of $0.1 million.

(8) Stock-Based Compensation

The Company maintains the Amended and Restated 2014 Omnibus Incentive Compensation Plan, as amended (the “2014 Plan”), which allows for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units, performance units and other stock-based awards to employees, officers, non-employee directors, consultants, and advisors. In addition, the 2014 Plan provides selected executive employees with the opportunity to receive bonus awards that are considered qualified performance-based compensation. The 2014 Plan is subject to automatic annual increases in the number of shares authorized for issuance under the 2014 Plan on the first trading day of January each year equal to the lesser of 1.5 million shares or 10% of the number of shares of common stock outstanding on the last trading day of December of the preceding year. As of January 1, 2022, 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 10,804,869 shares. As of September 30, 2022, 1,442,876 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.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-based compensation expense for 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, which were established by the Company’s board of directors. The Company’s board of directors determines if the performance conditions have been met.

During the nine months ended September 30, 2021, the Company granted 506,911 time-based restricted stock awards to employees with two-year cliff vesting of which 469,911 restricted stock awards remained outstanding as of September 30, 2022. In addition, during the nine months ended September 30, 2021, the Company granted 506,911 performance-based restricted stock awards to employees of which 187,964 restricted stock awards have fully vested and 281,947 restricted stock awards remained outstanding as of September 30, 2022. The performance-based conditions for these performance-based grants were deemed probable of achievement during the six months ended June 30, 2021 and, as of September 30, 2022, the Company has recorded $1.6 million in stock-based compensation expense related to these grants. As of September 30, 2022, there was $40,696 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 nine months ended September 30, 2022, the Company granted 841,654 time-based restricted stock awards to employees, non-employee directors and consultants of which 804,654 restricted stock awards remained outstanding as of September 30, 2022. In addition, during the nine months ended September 30, 2022, the Company granted 556,500 performance-based restricted stock awards to employees of which 548,000 restricted stock awards remained outstanding as of September 30, 2022. As of September 30, 2022, satisfaction of the related performance conditions has not been deemed probable of being achieved and 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 once the performance conditions have been deemed probable.

For the nine months ended September 30, 2022 and 2021, 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
	2022		2021		2022		2021		2022			2021
Research and development	$	776,809	$	1,198,492	$	723,638	$	1,245,175	$	1,500,447	$	2,443,667
General and administrative		941,321		1,307,844		868,357		1,017,668		1,809,678		2,325,512
	$	1,718,130	$	2,506,336	$	1,591,995	$	2,262,843	$	3,310,125	$	4,769,179

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2022:


		Weighted-		Weighted-
		Average		Average	Aggregate
	Number	Exercise		Contractual	Intrinsic
	of Shares	Price		Life (in Years)	Value
Outstanding as of December 31, 2021	5,224,913	$	8.74
Granted	1,136,728		2.17
Forfeited	(85,625)		10.97
Outstanding as of September 30, 2022	6,276,016		7.52	6.17	$	—
Exercisable as of September 30, 2022	4,303,603		9.58	5.00	$	—
Vested and expected to vest as of September 30, 2022	6,276,016	$	7.52

The weighted-average grant date fair values of options granted during the nine months ended September 30, 2022 and 2021 were $1.74 and $2.84, respectively.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	Nine months ended September 30,
	2022	2021
Weighted-average risk-free interest rate	2.02%	0.37%
Expected term of options (in years)	6.11	6.21
Expected stock price volatility	100.23%	95.60%
Expected dividend yield	0%	0%

As of September 30, 2022, there was $3.9 million of unrecognized stock-based compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.40 years. During the nine months ended September 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 nine months ended September 30, 2022:


		Weighted
		Average		Aggregate
		Grant Date		Intrinsic
	Shares	Fair Value		Value
Unvested as of December 31, 2021	989,822	$	3.62
Granted	1,398,154		2.17
Forfeited	(25,500)		2.41
Vested	(242,964)		3.60
Unvested as of September 30, 2022	2,119,512	$	2.86	$	1,551,483
Expected to vest as of September 30, 2022	1,566,512	$	2.85	$	1,146,687

As of September 30, 2022, excluding performance-based restricted stock awards that have not been deemed probable, there was $1.5 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 0.62 years.

(9) Operating Lease Obligations

The Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), Accounting Standards Codification 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 September 30, 2022, the Company’s right-of-use asset, net of amortization, was $394,205.

Other operating lease information as of September 30, 2022:


Weighted-average remaining lease term - operating leases	1.7	years
Weighted-average discount rate - operating leases	2.76	%

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of September 30, 2022:


	September 30,
Year ending:	2022
December 31, 2022	$	60,105
December 31, 2023		240,421
December 31, 2024		100,175
Total minimum lease payments		400,701
Less: imputed lease interest		(8,601)
Total lease liabilities	$	392,100

Lease expense for the nine months ended September 30, 2022 was comprised of the following:


	Nine months ended September 30,
		2022		2021
Operating lease expense	$	181,262	$	183,788
Variable lease expense		46,951		46,190
Total lease expense	$	228,213	$	229,978

Total cash payments related to leases were $227,266 and $237,835 for the nine months ended September 30, 2022 and 2021, respectively.

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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, 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our 2021 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 2021 Annual Report.

Overview

Company Overview

We are the leader in pharmaceutically-produced transdermal cannabinoid therapies for orphan 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, and chromosome 22q11.2 deletion syndrome, or 22q.

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 may have positive effects on treating behavioral symptoms of FXS and 22q.

We are currently developing Zygel (also known as ZYN002), the first and only pharmaceutically-produced cannabidiol formulated as a permeation-enhanced gel for transdermal delivery and manufactured without the presence of THC, 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 autism spectrum disorder, or 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 and is targeting treatment of behavioral symptoms of FXS and 22q. We have received orphan drug designations from the United States Food and Drug Administration, or FDA, for cannabidiol, the active ingredient in Zygel, for the treatment of FXS and 22q. During the first quarter of 2022, we received orphan drug designation from the European Commission for cannabidiol, the active ingredient in Zygel, for the treatment of FXS. In May 2019, we received Fast Track designation from the FDA for treatment of behavioral symptoms associated with FXS. The FDA’s Fast Track program is designed to facilitate the development of drugs intended to treat serious conditions and fill unmet medical needs and can lead to expedited review by the FDA in order to get new important drugs to the patient earlier.

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Clinical Development Programs

Our clinical programs for Zygel include ongoing and planned clinical trials evaluating Zygel in the treatment of behavioral symptoms of FXS, 22q and ASD.

The Zygel safety database across all clinical studies conducted by us includes data from more than 900 volunteers and patients. Across these clinical studies, Zygel has been well-tolerated with a safety profile that has been consistent across our Phase 2 and Phase 3 clinical trials.

FXS

CONNECT-FX Trial

In June 2020, we announced results of our 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, or ABC-C_FXS, 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-C_FXS compared to placebo. We performed a subsequent analysis of the CONNECT-FX population within those patients having 100% or complete methylation of the impacted FMR1 gene, which demonstrated that these patients having complete methylation and receiving Zygel similarly achieved statistical significance in the primary endpoint of improvement at 12 weeks of treatment in the Social Avoidance subscale of the ABC-C_FXS compared to placebo.

RECONNECT Trial

In September 2021, we announced that we had initiated our 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) trial, a pivotal, multi-national, confirmatory Phase 3 trial of Zygel in patients with FXS. The trial is designed to confirm the positive results observed in a population of responders in our CONNECT-FX trial.

RECONNECT is an 18-week trial that is expected to enroll approximately 200 children and adolescents, aged three through 17 years, at approximately 25 clinical sites in the United States, Australia, the United Kingdom and Ireland. Approximately 160 of the patients enrolled will have complete (100%) methylation of their FMR1 gene and

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approximately 40 patients will have partial methylation of their FMR1 gene. Patients will be randomized 1:1 to either Zygel or placebo. Randomization will be stratified by gender, methylation status and weight.

The primary endpoint for the trial will be the change from baseline to the end of the treatment period in the ABC-C_FXS Social Avoidance subscale in patients who have complete methylation of their FMR1 gene. The ABC-C_FXS Social Avoidance subscale is the same primary endpoint used in the CONNECT-FX trial.

Key secondary efficacy endpoints include: (i) the change from baseline to the end of the treatment period in the ABC-C_FXS Irritability subscale in patients who have complete methylation of their FMR1 gene; (ii) the percent of patients with any improvement on the Caregiver Global Impression of Change, or CaGI-C, at the end of the treatment period for Social Interactions among patients with complete methylation of the FMR1 gene; (iii) the percent of patients rated as improved on the Clinical Global Impression- Improvement, or CGI-I, scale among patients with complete methylation (100%) of the FMR1 gene; and (iv) the change from baseline to the end of the treatment period in the ABC-C_FXS Social Avoidance subscale among all randomized patients (complete and partial methylation of the FMR1 gene).

Top-line results for the RECONNECT trial are expected in the second half of 2023. All patients who complete dosing in the RECONNECT trial will be eligible to enroll in our ongoing open-label extension trial.

22q

Phase 2 INSPIRE Trial

In June 2022, we announced top-line results from our 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. The Phase 2 trial was designed for signal detection by assessing the safety, tolerability and efficacy of Zygel for the treatment of behavioral symptoms of chromosome 22q in children and adolescents. Zygel was administered to patients with 22q as add-on therapy to their standard of care and utilized a variety of efficacy assessments. Key findings from the trial include:

●

The total score and all five subscales of the Anxiety, Depression and Mood Scale (ADAMS) showed statistically significant improvements at 14 weeks of treatment compared to baseline;

●

All five subscales of the Aberrant Behavior Checklist – Community, or ABC-C, showed statistically significant improvements at 14 weeks of treatment compared to baseline;

●

The Pediatric Anxiety Rating Scale (PARS – R) showed statistically significant improvements at 14 weeks of treatment compared to baseline; and

●

The majority of patients showed clinically meaningful improvements at week 14 as demonstrated by the CGI-I. Seventy-five percent of patients were rated by the clinicians as “improved,” “much improved” or “very much improved” with nearly two-thirds (62.5%) of the patients being “much improved” or “very much improved.”

Zygel was shown to be well tolerated, and the safety profile was consistent with previously released data from other Zygel clinical trials. Three patients reported treatment related adverse events which were all mild application site adverse events. One patient discontinued treatment due to adverse events not related to Zygel.

Based on the positive Phase 2 data, the Company requested and has been granted an initial meeting with the FDA to obtain feedback on the data and the regulatory path forward for Zygel in the treatment of children and adolescents with 22q.

ASD

Phase 2 BRIGHT Trial

In May 2020, we reported positive top-line results of our 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

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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. In September 2021, we reported additional safety and efficacy data from our BRIGHT trial for the 18 patients that continued from week 14 through a longer term, 38-week treatment period, which we refer to as Period 2. In the 18 patients who completed treatment through the 38-week treatment period, statistically significant improvements compared to baseline were sustained in all efficacy measures.

While the data from the Company’s ASD clinical development program to date are compelling, given the difficult financial market, the Company has decided to prioritize its resources on FXS and 22q and defer the start of the Phase 3 development program in ASD that was previously planned for the second half of 2022.

Impact of COVID-19

We continue to closely monitor the status of the COVID-19 pandemic, including its potential impact on our clinical development plans, patient recruitment and overall clinical trial 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 and appropriate, direct-to-patient drug shipments and local study-related clinical laboratory collection.

Operations

We have never been profitable and have incurred net losses since inception. Our net losses were $27.0 million and $28.5 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, our accumulated deficit was $266.5 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, 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.

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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 the 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 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. 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.

The following table summarizes research and development expenses for the nine months ended September 30, 2022 and 2021:


	Nine months ended September 30,
	2022		2021
Research and development expenses - before R&D incentive	$	16,450,619	$	17,304,684
Research and development incentive		(818,469)		(902,555)
Total research and development expenses	$	15,632,150	$	16,402,129

We expect research and development expenses to increase for the year ending December 31, 2022 as compared to 2021, as we continue to conduct our RECONNECT clinical trial for FXS. 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;

●

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.

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Interest Income

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

Foreign Exchange Loss

Foreign exchange loss 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 2021 Annual Report under Part II, Item 7, “Critical Accounting Policies and Use of Estimates.” During the nine months ended September 30, 2022, there have been no material changes to the critical accounting estimates or critical accounting policies discussed in our 2021 Annual Report.

Results of Operations

Comparison of the Three Months Ended September 30, 2022 and 2021

Research and Development Expenses

Research and development expenses decreased by $1.3 million, or 21%, to $5.0 million for the three months ended September 30, 2022 from $6.3 million for the three months ended September 30, 2021. The decrease was primarily related to reductions in manufacturing and clinical costs associated with our Zygel program and lower stock-based compensation expenses.

General and Administrative Expenses

General and administrative expenses decreased by $0.4 million, or 11%, to $3.5 million for the three months ended September 30, 2022 from $3.9 million for the three months ended September 30, 2021. The decrease was primarily related to lower stock-based compensation expenses and a decrease in legal expenses.

Other Income (Expense)

During the three months ended September 30, 2022 and 2021, we recognized $0.3 million and $5,038, respectively, in interest income. The increase in interest income was due to higher average interest rates earned on our investments. During the three months ended September 30, 2022 and 2021, we recognized foreign currency losses of $0.4 million for both periods. 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.

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