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 March 31, 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)
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Delaware
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26-0389433
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80 W. Lancaster Avenue, Suite 300
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19333
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(484) 581-7505
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class: |
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Trading Symbol |
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Name of each exchange on which registered: |
Common Stock, $0.001 par value per share |
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ZYNE |
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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.
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Large accelerated filer ◻ |
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Accelerated filer ◻ |
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Smaller reporting company ⌧ |
Non-accelerated filer ⌧ |
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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 May 7, 2021, the registrant had 41,251,537 shares of Common Stock, $0.001 par value per share, outstanding.
TABLE OF CONTENTS
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Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (Unaudited) |
5 |
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Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020 (Unaudited) |
6 |
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7 |
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (Unaudited) |
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9 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Quarterly Report that are not statements of historical or current facts, such as those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning.
Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.
You should understand that the following important factors could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
● | our 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, under the caption “Item 1A. Risk Factors”. |
In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Form 10-Q (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any 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)
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March 31, |
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December 31, |
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2021 |
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2020 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
93,130,194 |
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$ |
59,157,187 |
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Incentive and tax receivables |
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9,009,814 |
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9,042,586 |
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Prepaid expenses and other current assets |
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5,060,547 |
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5,166,401 |
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Total current assets |
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107,200,555 |
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73,366,174 |
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Property and equipment, net |
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535,003 |
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585,403 |
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Incentive and tax receivables |
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338,810 |
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— |
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Right-of-use assets |
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733,933 |
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105,199 |
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Total assets |
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$ |
108,808,301 |
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$ |
74,056,776 |
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Liabilities and Stockholders' Equity |
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Current liabilities: |
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Accounts payable |
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$ |
1,678,193 |
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$ |
2,522,716 |
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Accrued expenses |
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10,680,655 |
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11,280,843 |
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Lease liabilities |
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209,325 |
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109,689 |
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Total current liabilities |
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12,568,173 |
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13,913,248 |
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Lease liabilities, long-term |
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525,141 |
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— |
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Total liabilities |
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13,093,314 |
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13,913,248 |
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Stockholders' equity: |
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Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding |
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— |
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— |
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Common stock, $0.001 par value; 200,000,000 shares authorized; 41,251,537 shares issued and outstanding at March 31, 2021 and 29,975,264 shares issued and outstanding at December 31, 2020 |
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41,252 |
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29,975 |
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Additional paid-in capital |
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305,807,818 |
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262,286,008 |
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Accumulated deficit |
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(210,134,083) |
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(202,172,455) |
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Total stockholders' equity |
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95,714,987 |
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60,143,528 |
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Total liabilities and stockholders' equity |
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$ |
108,808,301 |
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$ |
74,056,776 |
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See accompanying notes to unaudited consolidated financial statements.
5
ZYNERBA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended March 31, |
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2021 |
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2020 |
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Operating expenses: |
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Research and development |
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$ |
4,609,010 |
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$ |
6,882,793 |
General and administrative |
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3,275,797 |
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3,916,569 |
Total operating expenses |
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7,884,807 |
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10,799,362 |
Loss from operations |
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(7,884,807) |
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(10,799,362) |
Other income (expense): |
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Interest income |
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5,633 |
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201,684 |
Foreign exchange loss |
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(82,454) |
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(1,740,151) |
Total other expense |
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(76,821) |
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(1,538,467) |
Net loss |
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$ |
(7,961,628) |
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$ |
(12,337,829) |
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Net loss per share basic and diluted |
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$ |
(0.20) |
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$ |
(0.53) |
Basic and diluted weighted average shares outstanding |
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40,065,715 |
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23,399,438 |
See accompanying notes to unaudited consolidated financial statements.
6
ZYNERBA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
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Three months ended March 31, 2021 |
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Total |
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Common stock |
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Additional |
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Accumulated |
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stockholders' |
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Shares |
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Amount |
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paid-in capital |
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deficit |
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equity |
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Balance at December 31, 2020 |
29,975,264 |
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$ |
29,975 |
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$ |
262,286,008 |
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$ |
(202,172,455) |
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$ |
60,143,528 |
Issuance of common stock, net of issuance costs |
10,244,326 |
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10,245 |
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42,210,099 |
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— |
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42,220,344 |
Issuance of restricted stock |
1,018,822 |
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1,019 |
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(1,019) |
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— |
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— |
Exercise of stock options |
13,125 |
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13 |
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47,893 |
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— |
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47,906 |
Stock-based compensation expense |
— |
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— |
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1,264,837 |
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— |
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1,264,837 |
Net loss |
— |
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— |
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— |
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(7,961,628) |
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(7,961,628) |
Balance at March 31, 2021 |
41,251,537 |
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$ |
41,252 |
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$ |
305,807,818 |
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$ |
(210,134,083) |
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$ |
95,714,987 |
See accompanying notes to unaudited consolidated financial statements.
7
ZYNERBA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three months ended March 31, |
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2021 |
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2020 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(7,961,628) |
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$ |
(12,337,829) |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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61,455 |
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41,216 |
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Stock-based compensation |
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1,264,837 |
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1,323,352 |
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Changes in operating assets and liabilities: |
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Incentive and tax receivables |
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(306,038) |
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1,135,905 |
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Prepaid expenses and other assets |
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105,854 |
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767,903 |
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Right-of-use assets and liabilities |
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(3,957) |
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1,954 |
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Accounts payable |
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(859,523) |
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(1,535,807) |
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Accrued expenses |
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(593,967) |
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(394,859) |
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Net cash used in operating activities |
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(8,292,967) |
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(10,998,165) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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— |
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(138,209) |
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Net cash used in investing activities |
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— |
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(138,209) |
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Cash flows from financing activities: |
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Proceeds from the issuance of common stock |
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43,193,660 |
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1,816,471 |
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Payment of financing fees and expenses |
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(975,592) |
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(104,486) |
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Proceeds from the exercise of stock options |
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47,906 |
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— |
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Net cash provided by financing activities |
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42,265,974 |
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1,711,985 |
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Net increase (decrease) in cash and cash equivalents |
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33,973,007 |
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(9,424,389) |
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Cash and cash equivalents at beginning of period |
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59,157,187 |
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70,063,242 |
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Cash and cash equivalents at end of period |
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$ |
93,130,194 |
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$ |
60,638,853 |
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Supplemental disclosures of cash flow information: |
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Financing costs included in accounts payable and accrued expenses at end of period |
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$ |
15,000 |
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$ |
57,526 |
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Property and equipment acquired but unpaid at end of period |
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$ |
11,055 |
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$ |
143,150 |
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See accompanying notes to unaudited consolidated financial statements
8
(1) Nature of Business and Liquidity
Zynerba Pharmaceuticals, Inc., together with its subsidiary, Zynerba Pharmaceuticals Pty Ltd (“Zynerba”, the “Company”, “we”), is a clinical stage specialty pharmaceutical company focused on the development of pharmaceutically-produced transdermal cannabinoid therapies for rare and near-rare neuropsychiatric disorders, including Fragile X syndrome, autism spectrum disorder, 22q11.2 deletion syndrome, and a heterogeneous group of rare and ultra-rare epilepsies known as developmental and epileptic encephalopathies.
The Company has incurred losses and negative cash flows from operations since inception and has an accumulated deficit of $210.1 million as of March 31, 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.
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 “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 has 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 March 31, 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, 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 (“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 March 31, 2021 its results of operations for the three months ended March 31, 2021 and 2020 and cash flows for the three months ended March 31, 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
9
ZYNERBA PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 our 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 March 31, 2021, incentive and tax receivables included $9.0 million related to the AOF. The increase of $0.7 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 refund it expects to receive related to GST incurred is included in “Incentive and tax receivables” in the accompanying consolidated balance sheets. As of March 31, 2021, incentive and tax receivables included $0.3 million for refundable GST on expenses incurred with Australian vendors during the three months ended March 31, 2021.
10
Current incentive and tax receivables consisted of the following as of March 31, 2021 and December 31, 2020:
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March 31, |
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December 31, |
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2021 |
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2020 |
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Research and development incentive (non-AOF) for the period 1/1/18 - 12/31/18 |
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$ |
3,406,123 |
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$ |
3,425,791 |
Research and development incentive (non-AOF) for the period 1/1/19 - 12/31/19 |
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3,173,730 |
|
|
3,192,056 |
Research and development incentive (non-AOF) for the period 1/1/20 - 12/31/20 |
|
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2,114,794 |
|
|
2,127,005 |
Research and development incentive (AOF) for the period 1/1/18 - 12/31/19 |
|
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8,994,123 |
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|
9,046,058 |
Goods and services tax |
|
|
315,167 |
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|
297,734 |
Total incentive and tax receivables before reserve for AOF |
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18,003,937 |
|
|
18,088,644 |
Reserve for research and development incentive (AOF) for the period 1/1/18 - 12/31/19 |
|
|
(8,994,123) |
|
|
(9,046,058) |
Total incentive and tax receivables - current assets |
|
$ |
9,009,814 |
|
$ |
9,042,586 |
As of March 31, 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 $8.7 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 March 31, 2021 was $0.3 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 months ended March 31, 2021 and 2020:
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.
11
ZYNERBA PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following potentially dilutive securities outstanding as of March 31, 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:
|
|
|
|
|
|
|
|
March 31, |
|||
|
|
2021 |
|
2020 |
|
Stock options |
|
5,225,538 |
|
4,704,196 |
|
Unvested restricted stock |
|
1,185,822 |
|
11,800 |
|
|
|
6,411,360 |
|
4,715,996 |
|
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 820 (“ASC 820”), Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creates a fair value hierarchy that serves to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.
Level 3 — Valuations based on unobservable inputs and models that are supported by little or no market activity.
In accordance with the fair value hierarchy described above, the following table sets forth the Company's financial assets measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020:
12
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 March 31, 2021 and December 31, 2020:
(5) Property and Equipment
Property and equipment consisted of the following as of March 31, 2021 and December 31, 2020:
Depreciation expense was $61,455 and $41,216 for the three months ended March 31, 2021 and 2020, respectively.
(6) Accrued Expenses
Accrued expenses consisted of the following as of March 31, 2021 and December 31, 2020:
(7) Common Stock
In August 2019, the Company entered into the 2019 Sales Agreement with the 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 has 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.
13
ZYNERBA PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 March 31, 2021, 2,332,008 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 three months ended March 31, 2021, the Company granted 506,911 time-based restricted stock awards to employees with two-year cliff vesting. In addition, during the three months ended March 31, 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. For the three months ended March 31, 2021, none of the performance-based metrics were deemed probable of achievement. Any change in these estimates will result in a cumulative adjustment in the period in which the estimate is changed, so that as of the end of a period, the cumulative compensation expense recognized for an award or grant equals the amount that would be recognized on a straight-line basis as if the current estimates had been utilized since the beginning of the service period. As of March 31, 2021, the aggregate estimated grant date fair value of the restricted stock awards for which the satisfaction of the related-performance conditions have not been deemed probable was $1,839,591.
14
ZYNERBA PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
For the three months ended March 31, 2021 and 2020, the Company recorded stock-based compensation expense related to its stock option grants and restricted stock awards, as follows:
The following table summarizes the Company’s stock option activity for the three months ended March 31, 2021:
The weighted-average grant date fair values of options granted during the three months ended March 31, 2021 and 2020 were $2.79 and $3.60, respectively.
The fair values of stock options granted were calculated using the Black-Scholes option pricing model with the following weighted-average assumptions:
As of March 31, 2021, there was $6.2 million of unrecognized stock-based compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 2.66 years. During the three months ended March 31, 2021, the Company received $47,906 in cash from the exercise of employee stock options.
15
The following table summarizes the Company’s restricted stock award activity under the 2014 Plan for the three months ended March 31, 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 March 31, 2021 |
|
1,185,822 |
|
$ |
3.58 |
|
$ |
5,514,072 |
Vested and expected to vest as of March 31, 2021 |
|
673,911 |
|
$ |
3.58 |
|
$ |
3,133,686 |
As of March 31, 2021, excluding performance-based restricted stock awards that have not been deemed probable, there was $1.9 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 1.61 years. The Company expects that all 673,911 of the unvested, non-performance based, restricted stock awards will vest.
(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 March 31, 2021, the Company’s right-of-use asset, net of amortization, was $733,933.
Other operating lease information as of March 31, 2021:
|
|
|
|
Weighted-average remaining lease term - operating leases |
|
3.2 |
years |
Weighted-average discount rate - operating leases |
|
2.76 |
% |
16
The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
Year ended: |
|
2021 |
|
2020 |
||
December 31, 2021 |
|
$ |
184,847 |
|
$ |
111,506 |
December 31, 2022 |
|
|
240,421 |
|
|
— |
December 31, 2023 |
|
|
240,421 |
|
|
— |
December 31, 2024 |
|
|
100,175 |
|
|
— |
Total minimum lease payments |
|
|
765,864 |
|
|
111,506 |
Less: imputed lease interest |
|
|
(31,398) |
|
|
(1,817) |
Total lease liabilities |
|
$ |
734,466 |
|
$ |
109,689 |
Lease expense for the three months ended March 31, 2021 and 2020 was comprised of the following:
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
||||
|
|
|
2021 |
|
|
2020 |
Operating lease expense |
|
$ |
62,946 |
|
$ |
64,209 |
Variable lease expense |
|
|
16,841 |
|
|
14,674 |
Total lease expense |
|
$ |
79,787 |
|
$ |
78,883 |
Cash payments related to operating leases were $66,903 and $62,254 for the three months ended March 31, 2021 and 2020, respectively.
(10) Subsequent Events
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 “Agents”), pursuant to which the Company may sell, from time to time, up to $75.0 million of its common stock.
17
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 May 2021, the Zygel safety database across all clinical studies conducted by us includes data from 906 volunteers and patients. Across these clinical studies, Zygel has been well-tolerated and consistent with previously reported data.
18
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. We expect to discuss a path forward with the FDA in the first half of 2021.
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 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.
19
Zygel Clinical Development Timelines
We are closely monitoring the progression 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 shipment from investigator sites, 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 $8.0 million and $12.3 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, our accumulated deficit was $210.1 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 speaking, expenses associated with clinical trials will increase as our clinical trials progress. Product candidates in later stage clinical development generally have higher research and development expenses than those in earlier stages of development, primarily due to increased size and duration of the clinical trials. We track and record information regarding external research and development expenses for each grant, study or trial that we conduct. We use third-party CROs, CMOs, contractor laboratories and independent contractors in preclinical studies and clinical trials. We recognize the expenses associated with third parties performing these services for us in our preclinical studies and clinical trials based on the percentage of each study completed at the end of each reporting period.
Our Australian subsidiary, Zynerba Pharmaceuticals Pty Ltd, or the Subsidiary, is incorporated in Australia and is eligible to participate in an Australian research and development tax incentive program. As part of this program, the Subsidiary is eligible to receive a cash refund from the Australian Taxation Office, 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 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
20
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 March 31, 2021, incentive and tax receivables included $9.0 million related to the AOF. The increase of $0.7 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 months ended March 31, 2021 and 2020:
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; |
● | 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.
21
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
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 2020 Annual Report under Part II, Item 7, “Critical Accounting Policies and Use of Estimates.” During the three months ended March 31, 2021, there have been no material changes to the critical accounting estimates or critical accounting policies discussed in our 2020 Annual Report.
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
Research and Development Expenses
Research and development expenses decreased by $2.3 million, or 33%, to $4.6 million for the three months ended March 31, 2021 from $6.9 million for the three months ended March 31, 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 a reduction in the non-AOF Australian research and development incentive.
General and Administrative Expenses
General and administrative expenses decreased by $0.6 million, or 16%, to $3.3 million for the three months ended March 31, 2021 from $3.9 million for the three months ended March 31, 2020. The decrease was primarily related to decreases in pre-commercialization expense for Zygel, decreased employee-related costs and decreased stock-based compensation costs partially offset by an increase in directors and officers liability insurance.
22
Other Income (Expense)
During the three months ended March 31, 2021 and 2020, we recognized $5,633 and $0.2 million, respectively, in interest income. The decrease in interest income was primarily related to lower average interest rates earned on our investments. During the three months ended March 31, 2021 and 2020, we recognized foreign currency losses of $0.1 million and $1.7 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 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 March 31, 2021, our principal sources of liquidity were our cash and cash equivalents of $93.1 million. Our working capital was $94.6 million as of March 31, 2021.
Management believes that cash and cash equivalents as of March 31, 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
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 had 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.
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, or the Agents, pursuant to which we may sell, from time to time, up to $75.0 million of our common stock.
Debt
We had no debt outstanding as of March 31, 2021 or December 31, 2020.
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Future Capital Requirements
During the three months ended March 31, 2021, net cash used in operating activities was $8.3 million, and our accumulated deficit as of March 31, 2021 was $210.1 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 three months ended March 31, 2021 and 2020.
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Three Months Ended March 31, |
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2021 |
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2020 |
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Statement of Cash Flows Data: |
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|
|
|
Total net cash (used in) provided by: |
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|
|
|
|
|
|
Operating activities |
|
$ |
(8,292,967) |
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$ |
(10,998,165) |
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Investing activities |
|
|
— |
|
|
(138,209) |
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Financing activities |
|
|
42,265,974 |
|
|
1,711,985 |
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Net increase (decrease) in cash and cash equivalents |
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$ |
33,973,007 |
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$ |
(9,424,389) |
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Operating Activities
For the three months ended March 31, 2021, cash used in operating activities was $8.3 million compared to $11.0 million for the three months ended March 31, 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 three months ended March 31, 2020 cash used in investing activities represented the cost of expenditures made for manufacturing equipment.
Financing Activities
Cash provided by financing activities for the three months ended March 31, 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 three months ended March 31, 2020 consisted of $1.7 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.
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 March 31, 2021, we had cash and cash equivalents of $93.1 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.
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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 March 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under 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 March 31, 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 March 31, 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. The Company’s motion to dismiss the plaintiffs’ complaint was denied on November 25, 2020. The Company and the individual defendants have reached an agreement in principle to settle this action that is subject to the preliminary approval and final approval of the court.
With respect to the foregoing matter, the Company has previously incurred and expensed fees and expenses in an amount less than its insurance policy deductible of $2.0 million. The Company’s insurers have undertaken to cover the amount of the settlement payment in excess of the remainder of the insurance policy deductible, if the proposed settlement is finally approved by the Court. As of December 31, 2020, the Company has accrued both the amount of the settlement payment under the agreement in principle, and a corresponding insurance receivable from its insurers.
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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”)
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”) The 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 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 have recently reached an agreement in principle to settle the Derivative Action that is subject to the preliminary approval and final approval of 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 Derivative Action and make no admission of liability or any form of wrongdoing.
Rule 220 Action
On March 15, 2021, stockholder Roland Davies filed a complaint pursuant to 8 Del. C. § 220 (“§220”) in the Court of Chancery in 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 have denied, and continue to deny, that they have 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.
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 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 on Form 10-Q.
Item 3. Defaults Upon Senior Securities.
None.
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Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
On May 11, 2021, we entered into the 2021 Sales Agreement, with the Agents, pursuant to which we may, from time to time, issue and sell shares of its common stock, par value $0.001 per share, in an aggregate offering price of up to $75.0 million, or the Shares.
Under the terms of the 2021 Sales Agreement, the Agents may sell the Shares at market prices by any method that is deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended.
The offer and sales of the Shares made pursuant to the 2021 Sales Agreement, if any, will be made under our effective “shelf” registration statement on Form S-3 (File No. 333-233038), the base prospectus contained therein, dated August 13, 2019, and a prospectus supplement related to the offering of the Shares, dated May 12, 2021.
The information set forth in this Item 5 to Form 10-Q shall not constitute an offer to sell or the solicitation of any offer to buy the Shares, nor shall there be an offer, solicitation or sale of the Shares in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.
We are not obligated to, and we cannot provide any assurances that we will, make any sales of the Shares under the 2021 Sales Agreement. The 2021 Sales Agreement may be terminated by the Agents or us at any time upon ten days’ prior written notice to us or the Agents, respectively. We will pay the Agents a commission rate of up to 3.0% of the gross sales price per share of any Shares sold through the Agents as sales agents under the 2021 Sales Agreement. We have also provided the Agents with customary indemnification and contribution rights. We have agreed to reimburse the Agents for legal fees and disbursements, not to exceed $50,000 in the aggregate.
The foregoing description of the 2021 Sales Agreement is not complete and is qualified in its entirety by reference to the full text of such agreement, a copy of which is filed as Exhibit 10.1 to this Form 10-Q and is incorporated herein by reference.
The legal opinion of Troutman Pepper Hamilton Sanders LLP, our counsel, relating to the Shares is filed as Exhibit 5.1 to this Form 10-Q.
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Item 6. Exhibits.
The following exhibits are being filed herewith:
EXHIBIT INDEX
Exhibit No. |
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Exhibit |
5.1 |
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10.1 |
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10.2 |
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23.1 |
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Consent of Troutman Pepper Hamilton Sanders LLP (included in Exhibit 5.1) |
31.1 |
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31.2 |
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32.1 |
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32.2 |
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101 INS |
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Inline XBRL Document (filed herewith). |
101 SCH |
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Inline XBRL Taxonomy Extension Schema (filed herewith). |
101 CAL |
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Inline XBRL Taxonomy Extension Schema Calculation Linkbase (filed herewith). |
101 DEF |
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Inline XBRL Taxonomy Extension Schema Definition Linkbase (filed herewith). |
101 LAB |
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Inline XBRL Taxonomy Extension Schema Label Linkbase (filed herewith). |
101 PRE |
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Inline XBRL Taxonomy Extension Schema Presentation Linkbase (filed herewith). |
104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in exhibit 101) |
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.
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ZYNERBA PHARMACEUTICALS, INC. |
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Date: May 12, 2021 |
By: |
/s/ ARMANDO ANIDO |
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Armando Anido |
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Chief Executive Officer |
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(Principal executive officer) |
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Date: May 12, 2021 |
By: |
/s/ JAMES E. FICKENSCHER |
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James E. Fickenscher |
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Chief Financial Officer |
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(Principal financial and accounting officer) |
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Troutman Pepper Hamilton Sanders LLP
3000 Two Logan Square, Eighteenth and Arch Streets
Philadelphia, PA 19103-2799
troutman.com
May 12, 2021
Board of Directors Zynerba Pharmaceuticals, Inc. 80 W. Lancaster Avenue, Suite 300 Devon, PA 19333 |
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Ladies and Gentlemen:
We are acting as counsel to Zynerba Pharmaceuticals, Inc., a Delaware corporation (the “Company”), in connection with the sale and issuance from time to time of up to $75,000,000 of the Company’s common stock, par value $0.001 per share (the “Shares”), pursuant to the Company’s effective registration statement on Form S-3 (File No. 333-233038) (the “Registration Statement”) under the Securities Act of 1933, as amended (the “Act”), filed with the Securities and Exchange Commission (the “Commission”) on August 6, 2019, as declared effective by the Commission on August 13, 2019, a base prospectus dated August 13, 2019 (the “Base Prospectus”), and a prospectus supplement dated May 12, 2021, (together with the Base Prospectus, the “Prospectus”). The Shares are being sold pursuant to the terms of the Sales Agreement, dated May [11], 2021 (the “Agreement”), by and among the Company, Cantor Fitzgerald & Co., Canaccord Genuity LLC, H.C. Wainwright & Co., LLC and Ladenburg Thalmann & Co. Inc.
For purposes of this opinion letter, we have examined copies of such agreements, instruments and documents as we have deemed an appropriate basis on which to render the opinions hereinafter expressed. In our examination of the aforesaid documents, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the accuracy and completeness of all documents submitted to us, the authenticity of all original documents, and the conformity to authentic original documents of all documents submitted to us as copies (including telecopies). As to all matters of fact, we have relied on the representations and statements of fact made in the documents so reviewed, and we have not independently established the facts so relied on. This opinion letter is given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the Delaware General Corporation Law, as amended. We express no opinion herein as to any other statutes, rules or regulations.
Based upon, subject to and limited by the foregoing, we are of the opinion that following (i) issuance of the Shares pursuant to the terms of the Agreement, and (ii) receipt by the Company of the consideration for the Shares specified in the resolutions of the Board of Directors and the Pricing Committee of the Board of Directors, the Shares will be validly issued, fully paid, and nonassessable.
This opinion letter has been prepared for use in connection with the filing by the Company of a Quarterly Report on Form 10-Q relating to the offer and sale of the Shares, which Form 10-Q will be incorporated by reference into the Registration Statement and Prospectus, and speaks as of the date hereof. We assume no obligation to advise you of any changes in the foregoing subsequent to the delivery of this letter.
Zynerba Pharmaceuticals, Inc.
Page 2
May 12, 2021
We hereby consent to the filing of this opinion letter as Exhibit 5.1 to the above-described Form 10-Q and to the reference to this firm under the caption “Legal Matters” in the Prospectus. In giving this consent, we do not thereby admit that we are an “expert” within the meaning of the Act.
Very truly yours, |
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/s/ Troutman Pepper Hamilton Sanders LLP |
Troutman Pepper Hamilton Sanders LLP |
#54877394 v5
Zynerba Pharmaceuticals, Inc.
Shares of Common Stock
(par value $0.001 per share)
Controlled Equity OfferingSM
Sales Agreement
May 11, 2021
Cantor Fitzgerald & Co.
499 Park Avenue
New York, NY 10022
Canaccord Genuity LLC
99 High Street, Suite 1200
Boston, Massachusetts 02110
H.C. Wainwright & Co., LLC
430 Park Avenue
New York, New York 10022
Ladenburg Thalmann & Co. Inc.
277 Park Avenue, 26th Floor
New York, New York 10172
Ladies and Gentlemen:
Zynerba Pharmaceuticals, Inc., a Delaware corporation (the “Company”), confirms its agreement (this “Agreement”) with Cantor Fitzgerald & Co., Canaccord Genuity LLC, H.C. Wainwright & Co., LLC and Ladenburg Thalmann & Co. Inc. (each, an “Agent,” and collectively, the “Agents”), as follows:
NY: 1285955-2
The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended (the “Securities Act”) and the rules and regulations thereunder (the “Securities Act Regulations”), with the Commission a registration statement on Form S-3 (File No. 333-233038), including a base prospectus, relating to certain securities, including the Placement Shares to be issued from time to time by the Company, and which incorporates by reference documents that the Company has filed or will file in accordance with the provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder. The Company has prepared a prospectus supplement to the base prospectus included as part of the registration statement, which prospectus supplement relates to the Placement Shares to be issued from time to time by the Company (the “Prospectus Supplement”). The Company will furnish to the Agents, for use by the Agents, copies of the prospectus included as part of such registration statement, as supplemented by the Prospectus Supplement, relating to the Placement Shares to be issued from time to time by the Company. The Company may file one or more additional registration statements from time to time that will contain a base prospectus and related prospectus or prospectus supplement, if applicable (which shall be a Prospectus Supplement), with respect to the Placement Shares. Except where the context otherwise requires, such registration statement(s), including all documents filed as part thereof or incorporated by reference therein, and including any information contained in a Prospectus (as defined below) subsequently filed with the Commission pursuant to Rule 424(b) under the Securities Act Regulations or deemed to be a part of such registration statement pursuant to Rule 430B of the Securities Act Regulations, or any subsequent registration statement on Form S-3 filed pursuant to Rule 415(a)(6) under the Securities Act by the Company to cover any Placement Shares, is herein called the “Registration Statement.” The base prospectus or base prospectuses, including all documents incorporated therein by reference, included in the Registration Statement, as it may be supplemented, if necessary, by the Prospectus Supplement, in the form in which such prospectus or prospectuses and/or Prospectus Supplement have most recently been filed by the Company with the Commission pursuant to Rule 424(b) under the Securities Act Regulations, together with the then issued Issuer Free Writing Prospectus(es) (as defined below), is herein called the “Prospectus.”
Any reference herein to the Registration Statement, any Prospectus Supplement, Prospectus or any Issuer Free Writing Prospectus (defined below) shall be deemed to refer to and include the documents, if any, incorporated by reference therein (the “Incorporated Documents”), including, unless the context otherwise requires, the documents, if any, filed as exhibits to such Incorporated Documents. Any reference herein to the terms “amend,” “amendment” or “supplement” with respect to the Registration Statement, any Prospectus Supplement, the Prospectus or any Issuer Free Writing Prospectus shall be deemed to refer to and include the filing of any document under the Exchange Act on or after the most-recent effective date of the Registration Statement, or the date of the Prospectus Supplement, Prospectus or such
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Issuer Free Writing Prospectus, as the case may be, and incorporated therein by reference. For purposes of this Agreement, all references to the Registration Statement, the Prospectus or to any amendment or supplement thereto shall be deemed to include the most recent copy filed with the Commission pursuant to its Electronic Data Gathering Analysis and Retrieval system, or if applicable, the Interactive Data Electronic Application system when used by the Commission (collectively, “EDGAR”).
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(A) the subject of any sanctions administered or enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the United Nations Security Council, the European Union, Her Majesty’s Treasury, or other relevant sanctions authorities, including, without limitation, designation on OFAC’s Specially Designated Nationals and Blocked Persons List or OFAC’s Foreign Sanctions Evaders List (as amended, collectively, “Sanctions”), nor
(B) located, organized or resident in a country or territory that is the subject of Sanctions that broadly prohibit dealings with that country or territory (including, without limitation, Cuba, Iran, North Korea, Sudan, Syria and the Crimea Region of the Ukraine).
(ii) The Company and its Subsidiaries will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person or entity for the purpose of financing the activities of or business with any person, or in any country or territory, that currently is the subject to any U.S. sanctions administered by OFAC or in any other manner that will result in a violation by any person (including any person participating in the transaction whether as underwriter, advisor, investor or otherwise) of U.S. sanctions administered by OFAC.
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Any certificate signed by an officer of the Company and delivered to the Agents or to counsel for the Agents pursuant to or in connection with this Agreement shall be deemed to be a representation and warranty by the Company, as applicable, to the Agents as to the matters set forth therein.
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(i) files the Prospectus relating to the Placement Shares or amends or supplements (other than a prospectus supplement relating solely to an offering of securities other than the Placement Shares) the Registration Statement or the Prospectus relating to the Placement Shares by means of a post-effective amendment, sticker, or supplement but not by means of incorporation of documents by reference into the Registration Statement or the Prospectus relating to the Placement Shares;
(ii) files an annual report on Form 10-K under the Exchange Act (including any Form 10-K/A containing amended financial information or a material amendment to the previously filed Form 10-K);
(iii) files its quarterly reports on Form 10-Q under the Exchange Act; or
(iv) files a current report on Form 8-K containing amended financial information (other than information “furnished” pursuant to Items 2.02 or 7.01 of Form 8-K or to provide disclosure pursuant to Item 8.01 of Form 8-K relating to the reclassification of certain properties as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144) under the Exchange Act (each date of filing of one or more of the documents referred to in clauses (i) through (iv) shall be a “Representation Date”);
the Company shall furnish the Agents (but in the case of clause (iv) above only if an Agent reasonably determines that the information contained in such Form 8-K is material) with a certificate dated the Representation Date, in the form and substance satisfactory to the Agents and their counsel, substantially similar to the form previously provided to the Agents and their counsel, modified, as necessary, to relate to the Registration Statement and the Prospectus as amended or supplemented. The requirement to provide a certificate under this Section 7(l) shall be waived without an action on the part of the Agents or the Company for any Representation Date occurring at a time at which no Placement Notice is pending (including, for the purposes of clarity, during which a Suspension is in effect), which waiver shall continue until the earlier to occur of the date the Company delivers a Placement Notice hereunder or instructions for the sale of Placement Shares under a suspended Placement Notice (which for such calendar quarter shall be considered a Representation Date) and the next occurring Representation Date. Notwithstanding the foregoing, if the Company subsequently decides to sell Placement Shares following a Representation Date when the Company relied on such waiver and did not provide the Agents with a certificate under this Section 7(l), then before the Company delivers the instructions for the sale of Placement Shares or any of the Agents sell any Placement Shares pursuant to such instructions, the Company shall provide the Agents with a certificate in conformity with this Section 7(l) dated as of the date of the Placement Notice or the date that the instructions for the sale of Placement Shares are issued, as applicable.
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provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made solely in reliance upon and in conformity with the Agent Information (as defined below).
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Cantor Fitzgerald & Co.
499 Park Avenue
New York, NY 10022
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Attention:Capital Markets
Facsimile:(212) 307-3730
and:
Cantor Fitzgerald & Co.
499 Park Avenue
New York, NY 10022
Attention:General Counsel
and:
Canaccord Genuity LLC
99 High Street, Suite 1200
Boston, Massachusetts 02110
Attention: General Counsel
and:
H.C. Wainwright & Co., LLC
430 Park Avenue
New York, New York 10022
Attention: Head of Investment Banking
and:
Ladenburg Thalmann & Co. Inc.
277 Park Avenue, 26th Floor
New York, New York 10172
Attention: Head of Investment Banking
with a copy to:
New York Times Building
620 Eighth Avenue
New York, NY 10018
Attention: Donald Murray
Facsimile: (646) 441-9101
and if to the Company, shall be delivered to:
Zynerba Pharmaceuticals, Inc.
80 W. Lancaster Avenue, Suite 300
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with a copy to:
Troutman Pepper Hamilton Sanders LLP
3000 Two Logan Square
Philadelphia, PA 19103
Attention: Rachael M. Bushey, Esq.; Jennifer Porter, Esq.
Facsimile: (215) 981-4750
Each party to this Agreement may change such address for notices by sending to the parties to this Agreement written notice of a new address for such purpose. Each such notice or other communication shall be deemed given (i) when delivered personally or by verifiable facsimile transmission (with an original to follow) on or before 4:30 p.m., New York City time, on a Business Day or, if such day is not a Business Day, on the next succeeding Business Day, (ii) on the next Business Day after timely delivery to a nationally-recognized overnight courier and (iii) on the Business Day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid). For purposes of this Agreement, “Business Day” shall mean any day on which the Exchange and commercial banks in the City of New York are open for business.
An electronic communication (“Electronic Notice”) shall be deemed written notice for purposes of this Section 13 if sent to the electronic mail address specified by the receiving party under separate cover. Electronic Notice shall be deemed received at the time the party sending Electronic Notice receives verification of receipt by the receiving party. Any party receiving Electronic Notice may request and shall be entitled to receive the notice on paper, in a nonelectronic form (“Nonelectronic Notice”) which shall be sent to the requesting party within ten (10) days of receipt of the written request for Nonelectronic Notice.
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“Applicable Time” means (i) each Representation Date, (ii) the time of each sale of any Placement Shares pursuant to this Agreement and (iii) each Settlement Date.
“Governmental Authority” means (i) any federal, provincial, state, local, municipal, national or international government or governmental authority, regulatory or administrative agency, governmental commission, department, board, bureau, agency or instrumentality, court, tribunal, arbitrator or arbitral body (public or private); (ii) any self-regulatory organization; or (iii) any political subdivision of any of the foregoing.
“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433, relating to the Placement Shares that (1) is required to be filed with the Commission by the Company, (2) is a “road show” that is a “written communication” within the meaning of Rule 433(d)(8)(i) whether or not required to be filed with the Commission, or (3) is exempt from filing pursuant to Rule 433(d)(5)(i) because it contains a description of the Placement Shares or of the offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g) under the Securities Act Regulations.
“Rule 172,” “Rule 405,” “Rule 415,” “Rule 424,” “Rule 424(b),” “Rule 430B,” and “Rule 433” refer to such rules under the Securities Act Regulations.
All references in this Agreement to financial statements and schedules and other information that is “contained,” “included” or “stated” in the Registration Statement or the Prospectus (and all other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information that is incorporated by reference in the Registration Statement or the Prospectus, as the case may be.
All references in this Agreement to the Registration Statement, the Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to EDGAR; all references in this Agreement to any Issuer Free Writing Prospectus (other than any Issuer Free Writing Prospectuses that, pursuant to Rule 433, are not required to be filed with the Commission) shall be deemed to include the copy thereof filed with the Commission pursuant to EDGAR; and all references in this Agreement to “supplements” to the Prospectus shall include, without limitation, any supplements, “wrappers” or similar materials prepared in connection with any offering, sale or private placement of any Placement Shares by the Agents outside of the United States.
[Signature Page Follows]
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If the foregoing correctly sets forth the understanding between the Company and each Agent, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and the Agents.
Very truly yours,
ZYNERBA PHARMACEUTICALS, INC. |
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By: |
/s/Armando Anido |
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Name:Armando Anido |
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Title:Chief Executive Officer |
ACCEPTED as of the date first-above written:
CANTOR FITZGERALD & CO. |
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By: |
/s/ Sage Kelly |
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Name:Sage Kelly |
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Title:Global Head of Investment Banking |
CANACCORD GENUITY LLC |
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By: |
/s/ Eugene Rozelman |
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Name:Eugene Rozelman |
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Title:Managing Director |
H.C. WAINWRIGHT & CO., LLC |
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By: |
/s/ Edward D. Silvera |
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Name:Edward D. Silvera |
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Title:Chief Operating Officer |
LADENBURG THALMANN & CO. INC. |
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By: |
/s/ Vlad Ivanov |
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Name:Vlad Ivanov |
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Title:Managing Director |
SCHEDULE 1
FORM OF PLACEMENT NOTICE
[Date]
[Designated Agent]
[Address] (the “Designated Agent”)
Attn: []
Reference is made to the Sales Agreement among Zynerba Pharmaceuticals, Inc. (the “Company”), Cantor Fitzgerald & Co., Canaccord Genuity LLC, H.C. Wainwright & Co., LLC and Ladenburg Thalmann & Co. Inc. dated as of May 11, 2021. The Company confirms that all conditions to the delivery of this Placement Notice are satisfied as of the date hereof.
Date of Delivery of Issuance Notice (determined pursuant to Section 3(b)(i)):
Issuance Amount (equal to the total Sales Price for such Placement Shares):
$
Number of Days in Selling Period:
First Date of Selling Period:
Last Date of Selling Period:
Settlement Date(s) if other than standard T+2 settlement:
Minimum Price Limitation (in no event less than $1.00 without the prior written consent of the Designated Agent, which consent may be withheld in the Designated Agent’s sole discretion):
$per share
Comments:
Zynerba Pharmaceuticals, Inc.
By:
Name:
Title:
SCHEDULE 2
__________________________
Compensation
__________________________
The Company shall pay to the Designated Agent in cash, upon each sale of Placement Shares pursuant to this Agreement, an amount up to 3.0% of the aggregate gross proceeds from each sale of Placement Shares.
SCHEDULE 3
__________________________
Notice Parties
__________________________
The Company
● | Armando Anido (aa@zynerba.com) |
● | Terri B. Sebree (SeebreeT@zynerba.com) |
● | Jim Fickenscher (FickenscherJ@zynerba.com) |
● | Suzanne Hanlon (HanlonS@zynerba.com) |
The Agents
● | Sameer Vasudev (svasudev@cantor.com) |
● | CFControlledEquityOffering@cantor.com |
● | ZYNEATM@cgf.com |
● | ATM@hcwco.com |
● | David Strupp (dstrupp@ladenburg.com) |
● | Joseph Giovanniello (jgiovanniello@ladenburg.com) |
● | Ken Brush (kbrush@ladenburg.com) |
● | Eric Novotny (ENovotny@ladenburg.com) |
SCHEDULE 4
__________________________
Subsidiaries
__________________________
Incorporated by reference to Exhibit 21.1 of the Company’s most recently filed Form 10-K.
Form of Representation Date Certificate Pursuant to Section 7(l)
The undersigned, the duly qualified and elected [•], of Zynerba Pharmaceuticals, Inc., a Delaware corporation (the “Company”), does hereby certify in such capacity and on behalf of the Company, pursuant to Section 7(l) of the Sales Agreement, dated May 11, 2021 (the “Sales Agreement”), among the Company, Cantor Fitzgerald & Co., Canaccord Genuity LLC, H.C. Wainwright & Co., LLC and Ladenburg Thalmann & Co. Inc., that to the knowledge of the undersigned:
(i) The representations and warranties of the Company in Section 6 of the Sales Agreement are true and correct on and as of the date hereof with the same force and effect as if expressly made on and as of the date hereof, except for those representations and warranties that speak solely as of a specific date and which were true and correct as of such date; provided, however, that such representations and warranties also shall be qualified by the disclosure included or incorporated by reference in the Registration Statement and Prospectus; and
(ii) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied pursuant to the Sales Agreement at or prior to the date hereof.
Capitalized terms used herein without definition shall have the meanings given to such terms in the Sales Agreement.
ZYNERBA PHARMACEUTICALS, INC. |
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By: |
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Name: |
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Title: |
Date: [•]
Exhibit 21
Permitted Free Writing Prospectus
None.
Exhibit 31.1
CERTIFICATION
I, Armando Anido, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Zynerba Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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By: /s/ Armando Anido |
Name: Armando Anido |
Title: Chairman and Chief Executive Officer |
Dated: May 12, 2021 |
Exhibit 31.2
CERTIFICATION
I, James E. Fickenscher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Zynerba Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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By: /s/ James E. Fickenscher |
Name: James E. Fickenscher |
Title: Chief Financial Officer |
Dated: May 12, 2021 |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Zynerba Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Armando Anido, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ Armando Anido |
Armando Anido |
Chairman and Chief Executive Officer |
Dated: May 12, 2021 |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Zynerba Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Fickenscher, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ James E. Fickenscher |
James E. Fickenscher |
Chief Financial Officer |
Dated: May 12, 2021 |