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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2023

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

For the transition period from _____to _____

Commission file number: 001-37526

Zynerba Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		26-0389433 (I.R.S. Employer Identification No.)

80 W. Lancaster Avenue, Suite 300 Devon, PA (Address of principal executive offices)		19333 (Zip Code)

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

Not applicable

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

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


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

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

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

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


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

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

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

As of August 9, 2023, the registrant had 53,939,431 shares of common stock, $0.001 par value per share, outstanding.

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TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION		5

Item 1.	Consolidated Financial Statements (Unaudited)	5

	Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (Unaudited)	5

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 (Unaudited)	6

	Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2023 and 2022 (Unaudited)	7

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (Unaudited)	8

	Notes to Unaudited Consolidated Financial Statements	9

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

PART II—OTHER INFORMATION		29

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	32

Item 6.	Exhibits	33

	Signatures	34

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Quarterly Report on Form 10-Q, or this Quarterly Report, that are not statements of historical or current facts, such as those under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “continues,” “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 regarding the planned acquisition by Harmony Biosciences Holdings, Inc. (“Harmony”), including our ability to complete the pending transaction as contemplated by the Agreement and Plan of Merger, the parties’ ability to satisfy the conditions to the consummation of the offer and other conditions set forth in such agreement, the expected timetable for completing the transaction and effects of the offer and merger;

●

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, as well as our ability to continue as a going concern;

●

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

●

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

●

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

●

the results of our preclinical studies and earlier clinical trials of our product candidates may not be predictive of future results and we may not have favorable results in our ongoing or planned clinical trials;

●

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

●

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

●

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

●

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

●

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

●

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

●

our ability to limit our exposure under product liability lawsuits, shareholder class action lawsuits or other litigation;

●

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

●

legislative developments impacting our industry or the healthcare system broadly, including but not limited to the Inflation Reduction Act of 2022 and proposed changes to the Patient Protection and Affordable Care Act;

●

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

●

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

●

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

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●

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

●

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

●

the extent to which health pandemics and other outbreaks of communicable diseases could disrupt our operations or materially and adversely affect our business and financial conditions;

●

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

●

a deterioration of the credit rating for U.S. long-term sovereign debt, and/or actions and uncertainties surrounding the debt ceiling and the federal budget;

●

adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our current and projected business operations, financial condition and results of operations;

●

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

●

the other risks, uncertainties and factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, or our 2022 Annual Report, and our Quarterly Report on Form 10-Q for the three months ended March 31, 2023, under the caption “Item 1A. Risk Factors”.

In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Quarterly Report (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, even if experience or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law. Except as otherwise indicated, our forward-looking statements do not assume the consummation of the proposed acquisition by Harmony. If such acquisition is consummated, many of the forward-looking statements contained in this Quarterly Report would no longer be applicable.

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PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

ZYNERBA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	June 30,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	35,967,515	$	50,640,993
Incentive and tax receivables		1,308,583		1,225,383
Prepaid expenses and other current assets		2,018,874		2,908,731
Total current assets		39,294,972		54,775,107
Property and equipment, net		394,904		409,572
Incentive and tax receivables		567,648		—
Right-of-use assets		219,037		336,215
Total assets	$	40,476,561	$	55,520,894
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	2,479,345	$	1,942,830
Accrued expenses		8,758,767		7,014,882
Lease liabilities		217,879		214,901
Total current liabilities		11,455,991		9,172,613
Lease liabilities, long-term		—		119,524
Total liabilities		11,455,991		9,292,137
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding		—		—
Common stock, $0.001 par value; 200,000,000 shares authorized; 53,939,431 shares issued and outstanding at June 30, 2023 and 47,895,687 shares issued and outstanding at December 31, 2022		53,940		47,896
Additional paid-in capital		324,373,823		320,698,146
Accumulated deficit		(295,407,193)		(274,517,285)
Total stockholders' equity		29,020,570		46,228,757
Total liabilities and stockholders' equity	$	40,476,561	$	55,520,894

See accompanying notes to unaudited consolidated financial statements.

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ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Operating expenses:
Research and development	$	7,166,708	$	5,446,317	$	14,244,789	$	10,592,922
General and administrative		3,969,499		3,722,453		7,362,593		7,479,763
Total operating expenses		11,136,207		9,168,770		21,607,382		18,072,685
Loss from operations		(11,136,207)		(9,168,770)		(21,607,382)		(18,072,685)
Other income (expense):
Interest income		434,718		91,691		882,033		187,735
Foreign exchange loss		(74,576)		(775,927)		(164,559)		(458,675)
Total other income (expense)		360,142		(684,236)		717,474		(270,940)
Net loss	$	(10,776,065)	$	(9,853,006)	$	(20,889,908)	$	(18,343,625)

Net loss per share basic and diluted	$	(0.21)	$	(0.24)	$	(0.42)	$	(0.45)
Basic and diluted weighted average shares outstanding		50,150,138		41,406,803		49,295,103		40,858,688

See accompanying notes to unaudited consolidated financial statements.

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ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Six months ended June 30, 2023
								Total
	Common stock			Additional		Accumulated		stockholders'
	Shares	Amount		paid-in capital		deficit		equity
Balance at December 31, 2022	47,895,687	$	47,896	$	320,698,146	$	(274,517,285)	$	46,228,757
Issuance of common stock, net of issuance costs	3,279,077		3,279		1,747,000		—		1,750,279
Issuance of restricted stock	1,896,167		1,896		(1,896)		—		—
Common stock issued in lieu of annual bonus	431,556		432		278,940		—		279,372
Stock-based compensation expense	—		—		821,986		—		821,986
Net loss	—		—		—		(10,113,843)		(10,113,843)
Balance at March 31, 2023	53,502,487		53,503		323,544,176		(284,631,128)		38,966,551
Issuance of common stock, net of issuance costs	150,000		150		61,350		—		61,500
Issuance of restricted stock	286,944		287		(287)		—		—
Stock-based compensation expense	—		—		768,584		—		768,584
Net loss	—		—		—		(10,776,065)		(10,776,065)
Balance at June 30, 2023	53,939,431	$	53,940	$	324,373,823	$	(295,407,193)	$	29,020,570




	Six months ended June 30, 2022
								Total
	Common stock			Additional		Accumulated		stockholders'
	Shares	Amount		paid-in capital		deficit		equity
Balance at December 31, 2021	41,217,537	$	41,218	$	310,353,595	$	(239,481,479)	$	70,913,334
Issuance of common stock, net of issuance costs	857,060		857		1,582,916		—		1,583,773
Issuance of restricted stock	1,249,500		1,249		(1,249)		—		—
Stock-based compensation expense	—		—		1,160,482		—		1,160,482
Net loss	—		—		—		(8,490,619)		(8,490,619)
Balance at March 31, 2022	43,324,097		43,324		313,095,744		(247,972,098)		65,166,970
Issuance of common stock, net of issuance costs	488,892		489		818,877		—		819,366
Issuance of restricted stock	123,154		123		(123)		—		—
Stock-based compensation expense	—		—		1,108,543		—		1,108,543
Net loss	—		—		—		(9,853,006)		(9,853,006)
Balance at June 30, 2022	43,936,143	$	43,936	$	315,023,041	$	(257,825,104)	$	57,241,873

See accompanying notes to unaudited consolidated financial statements.

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ZYNERBA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six months ended June 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(20,889,908)	$	(18,343,625)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		117,331		114,727
Stock-based compensation		1,590,570		2,269,025
Changes in operating assets and liabilities:
Incentive and tax receivables		(650,848)		7,545,395
Prepaid expenses and other assets		950,836		1,202,672
Right-of-use assets and liabilities		632		631
Accounts payable		582,894		(199,978)
Accrued expenses		2,000,480		(271,854)
Net cash used in operating activities		(16,298,013)		(7,683,007)
Cash flows from investing activities:
Purchases of property and equipment		(97,948)		(51,607)
Net cash used in investing activities		(97,948)		(51,607)
Cash flows from financing activities:
Proceeds from the issuance of common stock		1,827,512		2,657,567
Payment of financing fees and expenses		(105,029)		(241,318)
Net cash provided by financing activities		1,722,483		2,416,249
Net decrease in cash and cash equivalents		(14,673,478)		(5,318,365)
Cash and cash equivalents at beginning of period		50,640,993		67,808,000
Cash and cash equivalents at end of period	$	35,967,515	$	62,489,635

Supplemental disclosures of cash flow information:
Financing costs included in accounts payable and accrued expenses at end of period	$	27,070	$	134,628
Property and equipment acquired but unpaid at end of period	$	93,632	$	—

See accompanying notes to unaudited consolidated financial statements

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business and Liquidity

a. Nature of Business

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

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.

b. Liquidity

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern (“ASC 205-40”), requires management to assess the Company’s ability to continue as a going concern for one year after the date the financial statements are issued. This standard requires management to 1) identify and disclose if there are initial conditions indicating substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of the financial statements, 2) disclose the principal conditions that gave rise to substantial doubt, 3) disclose management’s evaluation of the significance of those conditions in relation to the Company’s ability to meet its obligations and 4) disclose management’s plans that are intended to mitigate the adverse conditions. In accordance with the accounting standard, when considering management’s plans to mitigate the conditions giving rise to substantial doubt, management can only consider those plans which are probable to be successfully implemented.

As of June 30, 2023, the Company had cash and cash equivalents of $36.0 million and an accumulated deficit of $295.4 million. For the six months ended June 30, 2023, the Company reported a net loss of $20.9 million and cash used in operating activities of $16.3 million. The Company expects that its existing cash and cash equivalents will be sufficient to enable the Company to fund its operating expenses and capital expenditure requirements to mid-year 2024, but not more than one year after the date of the filing of this Quarterly Report on Form 10-Q, and therefore management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional funding. Management believes that the Company’s liquidity position as of the date of this filing provides sufficient runway to achieve important research and development milestones. Management intends to raise additional capital through equity offerings and/or debt financings, or from other potential sources of liquidity, which may include new collaborations, licensing or other commercial agreements for one or more of the Company’s research programs or patent portfolios or divestitures of the Company's assets. The Company’s ability to access the capital markets or otherwise raise such capital may be adversely impacted by geopolitical tensions and macroeconomic events and the recent disruptions to, and volatility in, financial markets in the United States and globally resulting from multiple factors such as COVID-19, inflationary pressures, banking instability, rising interest rates and the ongoing conflict in Ukraine. There is no assurance that such financing will be available when needed or on acceptable terms. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce, or eliminate its research and development programs or other operations. If any of these events occur, the Company’s ability to achieve its operational goals would be adversely affected.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The interim consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

(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, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the consolidated financial statements) considered necessary to present fairly the Company's financial position as of June 30, 2023, its results of operations for the three and six months ended June 30, 2023 and 2022 and cash flows for the six months ended June 30, 2023 and 2022. Operating results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the 2022 Annual Report.

b. Use of Estimates

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

c. Incentive and Tax Receivables

The Company’s subsidiary, Zynerba Pharmaceuticals Pty Ltd (the “Subsidiary”), is incorporated in Australia. The Subsidiary is eligible to participate in an Australian research and development tax incentive program. As part of this program, the Subsidiary is eligible to receive a cash refund from the Australian Taxation Office for a percentage of the research and development costs expended by the Subsidiary in Australia. The cash refund is available to eligible companies with an annual aggregate revenue of less than $20.0 million (Australian) during the reimbursable period. The Company estimates the amount of cash refund it expects to receive related to the Australian research and development tax incentive program and records the incentives when it is probable (1) the Company will comply with relevant conditions of the program and (2) the incentive will be received. The Company evaluates its eligibility under tax incentive programs as of each balance sheet date based on the most current and relevant data available. If the Company is deemed to be ineligible or unable to receive the Australian research and development tax credit, or the Australian government significantly reduces or eliminates the tax credit, the actual cash refund the Company receives may materially differ from its estimates.

In 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 June 30, 2023, incentive and tax receivables included $0.2 million for refundable GST on expenses incurred with Australian vendors during the three months ended June 30, 2023.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Current incentive and tax receivables consisted of the following as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
Research and development incentive	$	1,063,551	$	977,714
Goods and services tax		245,032		247,669
Total incentive and tax receivables - current assets	$	1,308,583	$	1,225,383

As of June 30, 2023, the Company’s estimate of the amount of cash refund it expects to receive for 2022 eligible spending as part of this incentive program was $1.1 million and was recorded as a current asset. The Company’s estimate of the amount of cash refund it expects to receive for 2023 eligible spending through June 30, 2023 was $0.6 million and was recorded as a non-current asset.

d. Research and Development

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

The following table summarizes research and development expenses for the six months ended June 30, 2023 and 2022:


	Six months ended June 30,
	2023		2022
Research and development expenses - before R&D incentive	$	14,930,416	$	11,176,773
Research and development incentive		(685,627)		(583,851)
Total research and development expenses	$	14,244,789	$	10,592,922

e. Net Loss Per Share

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

The following potentially dilutive securities outstanding as of June 30, 2023 and 2022 have been excluded from the computation of diluted weighted average shares outstanding, as their effects on net loss per share for the periods presented would be anti-dilutive:


	June 30,
	2023	2022
Stock options	6,706,432	6,276,016
Unvested restricted stock	3,618,722	2,307,476
	10,325,154	8,583,492

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

f. Recent Accounting Pronouncements

In November 2021, the FASB issued Accounting Standards Update No. 2021-10, Government Assistance (Topic 832): Disclosure by Business Entities about Government Assistance (“ASU 2021-10”), which improves the transparency of government assistance received by most business entities by requiring the disclosure of: (1) the types of government assistance received; (2) the accounting for such assistance; and (3) the effect of the assistance on a business entity’s financial statements. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The Company adopted ASU 2021-10 effective January 1, 2022, and the adoption did not have a material impact on its consolidated financial statements.

(3) Fair Value Measurements

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

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

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

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

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

In accordance with the fair value hierarchy described above, the following table sets forth the Company's financial assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022:



			Fair Value Measurement
	Carrying amount		as of June 30, 2023
	as of June 30, 2023		Level 1		Level 2		Level 3
Cash equivalents (money market accounts)	$	31,693,849	$	31,693,849	$	—	$	—
	$	31,693,849	$	31,693,849	$	—	$	—



			Fair Value Measurement
	Carrying amount		as of December 31, 2022
	as of December 31, 2022		Level 1		Level 2		Level 3
Cash equivalents (money market accounts)	$	44,663,395	$	44,663,395	$	—	$	—
	$	44,663,395	$	44,663,395	$	—	$	—

(4) Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
Prepaid development expenses	$	884,730	$	668,096
Prepaid insurance		288,097		1,546,784
Deferred financing costs		216,935		155,956
Other current assets		629,112		537,895
Total prepaid expenses and other current assets	$	2,018,874	$	2,908,731

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(5) Property and Equipment

Property and equipment consisted of the following as of June 30, 2023 and December 31, 2022:


	Estimated
	useful life	June 30,		December 31,
	(in years)	2023		2022
Equipment	2-5	$	1,165,570	$	828,666
Computer equipment	3-5		30,319		30,319
Furniture and fixtures	3-5		311,356		311,356
Leasehold improvements	various		68,881		68,881
Construction in process			—		234,241
Total cost			1,576,126		1,473,463
Less accumulated depreciation			(1,181,222)		(1,063,891)
Property and equipment, net		$	394,904	$	409,572

Depreciation expense was $117,331 and $114,727 for the six months ended June 30, 2023 and 2022 respectively.

(6) Accrued Expenses

Accrued expenses consisted of the following as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
Accrued compensation	$	1,494,753	$	2,016,402
Accrued research and development		5,957,323		4,239,719
Other		1,306,691		758,761
Total accrued expenses	$	8,758,767	$	7,014,882

(7) Common Stock

a. At-The-Market Financing

On May 11, 2021, the Company entered into a Controlled Equity Offering^SM Sales Agreement (the “2021 Sales Agreement”) with Cantor Fitzgerald & Co., Canaccord Genuity, LLC, H.C. Wainwright & Co. LLC and Ladenburg Thalmann & Co. Inc., as sales agents, pursuant to which, under a prospectus filed by the Company in May 2022, the Company may sell, from time to time, up to $75.0 million of its common stock. We are currently subject to General Instruction I.B.6 of Form S-3, and the amount of funds we can raise through primary public offerings of securities in any twelve-month period using our existing registration statement on Form S-3 is limited to one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates. We will be subject by this limit until such time as our public float exceeds $75.0 million.

During the six months ended June 30, 2023, the Company sold and issued 1,179,077 shares of common stock under the 2021 Sales Agreement in the open market at a weighted average selling price of $0.56 per share, resulting in gross proceeds of $0.7 million. Net proceeds after deducting commissions and offering expenses were $0.5 million.

b. Equity Purchase Agreement

On July 21, 2022 (the “Effective Date”), the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) pursuant to which Lincoln Park committed to purchase up to $20.0 million of the Company’s common stock. Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $20.0 million of the Company’s common stock. Such sales of common stock will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 36-month period commencing on the Effective

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Date. The number of shares the Company may sell to Lincoln Park on any single business day in a regular purchase is 150,000, but that amount may be increased up to 300,000 shares, depending upon the market price of the Company’s common stock at the time of sale and subject to a maximum limit of $2.0 million per regular purchase. The purchase price per share for each such regular purchase will be based on prevailing market prices of the Company’s common stock immediately preceding the time of sale as computed under the Purchase Agreement. In addition to regular purchases, the Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional accelerated purchases.

Pursuant to the terms of the Purchase Agreement, in July 2022, the Company issued 347,222 shares of its common stock to Lincoln Park as consideration for its commitment to purchase shares of the Company’s common stock under the Purchase Agreement.

During the six months ended June 30, 2023, the Company sold and issued 2,250,000 shares of common stock under the Purchase Agreement at a weighted average selling price of $0.52 per share, resulting in gross and net proceeds of $1.2 million.

(8) Stock-Based Compensation

The Company’s board of directors adopted the 2023 Zynerba Pharmaceuticals, Inc. Stock Option and Incentive Plan (the “2023 Plan”) in April 2023, which was subsequently approved by the stockholders in June 2023, under which the Company may grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, cash-based awards, and dividend equivalent rights to employees, officers, non-employee directors, consultants, and advisors. The number of shares available for issuance under awards granted pursuant to the 2023 Plan was 6,900,000 shares of the Company’s common stock. Shares of common stock underlying awards granted under the 2023 Plan that are forfeited, canceled or otherwise terminated (other than by exercise) will be added back to the share reserve available for issuance under the 2023 Plan. Notwithstanding the foregoing, the following shares shall not be added to the share reserve authorized for grant under the 2023 Plan: shares tendered or held back upon exercise of an option or shares subject to a stock appreciation right that are not issued in connection with the stock settlement of the stock appreciation right upon exercise thereof. Further, shares reacquired by the Company on the open market will not be added to the share reserve authorized for issuance. As of June 30, 2023, there were 6,182,640 shares available for future issuance under the 2023 Plan.

The Company also maintained 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 employees with the opportunity to receive bonus awards that are considered “qualified performance-based compensation” under Section 162(m) of the Internal Revenue Code. As of June 6, 2023, no additional awards will be granted under the 2014 Plan.

Options issued under the 2023 and 2014 Plans 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 one day before 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.

a.	Time-Based Restricted Stock Awards:

During 2022, the Company granted 841,654 time-based restricted stock awards to employees, non-employee directors and consultants, of which 595,664 restricted stock awards remain outstanding as of June 30, 2023. During the six months ended June 30, 2023, the Company granted 1,554,944 time-based restricted stock awards to employees and non-employee directors, which all remain outstanding as of June 30, 2023.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

b.	Restricted Stock Awards in Lieu of Bonus:

During the six months ended June 30, 2023, the Company granted 431,556 fully vested stock awards to certain employees in lieu of their earned annual bonus. The fair value of those vested stock awards was $0.3 million and was recorded against accrued compensation that existed as of December 31, 2022.

c.	Performance-Based Restricted Stock Awards:

Stock-based compensation expense for performance-based grants are recorded when management estimates that the vesting of these shares is probable based on the status of the Company’s research and development programs and other relevant factors, which were established by the Company’s board of directors. The Company’s board of directors determines if the performance conditions have been met.

During 2021, the Company granted 506,911 performance-based restricted stock awards to employees, of which 187,964 restricted stock awards have fully vested and 281,947 restricted stock awards remained outstanding as of June 30, 2023. The performance-based conditions for these performance-based grants were deemed probable of achievement during the six months ended June 30, 2021 and, as of June 30, 2023, the Company has recorded $1.7 million in stock-based compensation expense related to these grants.

During 2022, the Company granted 556,500 performance-based restricted stock awards to employees, of which 548,000 restricted stock awards remained outstanding as of June 30, 2023. During the six months ended June 30, 2023, the Company granted 628,167 performance-based restricted stock awards to employees. As of June 30, 2023, satisfaction of the related performance conditions for both the 2022 and 2023 grants have not been deemed probable of being achieved and there was $1.1 million and $0.3 million, respectively, of unrecognized stock-based compensation expense related to these performance-based awards, which will be expensed over the estimated service period related to each performance condition once the performance conditions have been deemed probable.

For the six months ended June 30, 2023 and 2022, the Company recorded stock-based compensation expense related to its stock option grants and restricted stock awards, as follows:


	Stock Option Grants				Restricted stock awards				Total
	2023		2022		2023		2022		2023			2022
Research and development	$	421,200	$	520,729	$	299,994	$	497,412	$	721,194	$	1,018,141
General and administrative		507,374		638,241		362,002		612,643		869,376		1,250,884
	$	928,574	$	1,158,970	$	661,996	$	1,110,055	$	1,590,570	$	2,269,025

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2023:


		Weighted-		Weighted-
		Average		Average	Aggregate
	Number	Exercise		Contractual	Intrinsic
	of Shares	Price		Life (in Years)	Value
Outstanding as of December 31, 2022	6,276,016	$	7.52
Granted	430,416		0.35
Outstanding as of June 30, 2023	6,706,432	$	7.06	5.72	$	—
Exercisable as of June 30, 2023	5,159,646	$	8.47	4.86	$	—
Vested and expected to vest as of June 30, 2023	6,706,432	$	7.06

The weighted-average grant date fair values of options granted during the six months ended June 30, 2023 and 2022 were $0.25 and $1.74, respectively.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	Six months ended June 30,
	2023	2022
Weighted-average risk-free interest rate	3.99%	2.02%
Expected term of options (in years)	5.50	6.11
Expected stock price volatility	87.35%	100.23%
Expected dividend yield	0%	0%

As of June 30, 2023, there was $2.5 million of unrecognized stock-based compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 1.9 years.

The following table summarizes the Company’s restricted stock award activity under the 2014 Plan for the six months ended June 30, 2023:


		Weighted
		Average		Aggregate
		Grant Date		Intrinsic
	Shares	Fair Value		Value
Unvested as of December 31, 2022	2,114,512	$	2.86
Granted	2,614,667		0.56
Vested	(1,110,457)		2.92
Unvested as of June 30, 2023	3,618,722	$	1.21	$	1,179,703
Expected to vest as of June 30, 2023	2,437,555	$	1.38	$	794,643

As of June 30, 2023, excluding performance-based restricted stock awards that have not been deemed probable, there was $1.3 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 1.2 years.

(9) Operating Lease Obligations

The Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), Accounting Standards Codification 842 prospectively using the modified-retrospective method and elected the package of transition practical expedients that does not require reassessment of: (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and nonlease components, which consist principally of common area maintenance charges, and to exclude leases with an initial term of 12 months or less.

The Company leases its headquarters where it occupies 10,877 square feet of office space. On March 1, 2021, the Company extended its lease for three additional years until May 31, 2024. The Company’s lease contains variable lease costs that do not depend on a rate or index and consist primarily of common area maintenance, taxes, and insurance charges. As the implicit rate was not readily determinable for the Company’s lease, the Company used an estimated incremental borrowing rate, or discount rate, to determine the initial present value of the lease payments. The discount rate for the lease was calculated using a synthetic credit rating model.

As of March 1, 2021, the effective date of the lease modification, the Company remeasured the lease liability for the remaining portion of the lease and adjusted the lease liability to $755,085 and right-of-use assets to $752,391, which was recorded net of a deferred rent liability of $2,694. As of June 30, 2023, the Company’s right-of-use asset, net of amortization, was $219,037.

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ZYNERBA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other operating lease information as of June 30, 2023:


Weighted-average remaining lease term - operating leases	0.9	years
Weighted-average discount rate - operating leases	2.76	%

The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of June 30, 2023:


	June 30,
Year ending:	2023
December 31, 2023	$	120,210
December 31, 2024		100,175
Total minimum lease payments		220,385
Less: imputed lease interest		(2,506)
Total lease liabilities	$	217,879

Lease expense for the six months ended June 30, 2023 was comprised of the following:


	Six months ended June 30,
		2023		2022
Operating lease expense	$	120,842	$	120,842
Variable lease expense		40,105		32,276
Total lease expense	$	160,947	$	153,118

Total cash payments related to leases were $160,316 and $152,487 for the six months ended June 30, 2023 and 2022, respectively.

10) Subsequent Events

Merger Agreement

On August 14, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Harmony Biosciences Holdings, Inc. (“Harmony”) and Xylophone Acquisition Corp., a wholly owned subsidiary of Harmony (“Merger Sub”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions therein, Harmony will commence a tender offer (the “Offer”) to acquire all of the issued and outstanding shares of common stock, par value $0.001 per share, of the Company (“Company Common Stock”), for (i) approximately $1.1059 per share of Company Common Stock (the “Common Cash Amount”), in cash, subject to any applicable withholding of taxes and without interest, plus (ii) one contingent value right per share of Company Common Stock (the “Common CVR Amount”), which represents the right to receive up to approximately $2.5444 per share of Company Common Stock in the form of one or more potential contingent payments, in cash, subject to any applicable withholding of taxes and without interest, upon the achievement of certain milestones as set forth in, and subject to and in accordance with the terms and conditions of, the Contingent Value Rights Agreement (the Common Cash Amount plus the Common CVR Amount, collectively, or any different amount per share paid pursuant to the Offer to the extent permitted by the Merger Agreement, being the “Offer Price”). The Offer will initially expire at 5:00 p.m. (New York City time) on the date that is 21 business days following the commencement of the Offer, subject to extension under certain circumstances. Following the consummation of the Offer, upon the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger.

The Merger Agreement includes customary representations, warranties and covenants of the Company, Harmony and Merger Sub. However, there can be no assurance that the conditions to the completion of the Offer and the Merger will be satisfied or waived, that the Offer and the Merger will be completed on the expected timeframe or at all, or that the Offer and the Merger will be consummated as contemplated by the Merger Agreement.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our 2022 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 2022 Annual Report.

Overview

Acquisition by Harmony Biosciences

On August 14, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Harmony Biosciences Holdings, Inc. (“Harmony”) and Xylophone Acquisition Corp., a wholly owned subsidiary of Harmony (“Merger Sub”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions therein, Harmony will commence a tender offer (the “Offer”) to acquire all of our issued and outstanding shares of common stock, par value $0.001 per share (“Company Common Stock”), for (i) approximately $1.1059 per share of Company Common Stock (“Common Cash Amount”), in cash, subject to any applicable withholding of taxes and without interest, plus (ii) one contingent value right per share of Company Common Stock (the “Common CVR Amount”), which represents the right to receive up to approximately $2.5444 per share of Company Common Stock in the form of one or more potential contingent payments, in cash, subject to any applicable withholding of taxes and without interest, upon the achievement of certain milestones as set forth in, and subject to and in accordance with the terms and conditions of, the Contingent Value Rights Agreement (the Common Cash Amount plus the Common CVR Amount, collectively, or any different amount per share paid pursuant to the Offer to the extent permitted by the Merger Agreement, being the “Offer Price”). The Offer will initially expire at 5:00 p.m. (New York City time) on the date that is 21 business days following the commencement of the Offer, subject to extension under certain circumstances.

Following the consummation of the Offer, upon the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation in the Merger. Pursuant to the terms and subject to the conditions of the Merger Agreement, the Merger will be effected pursuant to Section 251(h) of the Delaware General Corporation Law, which permits completion of the Merger without a vote of the holders of common stock upon the acquisition by Harmony of a majority of the aggregate voting power of common stock. As a result of the Merger, we will cease to be a publicly traded company. The Merger Agreement includes customary representations, warranties and covenants of us, Harmony and Merger Sub. However, there can be no assurance that the conditions to the completion of the Offer and the Merger will be satisfied or waived, that the Offer and the Merger will be completed on the expected timeframe or at all, or that the Offer and the Merger will be consummated as contemplated by the Merger Agreement. Except as otherwise indicated, we have prepared this Quarterly Report and the forward-looking statements contained in this Quarterly Report as if we were going to remain an independent, standalone company. If the acquisition is consummated, many of the forward-looking statements contained in this Quarterly Report would no longer be applicable.

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Company Overview

We are the leader in pharmaceutically-produced transdermal cannabinoid therapies for orphan neuropsychiatric disorders. We are committed to improving the lives of patients and their families living with severe, chronic health conditions, including Fragile X syndrome, or FXS, and chromosome 22q11.2 deletion syndrome, or 22q.

Cannabinoids are a class of compounds derived from Cannabis plants. The two primary cannabinoids contained in Cannabis are cannabidiol and tetrahydrocannabinol, or THC. Clinical and preclinical data suggest that cannabidiol may have positive effects on treating behavioral symptoms of FXS and 22q.

We are currently developing Zygel (also known as ZYN002), the first and only pharmaceutically-produced cannabidiol formulated as a permeation-enhanced gel for transdermal delivery and manufactured without the presence of THC, which is patent protected through 2030. Additional patents expiring between 2026 and 2040 are directed to methods of use relating to Zygel, including methods of treating FXS or 22q.

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

Zygel is being developed as a clear gel and is targeting treatment of behavioral symptoms of FXS and 22q. We have received orphan drug designations from the United States Food and Drug Administration, or FDA, and the European Commission for cannabidiol, the active ingredient in Zygel, for the treatment of FXS and 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.

Clinical Development Programs

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

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

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FXS

CONNECT-FX Trial

In June 2020, we announced results of our CONNECT-FX clinical trial, a multi-national randomized, double-blind, placebo-controlled, 14-week study designed to assess the efficacy and safety of Zygel in children and adolescents ages three through 17 years who have full mutation of the FMR1 gene. While Zygel did not achieve statistical significance versus placebo in the primary endpoint of improvement in the Social Avoidance subscale of the Aberrant Behavior Checklist – Community FXS, or ABC-C_FXS, a pre-planned ad hoc analysis of the most severely impacted patients in the trial, as defined by patients having at least 90% methylation (“highly methylated”) of the impacted FMR1 gene, demonstrated that those patients receiving Zygel achieved statistical significance in the primary endpoint of improvement at 12 weeks of treatment in the Social Avoidance subscale of the ABC-C_FXS compared to placebo. We performed a subsequent analysis of the CONNECT-FX population within those patients having 100% or complete methylation of the impacted FMR1 gene, which demonstrated that these patients having complete methylation and receiving Zygel similarly achieved statistical significance in the primary endpoint of improvement at 12 weeks of treatment in the Social Avoidance subscale of the ABC-C_FXS compared to placebo.

RECONNECT Trial

In September 2021, we initiated our RECONNECT (A Randomized, Double-Blind, Placebo-Controlled, Multiple-Center, Efficacy and Safety Study of ZYN002 Administered as a Transdermal Gel to Children, Adolescents and Young Adults with Fragile X Syndrome) trial, a pivotal, multi-national, confirmatory Phase 3 trial of Zygel in patients with FXS. The trial is designed to confirm the positive results observed in patients having 100% or complete methylation of the impacted FMR1 gene in our CONNECT-FX trial.

RECONNECT is an 18-week trial that is expected to enroll approximately 200 patients, aged three through 22 years, at 29 clinical sites in the United States, Australia and the United Kingdom. Approximately 160 of the patients enrolled will have complete (100%) methylation of their FMR1 gene and approximately 40 patients will have partial methylation of their FMR1 gene. Patients will be randomized 1:1 to either Zygel or placebo. Randomization will be stratified by gender, methylation status and weight.

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

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

22q

Phase 2 INSPIRE Trial

In June 2022, we announced top-line results from our Phase 2 INSPIRE clinical trial, a 14-week, open-label clinical trial designed to assess the safety, tolerability and efficacy of Zygel for treatment of behavioral symptoms of 22q. The Phase 2 trial was designed for signal detection by assessing the safety, tolerability and efficacy of Zygel for the treatment of behavioral symptoms of 22q in children and adolescents. Zygel was administered to patients with 22q as an add-on therapy to their standard of care and utilized a variety of efficacy assessments. Patients who completed the initial 14-week treatment period and met certain requirements were eligible to enroll in a 24-week open label extension for a total treatment period of 38 weeks. In December 2022, we announced additional data from patients who completed 38 weeks of treatment in the INSPIRE trial. Key findings from the trial include:

●

The total score and all five subscales of the Anxiety, Depression and Mood Scale (ADAMS) showed statistically significant improvements at 14 and 38 weeks of treatment compared to baseline;

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All five subscales of the Aberrant Behavior Checklist – Community, or ABC-C, showed statistically significant improvements at 14 and 38 weeks of treatment compared to baseline;

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The Pediatric Anxiety Rating Scale (PARS – R) showed statistically significant improvements at 14 and 38 weeks of treatment compared to baseline; and

●

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

Zygel was shown to be generally well tolerated over 38 weeks, and the safety profile was consistent with previously released data from other Zygel clinical trials. Three patients reported treatment related adverse events which were all mild application site adverse events. One patient discontinued treatment due to adverse events not related to Zygel.

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

Impact of Pandemics, Epidemics and Health-Related Crises

In response to the impact of COVID-19, for our clinical development programs, we implemented multiple measures consistent with the FDA’s guidance on the conduct of clinical trials of medical products during COVID-19, including remote site monitoring and patient visits using telemedicine where needed and appropriate, direct-to-patient drug shipments and local study-related clinical laboratory collection. There is a possibility that our current or future clinical trial sites may be affected by COVID-19, or a similar pandemic, epidemic or outbreak of a communicable disease, due to prioritization of hospital resources toward such health crisis, as well as the inability to access sites for initiation, patient enrollment and monitoring. As a result, patient screening, new patient enrollment, monitoring and data collection may be affected or delayed.

In the fall of 2022, there was a significantly higher prevalence of influenza and RSV, in addition to the ongoing presence of COVID-19, leading to a “tripledemic”. The impact of the tripledemic was greatest in children, who are the primary population for our clinical trials.

We are aware that several clinical sites involved in our clinical trials have in the past temporarily stopped or delayed enrolling new patients, with exemptions if appropriate, and it is possible that these or other clinical sites may be similarly affected in the future. These developments may delay or extend our projected clinical trial timelines. Some of our third-party manufacturers, which we use for the supply of materials for product candidates or other materials necessary to manufacture products to conduct preclinical tests and clinical trials, and contract research organizations may be impacted by COVID-19, or a similar pandemic, epidemic or outbreak of a communicable disease. Should they experience disruptions, such as temporary closures or suspension of services, we would likely experience delays in advancing our current or planned clinical trials. As of the date of this Quarterly Report on Form 10-Q, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. Actual results could differ from these estimates, and any such differences may be material to our consolidated financial statements.

Operations

We have never been profitable and have incurred net losses since inception. Our net losses were $20.9 million and $18.3 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, our accumulated deficit was $295.4 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.

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Financial Operations Overview

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

Research and Development Expenses

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

●

expenses associated with preclinical development and clinical trials;

●

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

●

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

●

depreciation, maintenance and other facility-related expenses.

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

Our Australian subsidiary, Zynerba Pharmaceuticals Pty Ltd, or the Subsidiary, is incorporated in Australia and is eligible to participate in an Australian research and development tax incentive program. As part of this program, the Subsidiary is eligible to receive a cash refund from the Australian Taxation Office, or the ATO, for a percentage of the research and development costs expended by the Subsidiary in Australia. The cash refund is available to eligible companies with an annual aggregate revenue of less than $20.0 million (Australian) during the reimbursable period. We estimate the amount of cash refund we expect to receive related to the Australian research and development tax incentive program and record the incentives when it is probable (1) we will comply with relevant conditions of the program and (2) the incentive will be received. We evaluate the Subsidiary’s eligibility under tax incentive programs as of each balance sheet date based on the most current and relevant data available. If the Subsidiary is deemed to be ineligible or unable to receive the Australian research and development tax credit, or the Australian government significantly reduces or eliminates the tax credit, the actual cash refund we receive may materially differ from our estimates.

The following table summarizes research and development expenses for the six months ended June 30, 2023 and 2022:


	Six months ended June 30,
	2023		2022
Research and development expenses - before R&D incentive	$	14,930,416	$	11,176,773
Research and development incentive		(685,627)		(583,851)
Total research and development expenses	$	14,244,789	$	10,592,922

We expect research and development expenses to increase for the year ending December 31, 2023, as compared to 2022, as we continue to conduct our RECONNECT clinical trial for FXS. These expenditures are subject to numerous uncertainties regarding timing and cost to completion. The impact of inflation could significantly impact the cost of our ongoing operations. 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.

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The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:

●

the number of sites included in the clinical trials;

●

the length of time required to enroll suitable patients;

●

the size of patient populations participating in the clinical trials;

●

the duration of patient follow-ups;

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the development stage of the product candidates; and

●

the efficacy and safety profile of the product candidates.

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

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance, legal, human resource, investor relations and commercial functions. Our general and administrative expenses also include facility and related costs not included in research and development expenses, professional fees for legal services, including patent-related expenses, litigation settlement expenses, consulting, tax and accounting services, insurance, market research and general corporate expenses. We expect that our general and administrative expenses will increase for the next several years due to inflation and increased labor costs, and 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 2022 Annual Report under Part II, Item 7, “Critical Accounting Estimates.” During the

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six months ended June 30, 2023, there have been no material changes to the critical accounting estimates or critical accounting policies discussed in our 2022 Annual Report.

Research and Development Expenses – Critical Accounting Estimates

We rely on third parties to conduct our preclinical studies and clinical trials, and to provide services, including data management, statistical analysis and electronic compilation. At the end of each reporting period, we compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we will consider in preparing these estimates include the number of patients enrolled in studies, milestones achieved and other criteria related to the efforts of our 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, we will record net prepaid or accrued expenses related to these costs.

Results of Operations

Comparison of the Three Months Ended June 30, 2023 and 2022

Research and Development Expenses

Research and development expenses increased by $1.8 million, or 32%, to $7.2 million for the three months ended June 30, 2023 from $5.4 million for the three months ended June 30, 2022. The increase was primarily related to increases in manufacturing and clinical costs associated with our Zygel program slightly offset by lower stock-based compensation expenses.

General and Administrative Expenses

General and administrative expenses increased by $0.3 million, or 7%, to $4.0 million for the three months ended June 30, 2023 from $3.7 million for the three months ended June 30, 2022. The increase was primarily related to higher legal fees and increased proxy solicitation costs related to our annual meeting, partially offset by lower stock-based compensation expenses and a decrease in directors’ and officers’ liability insurance costs.

Other Income (Expense)

During the three months ended June 30, 2023 and 2022, we recognized $0.4 million and $0.1 million, respectively, in interest income. The increase in interest income was due to higher average interest rates earned on our investments. During the three months ended June 30, 2023 and 2022, we recognized a foreign currency loss of $0.1 million and $0.8 million, respectively. Foreign currency gains and losses are due primarily to the remeasurement of the Subsidiary’s assets and liabilities, which are denominated in the local currency to the Subsidiary’s functional currency, which is the U.S. dollar.

Comparison of the Six Months Ended June 30, 2023 and 2022

Research and Development Expenses

Research and development expenses increased by $3.6 million, or 34%, to $14.2 million for the six months ended June 30, 2023 from $10.6 million for the six months ended June 30, 2022. The increase was primarily related to increases in manufacturing and clinical costs associated with our Zygel program slightly offset by lower stock-based compensation expenses.

General and Administrative Expenses

General and administrative expenses decreased by $0.1 million, or 2%, to $7.4 million for the six months ended June 30, 2023 from $7.5 million for the six months ended June 30, 2022. The decrease was primarily related to lower stock-based compensation expenses and a decrease in directors’ and officers’ liability insurance costs slightly offset by an increase in legal fees.

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Other Income (Expense)

During the six months ended June 30, 2023 and 2022, we recognized $0.9 million and $0.2 million, respectively, in interest income. The increase in interest income was due to higher average interest rates earned on our investments. During the six months ended June 30, 2023 and 2022, we recognized a foreign currency loss of $0.2 million and $0.5 million, respectively. Foreign currency gains and losses are due primarily to the remeasurement of the Subsidiary’s assets and liabilities, which are denominated in the local currency to the Subsidiary’s functional currency, which is the U.S. dollar.

Liquidity and Capital Resources

Since our inception in 2007, we have devoted most of our cash resources to research and development and general and administrative activities. We have financed our operations primarily with the proceeds from the issuance and sale of equity securities (most notably our initial public offering, our follow-on public offerings and sales under our “at-the-market” offerings and through the Purchase Agreement), convertible promissory notes, state and federal grants and research services.

To date, we have not generated any revenue from the sale of products, and we do not anticipate generating any revenue from the sales of products for the foreseeable future. We have incurred losses and generated negative cash flows from operations since inception. As of June 30, 2023, our principal sources of liquidity were our cash and cash equivalents of $36.0 million. Our working capital was $27.8 million as of June 30, 2023.

Management believes that cash and cash equivalents as of June 30, 2023 will be sufficient to enable us to fund operating expenses and capital expenditure requirements to mid-year 2024, but not more than one year after the date of the filing of this Quarterly Report on Form 10-Q, and therefore management has concluded that substantial doubt exists about the Company’s ability to continue as a going concern. Substantial additional financings will be needed to fund our operations and to complete clinical development of and to commercially develop our product candidates. There can be 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 geopolitical tensions and macroeconomic events and the recent disruptions to, and volatility in, financial markets in the United States and globally resulting from multiple factors such as health-related crises, inflationary pressures, banking instability, rising interest rates and the ongoing conflict in Ukraine.

Additionally, while the Merger Agreement is in effect, we are subject to restrictions on our business activities, generally requiring us to conduct our business in the ordinary course, consistent with past practice, and subject to a variety of specified limitations absent Harmony’s prior consent. These limitations include, among other things, restrictions on our ability to acquire other businesses and assets, sell, transfer or license our assets, make investments, repurchase or issue securities, pay dividends, make capital expenditures, amend our organizational documents, issue securities and incur indebtedness.

At-The-Market Financings

On May 11, 2021, we entered into a Controlled Equity Offering^SM Sales Agreement, or the 2021 Sales Agreement, with Cantor Fitzgerald & Co., Canaccord Genuity, LLC, H.C. Wainwright & Co. LLC and Ladenburg Thalmann & Co. Inc., as sales agents, pursuant to which, under a prospectus filed in May 2022, we may sell, from time to time, up to $75.0 million of our common stock. We are currently subject to General Instruction I.B.6 of Form S-3, and the amount of funds we can raise through primary public offerings of securities in any twelve-month period using our existing registration statement on Form S-3 is limited to one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates. We will be subject to this limit until such time as our public float exceeds $75.0 million.

During the six months ended June 30, 2023, we sold and issued 1,179,077 shares of common stock under the 2021 Sales Agreement in the open market at a weighted average selling price of $0.56 per share, resulting in gross proceeds of $0.7 million. Net proceeds after deducting commissions and offering expenses were $0.5 million.

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Equity Purchase Agreement

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

During the six months ended June 30, 2023, we sold and issued 2,250,000 shares of common stock under the Purchase Agreement at a weighted average selling price of $0.52 per share, resulting in gross and net proceeds of $1.2 million.

Debt

We had no debt outstanding as of June 30, 2023 or December 31, 2022.

Future Capital Requirements

During the six months ended June 30, 2023, net cash used in operating activities was $16.3 million, and our accumulated deficit as of June 30, 2023 was $295.4 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:

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

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the clinical development plans we establish for these product candidates;

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

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

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

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

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

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

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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 pandemics, epidemics and other outbreaks of communicable diseases could disrupt our operations or materially and adversely affect our business and financial conditions;

●

the timing and outcome of the ATO’s review regarding our eligibility to receive tax credits related to the research and development tax incentive program; and

●

liquidity constraints, failures and instability in U.S. and international financial banking systems.

We expect to seek additional funding to sustain our future operations and while we have successfully raised capital in the past, the ability to raise capital in future periods is not assured. Based on our available cash as of June 30, 2023, we will need to raise additional capital in the next twelve months to continue as a going concern.

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 the sale of equity securities via the 2021 Sales Agreement or the Purchase Agreement, public or private equity offerings, debt financings, collaborations, licensing or other commercial agreements for one or more of our research programs or patent portfolios, divestitures of our assets, or other financing alternatives. Other than the Purchase Agreement, 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 or Purchase Agreement, our stockholders will experience dilution.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the six months ended June 30, 2023 and 2022.


	Six Months Ended June 30,
	2023		2022
Statement of Cash Flows Data:
Total net cash (used in) provided by:
Operating activities	$	(16,298,013)	$	(7,683,007)
Investing activities		(97,948)		(51,607)
Financing activities		1,722,483		2,416,249
Net decrease in cash and cash equivalents	$	(14,673,478)	$	(5,318,365)

Operating Activities

For the six months ended June 30, 2023, cash used in operating activities was $16.3 million compared $7.7 million of cash provided by operating activities for the six months ended June 30, 2022. The change from the comparable 2022 period was primarily due to (a) the Company receiving payment of $8.0 million from the ATO, during the six months ended March 31, 2022, for the research and development incentive for the years ended December 31, 2018, 2019 and 2020, (b) increased research and development expenses related to the clinical trial costs of our Zygel program, slightly offset by (c) changes in accounts payable and accrued expenses. Our cash flows used in operations may differ substantially from our net loss due to non-cash charges and changes in balance sheet accounts.

Excluding the $8.0 million of cash received from the ATO in 2022, we expect cash used in operating activities to increase for the year ending December 31, 2023 as compared to 2022, as we continue to conduct our RECONNECT clinical trial for FXS.

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Investing Activities

For the six months ended June 30, 2023 and 2022, cash used in investing activities represented the cost of expenditures made for manufacturing equipment.

Financing Activities

Cash provided by financing activities for the six months ended June 30, 2023 consisted of $0.5 million in net proceeds from sales of our shares of common stock under the 2021 Sales Agreement and $1.2 million in net proceeds from sales of our shares under the Purchase Agreement. Cash provided by financing activities for the six months ended June 30, 2022 consisted of $2.4 million in net proceeds from sales of our shares of common stock under the 2021 Sales Agreement.

Recently Adopted Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2021-10, Government Assistance (Topic 832): Disclosure by Business Entities about Government Assistance, or ASU 2021-10, which improves the transparency of government assistance received by most business entities by requiring the disclosure of: (1) the types of government assistance received; (2) the accounting for such assistance; and (3) the effect of the assistance on a business entity’s financial statements. This guidance is effective for financial statements issued for annual periods beginning after 15 December 2021. The adoption of the guidance on January 1, 2022 did not have a material impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes, nor do we engage in any hedging activities. As of June 30, 2023, we had cash and cash equivalents of $36.0 million consisting primarily of cash and money market account balances. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an immediate 10% increase in interest rates would have any significant impact on the realized value of our investments. Accordingly, we do not believe we are exposed to material market risk with respect to our cash and cash equivalents.

We have engaged third parties to manufacture our product candidates in Australia, Canada and the United Kingdom and to conduct clinical trials for our product candidates in the United States, Australia and New Zealand. Manufacturing and research costs related to these operations are paid for in a combination of U.S. dollars and local currencies, limiting our foreign currency exchange rate risk, however, our consolidated financial statements are reported in U.S. dollars and changes in foreign currency exchange rates could significantly affect our financial condition, results of operations, or cash flows. If we conduct clinical trials and seek to manufacture a more significant portion of our product candidates outside of the United States in the future, we could incur significant foreign currency exchange rate risk.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms, promulgated by the Securities and Exchange Commission. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2023, 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.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended June 30, 2023 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.

We may become engaged in legal actions arising in the ordinary course of our business (such as, for example, proceedings relating to employment matters or the initiation or defense of proceedings relating to intellectual property rights) from time to time and, while there can be no assurance, we believe that the ultimate outcome of these legal actions will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

Item 1A. Risk Factors.

You should carefully consider the risk factors described in our 2022 Annual Report, as supplemented by our Quarterly Report on Form 10-Q for the three months ended March 31, 2023, under the caption “Item 1A. “Risk Factors.” Except as set forth below, there have been no material changes in our risk factors since we filed those reports. The risks described in those reports 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.

Risks Related to the Pending Acquisition

The completion of the Offer and the Merger are subject to conditions, some or all of which may not be satisfied or completed on a timely basis, if at all. Failure to complete the Offer and the Merger could have material adverse effects on our business, financial condition and results of operations.

On August 14, 2023, we entered into the Merger Agreement with Harmony and Merger Sub. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions therein, Harmony will commence the Offer to acquire all of the issued and outstanding shares of our common stock. Following the consummation of the Offer, upon the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation in the Merger. The completion of the Offer and the Merger are subject to a number of conditions, which make the completion and timing of the Offer and Merger uncertain. There can be no assurance that the conditions to the completion of the Offer and the Merger will be satisfied or waived, that the Offer and the Merger will be completed on the expected timeframe or at all, or that the Offer and the Merger will be consummated as contemplated by the Merger Agreement.

If the Offer and Merger are not consummated within the expected time frame or at all, we may be subject to a number of material risks and our financial results and operations may be materially adversely affected. Our share price may fluctuate significantly based on announcement by Harmony, other third parties or us regarding the Offer and Merger.

In the event the Offer and the Merger are not timely consummated, the price of our common stock may decline. In addition, some costs related to the Offer and the Merger must be paid whether or not the Offer and the Merger are completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, as well as the diversion of management and resources towards the Offer and Merger, for which we will have received little or no benefit if completion of the Merger does not occur. In such an event, we may also experience negative reactions from our investors, suppliers, and employees. In addition, if the Merger Agreement is terminated under specified circumstances, we will be required to pay Harmony a termination fee of $4.5 million.

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The Merger Agreement limits our ability to pursue alternative transactions, which could deter a third party from proposing an alternative transaction.

The Merger Agreement contains customary “no-shop” restrictions that, subject to certain exceptions, inhibit our ability to solicit alternative transaction proposals from third parties and engage in discussions or negotiations with third parties regarding transaction proposals. In the event we receive any alternative transaction proposal, then we are required to provide prompt notice (and in any event within 24 hours after receipt thereof) and certain information concerning such proposal to Harmony. It is possible that these or other provisions in the Merger Agreement, including a termination fee of $4.5 million payable to Harmony under certain circumstances, might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of our outstanding common stock from considering an acquisition or might result in a potential competing acquirer proposing an overall lower per-share consideration amount than it might otherwise have proposed to offer.

Lawsuits may be filed against us and the members of our board of directors arising out of the proposed Offer and Merger, which may delay or prevent the proposed Offer and Merger.

Putative stockholder complaints, including stockholder class action complaints, and other complaints may be filed against us, our board of directors, Harmony, Harmony’s board of directors, and others in the future in connection with the transactions contemplated by the Merger Agreement. The outcome of future litigation is uncertain, and we may not be successful in defending against any such future claims. Future lawsuits that may be filed against us, our board of directors, Harmony, or Harmony’s board of directors could delay or prevent the consummation of the Offer and the Merger, divert the attention of our management and employees from our day-to-day business, and otherwise adversely affect us financially.

The following risk factors do not take into account the planned Offer and Merger and assume that we continue to operate our business.

Our failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a de-listing of our common stock.

On November 1, 2022, we received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market LLC, or Nasdaq, notifying us that for the prior 30 consecutive business days the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing, or the Bid Price Rule. Therefore, in accordance with the Nasdaq Listing Rules, we were provided 180 calendar days, or until May 1, 2023, to regain compliance.

In accordance with the deficiency letter and the Nasdaq Listing Rules, we notified Nasdaq of our intention to cure the deficiency and requested an additional 180 calendar days in order to do so. On May 2, 2023, Nasdaq approved our transfer from The Nasdaq Global Market to The Nasdaq Capital Market and granted an additional 180 calendar days, or until October 30, 2023, to regain compliance with the Bid Price Rule. If, at any time before October 30, 2023, the bid price for our common stock closes at $1.00 or more for a minimum of 10 consecutive business days, we will regain compliance with the Bid Price Rule, unless the Nasdaq staff exercises its discretion to extend this 10-day period pursuant to Nasdaq Listing Rules. We have not regained compliance with the Bid Price Rule as of the filing date of this Quarterly Report on Form 10-Q.

We intend to regain compliance with the Bid Price Rule by implementing a reverse stock split. We are seeking stockholder approval of a reverse stock split of our common stock at a ratio of any whole number between 1-for-2 and 1-for-50, or the Reverse Stock Split Proposal, at our 2023 Annual Meeting of Stockholders, or the 2023 Annual Meeting, which requires approval by a majority of the outstanding shares of our common stock entitled to vote. The 2023 Annual Meeting was held on June 13, 2023 and since then has been adjourned twice with respect to the Reverse Stock Split Proposal, most recently until August 25, 2023, in an effort to solicit additional stockholder votes. As of the filing date of this Quarterly Report on Form 10-Q, we continue to solicit votes from our stockholders with respect to the Reverse Stock Split Proposal.

However, there is no assurance that our stockholders will ultimately approve the Reverse Stock Split Proposal by October 30, 2023, or that, even if approved, any such reverse stock split would have the intended effect, or that any other attempt we may undertake will result in compliance with the Bid Price Rule, or that our common stock will not be delisted from Nasdaq. If we fail to regain and/or maintain compliance with Nasdaq’s continued listing requirements, Nasdaq may take steps to delist our common stock. Even if we are not delisted, the perception among investors that we

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are at a heightened risk of delisting could negatively affect the market price and trading volume of our common stock, or our ability to raise capital. If our common stock is delisted from Nasdaq and we are unable to list our common stock on another national securities exchange, we and our stockholders could face significant negative consequences including:

●

limited availability of market quotations and liquidity for our securities;

●

a determination that our common stock is a “penny stock” which would require brokers trading in the common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for shares of common stock;

●

a limited amount of analyst coverage, if any; and

●

a decreased ability to issue additional securities or obtain additional financing in the future.

Our liquidity position raises substantial doubt about our ability to continue as a going concern and we will require substantial additional funding.

Management has concluded that substantial doubt exists about our ability to continue as a going concern for the next twelve months from the date hereof. As of June 30, 2023, we had an accumulated deficit of $295.4 million, cash and cash equivalents of $36.0 million and current liabilities of $11.5 million. Based on available resources, we believe that our cash and cash equivalents on hand will be sufficient to fund our currently anticipated operating and capital expenditure requirements to mid-year 2024. We expect to continue to incur losses for the foreseeable future as we continue our efforts to develop our current and future product candidates.

Substantial additional financing will be needed by us to fund our operations and capital expenditure requirements. Although we currently estimate that available funds could be sufficient to mid-year 2024, we have based these estimates on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors and employees. Obtaining additional financing contains risks, including:

●

additional equity financing may not be available to us on satisfactory terms, or at all, and any equity we are able to issue could lead to dilution for current stockholders;

●

loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants and control or revocation provisions;

●

the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing; and

●

if we fail to obtain required additional financing to grow our business we may need to seek bankruptcy protection in the near term.

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

Recent Sales of Unregistered Securities

None.

Purchase of Equity Securities

We did not purchase any of our registered equity securities during the period covered by this Quarterly Report.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

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Item 5. Other Information.

On August 8, 2023, our Board of Directors appointed Kenneth Jones, the Company’s Corporate Controller, to serve as the Company’s Interim Chief Financial Officer and perform the duties of the principal financial officer and principal accounting officer while James Fickenscher, the Company’s Chief Financial Officer and Vice President, Corporate Development, is on a temporary medical leave of absence. Mr. Jones will continue to serve as the Company’s Corporate Controller during this time. We expect Mr. Fickenscher will resume his position as the Company’s Chief Financial Officer and Vice President, Corporate Development and perform the duties of the principal financial officer and principal accounting officer upon his return.

Mr. Jones, 59, has served as Vice President and Corporate Controller of the Company since March 2017 bringing more than 25 years of experience in high-growth, early-stage private and public companies. Prior to joining us, Mr. Jones served as Controller at Vitae Pharmaceuticals, Inc., a clinical-stage biopharmaceutical company, from December 2006 to March 2017. In this role, Mr. Jones was instrumental in transforming the company from a private start-up to a public development stage company. He was responsible for the overall management of the company’s accounting and financial reporting function until the company was acquired by Allergan plc in 2016. From August 2001 to October 2006, Mr. Jones served as Vice President and Controller at UbiquiTel, Inc., a telecommunications company, where he was responsible for providing both an operational and financial reporting role until the company was acquired by Sprint Nextel Corp. in 2006. Mr. Jones holds a B.S. in Accounting from Bloomsburg University of Pennsylvania and is a certified public accountant.

There are no arrangements or understandings between Mr. Jones and any other persons pursuant to which Mr. Jones was appointed as Interim Chief Financial Officer of the Company. In addition, there are no family relationships between Mr. Jones and any director or executive officer of the Company, and there are no transactions involving Mr. Jones requiring disclosure under Item 404(a) of Regulation S-K.

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Item 6. Exhibits.

The following exhibits are being filed herewith:

EXHIBIT INDEX

Exhibit No.		Exhibit
10.1		Zynerba Pharmaceuticals, Inc. 2023 Stock Option and Incentive Plan
10.2		Form of Incentive Stock Option Agreement under Zynerba Pharmaceuticals, Inc. 2023 Stock Option and Incentive Plan
10.3		Form of Non-Qualified Stock Option Agreement for Company Employees under Zynerba Pharmaceuticals, Inc. 2023 Stock Option and Incentive Plan
10.4		Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under Zynerba Pharmaceuticals, Inc. 2023 Stock Option and Incentive Plan
10.5		Form of Restricted Stock Award Agreement under Zynerba Pharmaceuticals, Inc. 2023 Stock Option and Incentive Plan
10.6		Form of Restricted Stock Award Agreement for Non-Employee Directors under Zynerba Pharmaceuticals, Inc. 2023 Stock Option and Incentive Plan
31.1		Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101 INS		Inline XBRL Document (filed herewith).
101 SCH		Inline XBRL Taxonomy Extension Schema (filed herewith).
101 CAL		Inline XBRL Taxonomy Extension Schema Calculation Linkbase (filed herewith).
101 DEF		Inline XBRL Taxonomy Extension Schema Definition Linkbase (filed herewith).
101 LAB		Inline XBRL Taxonomy Extension Schema Label Linkbase (filed herewith).
101 PRE		Inline XBRL Taxonomy Extension Schema Presentation Linkbase (filed herewith).
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in exhibit 101)

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SIGNATURES

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


	ZYNERBA PHARMACEUTICALS, INC.

Date: August 14, 2023	By:	/s/ ARMANDO ANIDO
		Armando Anido
		Chief Executive Officer
		(Principal Executive Officer)

Date: August 14, 2023	By:	/s/ KENNETH T. JONES
		Kenneth T. Jones
		Interim Chief Financial Officer
		(Principal Financial and Accounting Officer)

Zynerba Pharmaceuticals, Inc. 10-Q