Zynerba Pharmaceuticals, Inc.
Annual Report 2016

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016.OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from __________ to ___________. Commission file number: 001-37526 Zynerba Pharmaceuticals, Inc.(Exact name of registrant as specified in its charter) Delaware(State or other jurisdiction of incorporation or organization) 26-0389433(I.R.S. Employer Identification Number) 80 W. Lancaster Avenue, Suite 300, Devon, PA(Address of principal executive offices) 19333(Zip Code) (484) 581-7505(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, par value $0.001 per share The NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No 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 thepreceding 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 past90 days. ☒ Yes ☐ No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File requirement to besubmitted and posted 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 registrantwas required to submit and post such files).☒ Yes ☐ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not becontained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated filer ☐Accelerated filer ☐ Non-accelerated filer ☐Smaller reporting company ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2016, the last day of the registrant’ssecond fiscal quarter, was approximately $49.5 million, based upon the closing price on the NASDAQ Global Market reported for such date. The market value ofvoting stock and non-voting common equity by non-affiliates excludes the value of those shares held by executive officers and directors of the registrant (suchexclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the Registrant.) There were 13,214,825 shares of the registrant’s common stock, par value $0.001 per share, outstanding as of March 24, 2017. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K incorporates certain information by reference from the registrant’s proxy statement for the 2017 annual meeting ofstockholders to be filed no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2016. Table of Contents TABLE OF CONTENTS PART I Item 1. Business5 Item 1A. Risk Factors37 Item 1B. Unresolved Staff Comments68 Item 2. Properties68 Item 3. Legal Proceedings69 Item 4. Mine Safety Disclosures69 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities70 Item 6. Selected Financial Data72 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations73 Item 7A. Quantitative and Qualitative Disclosures About Market Risk83 Item 8. Financial Statements and Supplementary Data84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure105 Item 9A. Controls and Procedures105 Item 9B. Other Information106 PART III Item 10. Directors, Executive Officers and Corporate Governance106 Item 11. Executive Compensation.106 Item 12. Security Ownership of Certain Beneficial Owners and management and Related Stockholder Matters106 Item 13. Certain Relationships and Related Transactions, and Director Independence107 Item 14. Principal Accounting Fees and Services107 PART IV Item 15. Exhibits, Financial Statement Schedules107 Item 16. Form 10-K Summary107 2 Table of Contents FORWARD-LOOKING STATEMENTS Statements made in this Annual Report on Form 10-K (this “Report”) that are not statements of historical or current facts are“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-lookingstatements discuss our current expectations and projections relating to our financial condition, results of operations, plans,objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,”“anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “potential,” “project,” “projection,”“seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words andterms of similar meaning. Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees ofperformance. You should not place undue reliance on these statements. We have based these forward-looking statements onour current expectations and projections about future events. Although we believe that our assumptions made in connectionwith the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will proveto be correct. You should understand that the following important factors could affect our future results and could cause those results orother outcomes to differ materially from those expressed or implied in our forward-looking statements: ·our estimates regarding expenses, future revenue, capital requirements and timing and availability of and the needfor additional financing; ·the success and timing of our preclinical studies and clinical trials; ·the potential results of preclinical studies and clinical trials for ZYN002 and ZYN001; ·our dependence on third parties in the conduct of our preclinical studies and clinical trials; ·the difficulties and expenses associated with obtaining and maintaining regulatory approval of ZYN002 andZYN001; ·our plans and ability to develop and commercialize ZYN002 and ZYN001; ·the successful development of our commercialization capabilities, including sales and marketing capabilities; ·the size and growth of the potential markets for ZYN002 and ZYN001, the rate and degree of market acceptance ofZYN002 and ZYN001 and our ability to serve those markets; ·legal and regulatory developments in the United States and foreign countries; ·the success of competing therapies and products that are or become available; ·our ability to limit our exposure under product liability lawsuits; ·our use of the proceeds from our initial public offering, or IPO, and any subsequent offerings, including our “at-the-market,” or ATM, offerings and our recent follow-on offering; ·our ability to obtain and maintain intellectual property protection for ZYN002 and ZYN001; ·recently enacted and future legislation regarding the healthcare system, including changes to the Affordable CareAct that may be made in the 115 United States Congress; 3 thTable of Contents ·our ability to obtain and maintain third-party manufacturing for our product candidates on commercially reasonableterms; ·the performance of third parties upon which we depend, including third-party contract research organizations(“CROs”) and third-party manufacturers; and ·our ability to recruit or retain key scientific or management personnel or to retain our executive officers. In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Report(including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, topublicly update or revise any forward-looking statements, even if experience or future developments make it clear thatprojected results expressed or implied in such statements will not be realized, except as may be required by law. See Item 1A, “Risk Factors,” in this Report for a more complete discussion of these risks and uncertainties and for other risksand uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors thatcould cause actual results or developments to differ materially from those expressed in any of our forward-lookingstatements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance thatactual results or developments anticipated by us will be realized or, even if substantially realized, that they will have theexpected consequences to, or effects on, us. Given these uncertainties, you are cautioned not to place undue reliance on suchforward-looking statements. 4 Table of Contents PART I Item 1. Business Unless the context indicates otherwise, the terms “Zynerba,” “Zynerba Pharmaceuticals,” “we,” “us,” “our,” “our company”and “our business” refer to Zynerba Pharmaceuticals, Inc. Company Overview We are a clinical stage specialty pharmaceutical company dedicated to developing and commercializing innovativetransdermal synthetic cannabinoid treatments for patients with high unmet needs. We are evaluating two patent protectedproduct candidates, ZYN002 and ZYN001, in five indications. We are studying ZYN002 in adult patients with refractoryepileptic focal seizures (formerly known as complex partial seizures) and osteoarthritis, or OA, and in pediatric patients withfragile X syndrome, or FXS. We intend to study ZYN001 in patients with fibromyalgia and peripheral neuropathic pain. Webelieve these product candidates will provide new treatment options for patients, as well as additional treatment options forpatients not currently receiving adequate relief from current treatment regimens. In 2016, we completed a Phase 1 program forZYN002 in which it was demonstrated to be safe and well tolerated in both healthy volunteers and patients with epilepsy. Weare currently conducting Phase 2 clinical trials for ZYN002 in adult patients with refractory epileptic focal seizures, adultpatients with OA and pediatric patients with FXS. We expect to initiate Phase 1 clinical trials for ZYN001 in the first half of2017. Cannabinoids are a class of compounds derived from Cannabis plants. The two primary cannabinoids contained in Cannabisare cannabidiol, or CBD, and ∆9-tetrahydrocannabinol, or THC. Clinical and preclinical data suggest that CBD has positiveeffects on treating epilepsy, arthritis and FXS, and THC has positive effects on treating pain. We believe ZYN002 maypotentially offer first‑line therapies to patients suffering from epilepsy, OA and FXS, and ZYN001 may potentially offer first-line therapies to patients suffering from fibromyalgia and peripheral neuropathic pain. ZYN002 is the first and only synthetic CBD formulated as a permeation‑enhanced gel for transdermal delivery, and ispatent protected through 2030. CBD is the primary non‑psychoactive component of Cannabis. In preclinical animal studies,ZYN002’s permeation enhancer increased delivery of CBD through the layers of the skin and into the circulatory system.These preclinical studies suggest increased bioavailability, consistent plasma levels and the avoidance of first‑pass livermetabolism of CBD when delivered transdermally. In addition, an in vitro study published in Cannabis and CannabinoidResearch in April 2016 demonstrated that CBD is degraded to THC in an acidic environment such as the stomach. Webelieve such degradation may lead to increased psychoactive effects if CBD is delivered orally and may be avoided with thetransdermal delivery of ZYN002, which maintains CBD in a neutral pH. ZYN002, which is being developed as a clear gelwith once- or twice-daily dosing, is targeting treatment of epilepsy, OA and FXS, which collectively affect millions ofpatients using treatments that currently comprise a multi‑billion dollar market. We have been granted orphan drugdesignation from the U.S. Food and Drug Administration, or FDA, for ZYN002 for the treatment of FXS. ZYN001 is a pro‑drug of THC that enables effective transdermal delivery of THC via a patch and is patent‑protected through2031. A pro‑drug is a drug administered in an inactive or less active form and designed to enable more effective delivery,which is then converted into an active form through a normal enzymatic process. In addition, we expect that ZYN001 will beclassified by the FDA as a new chemical entity, or NCE. We are working with a development partner, LTS LOHMANNTherapie-Systeme AG, or LTS, to optimize the formulation of ZYN001 into a state of the art drug-adhesive matrixtransdermal patch to be used in clinical studies. In our preclinical animal studies, ZYN001 demonstrated effective skin permeation with sustained delivery and rapidconversion of ZYN001 to THC. These preclinical studies suggest increased bioavailability, consistent plasma levels and theavoidance of first‑pass liver metabolism of ZYN001. In addition, preclinical testing has shown no genotoxicity findings andsafety pharmacology findings consistent with those seen with THC. ZYN001 is targeting two pain indications, fibromyalgiaand peripheral neuropathic pain, which collectively represent multi-billion dollar markets. 5 Table of Contents Our key development programs and expected timelines for the development of ZYN002 and ZYN001 are shown in the chartbelow: Cannabinoid Science Overview Cannabinoids refer to a unique class of compounds derived from the Cannabis plant. Of the over 100 cannabinoidcompounds currently identified, THC and CBD are the primary cannabinoids used for pharmaceutical purposes. THC wasidentified as the major psychoactive cannabinoid and subsequently found to be a partial agonist of the CB1 and CB2receptors, activation of which stimulates the endogenous noradrenergic pathway, inducing antinociception and suggesting arole for THC in pain management. CBD, the main non‑psychoactive component of Cannabis, has little affinity for the CB1 and CB2 receptors. It does, however,produce multiple effects, including blocking the equilibrative nucleoside transporter, the orphan G‑protein‑coupled receptorGRP55, and the transient receptor potential of melastatin type 8 channel; enhancing activity of 5‑HT1a and glycine receptorsand the transient receptor potential of ankyrin type 1 channel; and regulating the intracellular effects of calcium. Theinfluence of CBD on these targets — each of which we believe plays a key role in neuronal excitability — is the scientificbasis for its antiepileptic potential. CBD inhibits the metabolism (breakdown) of two endocannabinoids (anandamide and 2-arachidonoylglycerol, or 2-AG).Inhibition of the metabolism of these endocannabinoids is thought to result in increased anandamide and 2-AG availabilityand greater CB1 and CB2 activation. Therefore, CBD acts as a facilitator of the endogenous endocannabinoid system, whichmodifies release of other neurotransmitters from presynaptic terminals. This modulation of neurotransmitter release frompresynaptic neurons of various classes is the scientific basis for the use of CBD in the treatment of FXS. CBD exerts a range of anti‑inflammatory effects, including attenuation of the endothelial cell activation, chemotaxis ofinflammatory cells, suppression of T‑cell macrophage reactivity, and induction of apoptosis of T cells, which suggests apossible therapeutic role in the treatment of OA. CBD’s agonist effect on TRPV1 receptors leads to antihyperalgesia, whichfurther suggests a possible role in the treatment of OA. Third‑party studies suggest that psychotropic effects of Cannabis arecaused by THC, not CBD. Clinical and preclinical data suggest that THC has positive effects on treating pain and CBD has positive effects on treatingepilepsy, arthritis and FXS. Clinical data suggest that THC and CBD have a very high therapeutic index. Interest6 Table of Contents in cannabinoid therapeutics has increased significantly over the past several years as preclinical and clinical data hasemerged highlighting the potential efficacy and safety benefits of cannabinoid therapeutics. Dronabinol and nabilone, oralformulations of THC, have been approved by the FDA. In third‑party studies, adverse events from oral THC includingdronabinol and nabilone were primarily psychotropic and related to peak plasma levels. Many patients have receivedCBD‑enriched Cannabis and Epidiolex, a liquid formulation of highly concentrated CBD which is currently indevelopment. The cannabinoid therapeutics market is expected to grow significantly due to the potential benefits theseproducts may provide over existing therapies. Our Product Candidates ZYN002 Overview ZYN002 is the first and only synthetic CBD formulated as a patent‑protected permeation‑enhanced gel for transdermaldelivery (see Figure 1). Figure 1 — Chemical structure and delivery of CBD. ZYN002 is being developed as a clear gel that is designed to provide consistent, controlled drug delivery with convenientonce‑ or twice‑daily dosing. Because CBD is virtually insoluble in water, we use ethanol and propylene glycol assolubilizing agents and Transcutol HP as a permeation enhancer. All excipients in the gel have been classified as GenerallyRecognized As Safe, or GRAS, and have been used in transdermal products previously approved by the FDA. The permeation enhancer in ZYN002 increases the delivery of CBD through the layers of the skin and into the circulatorysystem. Transdermal delivery allows the CBD in ZYN002 to avoid stomach acid degradation and the first‑pass liver metabolism thatoccurs with oral or oral mucosal delivery methods. Drugs applied transdermally are absorbed across the skin into the systemiccirculation, enabling the potential to have a consistent absorption with increased bioavailability. Market Overview and Rationale ZYN002 is targeting treatment of epilepsy, OA and FXS. Epilepsy — Epilepsy is a disease characterized by an enduring predisposition to generate epileptic seizures (transientsymptoms due to abnormal neuronal activity in the brain) and by the neurobiological, cognitive, psychological, and socialconsequences of the condition. Focal seizures usually start in a small area of the temporal lobe or frontal lobe of the brain andquickly involve other areas of the brain that affect alertness and awareness. Focal seizures are the most common type ofseizure, representing approximately 60% of all epilepsies.7 ®®Table of Contents According to Decision Resources, in 2017 there are expected to be approximately 2.4 million epilepsy patients in the UnitedStates, of which approximately 60% suffer from focal seizures, and treatments for these patients are expected to represent atotal U.S. market size of approximately $2.5 billion. We believe that ZYN002 may provide an effective treatment for epilepsy based on the anticonvulsant effects of CBD due toits ability to reduce neuronal hyperexcitability shown in multiple in vivo models of epilepsy conducted by third parties.Epilepsy specialists and patient organizations have shown considerable interest in the potential therapeutic role of CBD inadults with epilepsy and, especially, children with intractable epilepsy. Two companies have active CBD developmentprograms for the treatment of patients with Dravet syndrome, or DS, or Lennox Gastaut syndrome, or LGS, infantile spasmsand tuberous sclerosis complex, all of which are rare and severe forms of pediatric epilepsy. Unlike these cannabinoid‑basedchildhood orphan epilepsy development programs, we are conducting development programs for ZYN002 in a much broadersubset of the epilepsy population. In 2016, a third party reported results from three double-blind, placebo-controlled Phase 3 clinical trials of Epidiolex®, onein DS patients and two in LGS patients. In the DS trial, Epidiolex demonstrated a statistically significant reduction inconvulsive seizures compared with placebo. A total of 120 patients with an average age of 10 years and receiving on averagethree concomitant anti-epileptic drugs, or AEDs, were treated for 14 weeks with 61 patients receiving Epidiolex 20mg/kg/day and 59 patients receiving placebo. In the first LGS trial, Epidiolex demonstrated a statistically significant reduction in drop seizures compared with placebo. Atotal of 171 patients aged 2 to 55 years and receiving on average three AEDs were treated for 14 weeks with 86 patientsreceiving Epidiolex 20 mg/kg/day and 85 patients receiving placebo. In the second LGS trial, Epidiolex also demonstrated astatistically significant reduction in drop seizures compared with placebo. A total of 225 patients with LGS ranging in agefrom 2 to 55 years old and on average taking three concomitant AEDs were treated for 14 weeks with 76 patients receivingEpidiolex 20 mg/kg/day, 73 patients receiving Epidiolex 10 mg/kg/day and 76 patients receiving placebo. Both doses ofEpidiolex achieved statistically significant reduction in drop seizures compared to placebo. In an open label interventional trial conducted by a third party, 214 patients with treatment resistant epilepsy were treated forat least 12 weeks with an oral CBD solution (2-5 mg/kg per day, up-titrated until intolerance or to a maximum dose of 25mg/kg or 50 mg/kg per day, depending on the study site). In this open label trial, baseline median monthly frequency ofmotor seizures was 30.0 and decreased to 15.8 over the 12-week treatment period. A post-hoc analysis showed the greatestreduction in seizures occurred in patients with focal seizures (a 55% reduction). ZYN002 is being developed by us for the treatment of epilepsy in patients with focal seizures. Osteoarthritis — OA is a degenerative joint disease that leads to wear and tear of the joints and affects the cartilage, jointlining, ligaments and bone. It is the most common form of joint disease and tends to occur most often in the hand joints,spine, hip, knees and great toes. It is characterized by the breakdown of the joint cartilage, bony changes in the joints anddeterioration of the tendons and ligaments leading to pain and inflammation of the joint lining. According to Data Monitor information from 2009 and further adjusted to account for annual growth rates, it is predicted thatthe total number of U.S. adults (25 years of age or older) with OA will be approximately 31 million in 2017. In addition,based on estimates from Decision Resources, treatment for patients suffering from OA is predicted to represent a total U.S.market size of approximately $1.3 billion in 2017. We believe that ZYN002 may provide an effective treatment for OA based on research we have conducted. We examined theefficacy of transdermal ZYN002 for reduction of inflammation and pain in vivo, assessing adverse effects in a rat withcomplete Freund’s adjuvant‑induced monoarthritic knee. ZYN002 gel (0.6, 3.1, 6.2, or 62.3 mg/day) was applied for fourconsecutive days after arthritis induction. The level of inflammation was assessed by knee joint circumference and immunecell invasion in histological sections. 8 Table of Contents Measurement of CBD plasma concentration revealed linearity with daily doses of 0.6 to 6.2 mg of ZYN002. Compared withbaseline, rats treated with ZYN002 gel had significant, dose‑dependent reductions in knee joint and synovial membraneswelling, immune cell infiltration, and spontaneous pain rating scores (P≤0.05). Paw withdrawal latency, or PWL, recoveredto near‑baseline levels. Immunohistochemical analysis of spinal cord and dorsal root ganglia revealed dose‑dependentreductions of pro‑inflammatory biomarkers (CD11b/c, CGRP, TNF). The data suggests that topical ZYN002 has the potentialto provide effective relief of pain and inflammation caused by OA. We anticipate ZYN002 may be used as monotherapy inpatients with OA. FXS — FXS is a genetic condition that causes intellectual disability, anxiety disorders, behavioral and learning challengesand various physical characteristics. The impairment can range from learning disabilities to more severe cognitive orintellectual disabilities. According to the National Fragile X Foundation, FXS affects 1 in 3,600 to 4,000 males and 1 in4,000 to 6,000 females of all races and ethnic groups. According to a 2012 CDC study, approximately 1 in 151 women carrythe Fragile X gene and could pass it to their children. Approximately 1 in 468 men carry the Fragile X gene and theirdaughters will also be carriers. FXS is an autism spectrum disorder, and patients with FXS exhibit autism‑like symptomsincluding cognitive impairment, anxiety and mood swings, attention deficit and heightened stimuli. Approximately 7% ofwomen and 18% of men with FXS have seizures. People with FXS are affected throughout their lives. Currently, there are noknown cures or approved therapies for the treatment of FXS. Special education and symptomatic treatments for anxiety andirritability are employed to lessen the burden of illness. FXS is the most common inherited intellectual disability. Based on the 2012 U.S. Census and the National Fragile XFoundation FXS prevalence rates, in 2012 there were approximately 71,000 patients with FXS in the United States. We believe ZYN002 may provide an effective treatment for FXS based on its capacity to interact with the endocannabinoidsystem, which is compromised in patients with FXS. Specifically, CBD indirectly increases the concentration of thecannabinoids 2‑AG and anandamide, which are endogenous ligands at the CB1 and CB2 receptors. Furthermore, the FragileX mental retardation protein 1 that is diminished in patients with FXS, is required for the production of 2‑AG. Therefore, FXSresults in the reduction of endogenous stimulation of endocannabinoid receptors while CBD facilitates the availability ofendogenous endocannabinoids, potentially attenuating the pathophysiology of the disease. We anticipate ZYN002 may beused as monotherapy in patients with FXS. In vitro and Preclinical Studies In an in vitro study published in Cannabis and Cannabinoid Research in April 2016, we evaluated the effects of exposingCBD to acidic conditions. We exposed CBD to simulated gastric fluid. Upon high‑performance liquid chromatographyanalysis of this solution, we found Δ‑8 THC and Δ‑9 THC compounds formed from the degradation of CBD in this acidiccondition. These results suggest that CBD may degrade and form THC if delivered by oral or oral mucosal routes. In addition,prior to commencing our Phase 1 program for ZYN002, we studied the pharmacokinetic, or PK, profile of ZYN002 inpreclinical animal studies which demonstrated that ZYN002 achieves sustained, consistent CBD plasma levels. Clinical Trials Following a pre‑ Investigational New Drug, or IND, meeting with the FDA, we initiated Phase 1 clinical trials for ZYN002 inAustralia in October 2015. In 2016, we completed three Phase 1 studies for ZYN002 and initiated Phase 2 clinical trials ofZYN002 in each indication. We have also initiated a standard toxicology program for ZYN002 concurrently with the clinicalprogram. The toxicology program consists of standard single‑dose toxicology, multiple‑dose toxicology, reproductivestudies and carcinogenicity studies. Phase 1 Clinical Trials— In June 2016, we completed two Phase 1 clinical trials for ZYN002 in healthy volunteers andpatients with epilepsy. The first Phase 1 single rising dose clinical trial for ZYN002 in healthy human subjects and inpatients with epilepsy evaluated the tolerability and PK profile of ZYN002. Results from this clinical trial demonstrated thatZYN002 was safe and well-tolerated at all tested dose levels and the incidence of adverse events associated with ZYN002was similar to placebo for both healthy subjects and epilepsy patients. The second Phase 1 clinical trial was a9 Table of Contents randomized, double-blind, placebo controlled multiple rising dose clinical trial for ZYN002 in twenty-four healthyvolunteers and twelve patients with epilepsy to evaluate the PK profile, pharmacodynamics, or PD, and tolerability ofmultiple doses (200, 250, and 500 mg) of ZYN002. Each volunteer and patient received seven days of either ZYN002 orplacebo. Results from this clinical trial demonstrated that ZYN002 was safe and well-tolerated at all dose levels. The twicedaily dosing provided a more favorable PK profile with comparable results between healthy volunteers and epilepsy patients. Transdermal application of ZYN002 was very well tolerated with minimal skin erythema. Skin dryness at the application sitewas common for both ZYN002 and placebo gel. Overall, the incidence of adverse events associated with ZYN002 wassimilar to placebo in both healthy volunteers and adult epilepsy patients. There were no reports of somnolence or fatigue anda very low incidence of gastrointestinal events was observed. There were no serious adverse events or discontinuations forhealthy volunteers and epilepsy patients receiving ZYN002. One healthy volunteer receiving placebo gel developed aserious adverse event suspected to be a catheter infection and was discontinued from the study. In addition, healthyvolunteers and epilepsy patients had no drug related changes in performance on the Trail Making Test, a test of visualattention, psychomotor ability, and task switching; a divided attention task; and the Paced Auditory Serial Addition Task, orPASAT, a test that measures working memory and focused attention. These results indicate that ZYN002 did not produceimpairment in critical areas of cognitive functioning often impacted by central nervous system drugs. No changes in moodsymptoms as accessed by the Inventory of Depression and Anxiety Symptoms, or IDAS, and the Positive and Negative AffectSchedule, or PANAS were observed for ZYN002 suggesting that ZYN002 is not associated with declines in psychologicalhealth. In July 2016, we completed a third Phase 1 clinical trial for ZYN002 which was randomized, double-blind, placebocontrolled trial in 42 healthy volunteers. The volunteers received a range of CBD doses from 395 mg to 504 mg daily in2.5% and 4.2% ZYN002 formulations for fourteen days. Results from this clinical trial demonstrated that ZYN002 was verywell tolerated with minimal skin erythema. CBD plasma concentrations were dose dependent and did not fluctuate at steadystate. The 4.2% formulation demonstrated a comparable PK and tolerability profile to the 2.5% concentration and was easierto use due to the lower volume. There were no serious adverse events or discontinuations from this clinical trial. Overall, in the Phase 1 program, ZYN002 was demonstrated to be safe and well tolerated, provided a favorable CBD PKprofile, and no THC was detected in plasma or urine. Phase 2 Clinical Trials— In June 2016, we initiated a Phase 2 randomized, multi-center, multi-dose clinical trial designed toevaluate the efficacy and safety of ZYN002 in adult patients with refractory epileptic focal seizures, which we refer to as theSTAR 1 (Synthetic Transdermal Cannabidiol for the Treatment of Epilepsy) trial. We have enrolled 224 patients into thescreening period and completed enrollment in the trial. Screened patients are being followed for 8 weeks during the baselinephase. After the baseline phase, approximately 180 patients will be randomized (1:1:1) to receive one of two doses of CBDgel (195 mg or 97.5 mg CBD in ZYN002 4.2%) or placebo gel every 12 hours for 12 weeks. The primary endpoint of thestudy is median reduction in seizure frequency over the twelve-week treatment period. We expect to report preliminarytopline results for STAR 1 in July/August 2017. In November 2016, we announced that we initiated a 12-month open-labelextension clinical trial (STAR 2) for patients who successfully complete the STAR 1 trial. In August 2016, we initiated a Phase 2 randomized, multi-center, multi-dose clinical trial designed to evaluate the efficacyand safety of ZYN002 in adult patients with knee pain due to OA, which we refer to as the STOP (Synthetic TransdermalCannabidiol for the Treatment of Knee Pain due to Osteoarthritis) trial. We have enrolled 418 patients into the screeningperiod and completed enrollment in the trial. Patients who complete screening are being followed for two weeks during abaseline phase, which includes a one-week washout period. A total of 320 patients have been randomized (1:1:1) to receiveone of two doses of CBD gel (250 mg or 125 mg CBD in ZYN002 4.2%) or placebo gel every 12 hours for 12 weeks. Theprimary endpoint of the study is the change from baseline in the weekly mean of the 24-hour average worst pain score. Weexpect to report topline results for STOP in July/August 2017. 10 Table of Contents In December 2016, we initiated an exploratory Phase 2 clinical trial designed to evaluate the safety and efficacy of ZYN002in children with FXS, which we refer to as the FAB-C (Treatment of Fragile X Syndrome Anxiety and Behavioral Challengeswith CBD) trial. Approximately 16 patients between the ages of 8-17 years will be enrolled in the clinical trial and will befollowed for six weeks during a titration period, where they will receive a daily dose of CBD gel (50 mg CBD in ZYN0024.2%) that may be titrated up to a daily dose of CBD gel (250 mg CBD in ZYN002 4.2%). After completion of the titrationperiod, patients will receive one of three daily maintenance doses of CBD gel (50 mg, 100 mg or 250 mg CBD in ZYN0024.2%) for an additional six weeks. The primary endpoint of the study is the changes in anxiety, depression and mood asmeasured by the Anxiety, Depression and Mood Scale, or ADAMS, a validated patient reported outcomes questionnaire.Secondary endpoints include the Aberrant Behavior Checklist and sleep assessments including sleep onset, sleep time, andnighttime awakenings. We expect to report topline results for FAB-C in the third quarter of 2017. Phase 3 Clinical Trials— We intend to use the data from the Phase 2 clinical trials detailed above to select doses of ZYN002for our Phase 3 program, which we expect will consist of two randomized, double‑blind, placebo‑controlled clinical trials foreach indication and open‑label long‑term clinical trials. ZYN001 Overview ZYN001 is a pro-drug of THC that enables effective transdermal delivery via a patch and is patent protected through 2031.We expect that ZYN001 will be classified by the FDA as an NCE. The structure of the skin effectively inhibits thetransdermal delivery of most therapeutics. Drugs classified as hydrophobic, such as THC, add an additional impediment totheir transdermal delivery through the skin. THC is naturally hydrophobic and thus is unable to be effectively deliveredthrough human skin. A pro‑drug is a drug administered in an inactive or less active form and designed to enable moreeffective delivery, and then converted into an active form through a normal metabolic process. Chemically, ZYN001 is thesynthetic D‑glyceric acid ester of THC. Unlike THC, ZYN001 is able to be efficiently absorbed into the skin throughtransdermal delivery. After crossing the stratum corneum, ZYN001 is hydrolyzed back to THC and glyceric acid underphysiological conditions, mainly due to the action of common enzymes in the skin tissue known as “esterases.” See Figure 2below. Figure 2. Hydrolysis of ZYN001 into glyceric acid and THC. The transdermal patch is a non-invasive, non-oral dosage form that has been proven to be an effective method of delivery inother FDA approved products. We are working with a development partner, LTS, to optimize the formulation of ZYN001 intoa state of the art drug-adhesive matrix transdermal patch. We intend to test the ZYN001 patch for application to the arm, backand thigh. The drug substance is produced synthetically and is not derived or extracted from botanicals. The excipients inthe patch have been classified as GRAS, and have been used in transdermal products previously approved by the FDA. As illustrated below in Figure 3, transdermal delivery often provides more consistent plasma levels without the peaks andvalleys often associated with an oral dosage form. 11 Table of Contents Figure 3. Illustration of transdermal delivery. Market Overview and Rationale ZYN001 is targeting two pain indications, fibromyalgia and peripheral neuropathic pain. Fibromyalgia — Fibromyalgia is a chronic health problem that causes pain throughout the body and other symptoms such asfatigue and cognitive (memory or thought) problems. According to Decision Resources, in 2017, there are expected to beapproximately 6.1 million adult fibromyalgia patients in the United States, and pain treatment for these patients are expectedto represent a total U.S. market size of approximately $1.4 billion. We believe that ZYN001 may provide an effective treatment for fibromyalgia based on the hypothesis that anendocannabinoid deficiency is the underlying cause of fibromyalgia, which may enable patients to benefit from therapy withan exogenous cannabinoid. Nabilone, a compound which is chemically similar but not identical to THC, has shownsignificant reduction in fibromyalgia pain in a third‑party randomized clinical trial, but it has also been associated with doselimiting psychoactive adverse effects. We believe ZYN001 has the potential to treat fibromyalgia by delivering sustained,consistent plasma levels of THC to provide a therapeutic benefit with minimal psychoactive adverse effects. We anticipateZYN001 may be used as monotherapy in patients with fibromyalgia. Peripheral Neuropathic Pain — Neuropathic pain is defined as pain initiated or caused by a primary lesion or dysfunction ofthe central or peripheral nervous systems. In patients with peripheral neuropathic pain, the pain is a symptom of anotherdisease that has caused nerve damage — such as a herniated disc (lower back pain), diabetes (diabetic neuropathy), cancer(neuropathic cancer pain), or herpes zoster infection (postherpetic neuralgia) — but it is recognized as a clinical condition onits own. Because the damage does not involve the brain or spinal cord, the resulting neuropathic pain is defined asperipheral. According to Decision Resources, in 2017 there are expected to be approximately 15.2 million peripheral neuropathic painpatients in the United States, and pain treatment for these patients are expected to represent a total U.S. market size ofapproximately $3.3 billion in 2017. We believe that ZYN001 may provide effective treatment for peripheral neuropathic pain based on third‑party studies inanimals that have shown that cannabinoid receptors are found in high concentrations in the central nervous system, as well ason peripheral neurons and along the principal nociceptive pathways. The results of a third‑party randomized,placebo‑controlled clinical trial demonstrated that low‑dose vaporized Cannabis may reduce neuropathic pain which webelieve suggests a role for THC in peripheral neuropathic pain management. We anticipate ZYN001 may be used asmonotherapy in patients with peripheral neuropathic pain. 12 Table of Contents Preclinical Studies In preclinical studies, the transdermal route of administration of ZYN001 achieved consistent THC plasma levels that webelieve will deliver therapeutic benefit with minimal psychoactive side effects thereby distinguishing it from oral and oralmucosal delivery systems. In vivo guinea pig PK — The PK of a 4% ZYN001 patch was examined in a hairless guinea pig model by adhering twopatches, with a total of 6.25 cm active area, to the guinea pig. PK refers to a drug’s absorption, distribution, metabolism, andexcretion from the body and measures, among other things, the concentration of the drug in the plasma. The patchesremained on the guinea pig for 72 hours, and blood samples were obtained for 103 hours. Plasma samples were analyzed byliquid chromatography‑tandem mass spectrometry, or LC/MSMS. ZYN001, THC, and metabolites of THC (hydroxy‑THC, orTHC‑OH, and 11‑nor‑delta‑9‑THC carboxylic acid, or TCH‑COOH), were measured. No skin irritation or erythema wasshown. The standard battery of genotoxicology studies required by the FDA for ZYN001 showed no adverse effects. The safetypharmacology studies required by the FDA demonstrated that ZYN001 has a pharmacology profile consistent with THC. Thecompound is currently being investigated in preclinical toxicology. Clinical Trials We discussed our planned preclinical studies and clinical trials for ZYN001 with the FDA at a Pre‑IND meeting inAugust 2013. We anticipate initiating Phase 1 clinical trials in the first half of 2017. Phase 2 clinical trials investigatingZYN001 in each individual indication are planned to begin by the end of 2017. Phase 1 Clinical Trials— We plan to evaluate the tolerability and PK profile of ZYN001 in a Phase 1 single rising dose andmultiple rising doses clinical trial in healthy human subjects. Subsequently, we intend to conduct a Phase 1 multiple risingdose clinical trials to examine the tolerability, PK and PD of multiple doses of ZYN001 in patients with fibromyalgia. In thistrial, we will evaluate ZYN001 in several pain models: capsaicin, UV-B and cold pressor. To complete the Phase 1 program,we will conduct a bioequivalence clinical trial assessing the PK of ZYN001 when applied to various parts of the body(e.g., arm, thigh and back). Phase 2a Clinical Trials— We intend to initiate Phase 2 clinical trials for ZYN001 as outlined in the following table: Phase 2a Clinical Trials Expected Type of Target Indication Patient Population Therapy Design Fibromyalgia Patients who meet theAmerican College ofRheumatology criteriafor fibromyalgiasyndrome Monotherapy,first‑line therapy inpatients withfibromyalgia Randomized, double‑blind,placebo‑controlled trialcomparing the efficacy andsafety of multiple doses ofZYN001 to placebo Peripheral Neuropathic Pain Patients withperipheral neuropathicpain of at least sixmonths’ duration Monotherapy,first‑line therapy inpatients withperipheral neuropathicpain Randomized, double‑blind,placebo‑controlled trialcomparing the efficacy andsafety of multiple doses ofZYN001 to placebo Phase 2b Clinical Trials— Depending on the results of Phase 2a clinical trials, we may need to further define the dosing inPhase 2b clinical trials or we may proceed directly into Phase 3 clinical trials. 13 2Table of Contents Phase 3 Clinical Trials— We intend to use the data from the Phase 2 clinical trials outlined above to select doses of ZYN001for our Phase 3 program, which we expect will consist of two randomized, double‑blind, placebo‑controlled clinical trials foreach indication and open‑label long‑term clinical trials. Intellectual Property The success of our product candidates will depend in large part on our ability to: ·obtain and maintain patent and other legal protections for the proprietary compounds, technology, inventionsand improvements we consider important to our business; ·prosecute our patent applications and defend our issued patents; ·preserve the confidentiality of our trade secrets; and ·operate without infringing the patents and proprietary rights of third parties. We internally developed our intellectual property related to ZYN002 and ZYN001. We have sought and intend to continueto seek appropriate patent protection for our product candidates, as well as other proprietary technologies and their uses byfiling patent applications in the United States and selected other countries. As of March 24, 2017, we owned a total of eight issued U.S. utility patents, one allowed U.S. utility patent and two pendingU.S. utility patent applications. These U.S. patents and patent applications will expire between 2029 through 2031. We havealready obtained additional patent term for some of the issued patents to compensate us for delays at the U.S. Patent Office,under the patent term adjustment laws. These patents, and any pending applications that ultimately issue as patents, may alsobe eligible for patent term extension for delay caused by FDA regulatory review, thereby further extending their patent terms. In addition to our U.S. intellectual property, we own eighty-six corresponding foreign issued patents and sevencorresponding foreign applications, which will expire between 2026 and 2031. ZYN002 Our ZYN002 patent portfolio currently consists of two issued patents in the United States, six issued patents in France,Germany, Ireland, Japan, Switzerland, and the United Kingdom and one pending patent application in Canada. The issuedpatents claim the permeation enhanced formulation of ZYN002 and methods of use relating to ZYN002. The issued patentswill expire between 2026 and 2030. Any patents that issue from our currently pending patent applications will expire in2030. ZYN001 Our ZYN001 patent portfolio currently consists of two issued patents in the United States, one issued patent in Japan, issuedpatents in forty-three countries in Europe, including France, Germany, Ireland, Italy, Spain and the United Kingdom, oneallowed patent application in the United States and patent applications pending in the United States, Europe, Canada andJapan. The issued patents are composition of matter patents, which cover the chemical structure of the pro‑drug ZYN001, theD‑glyceric acid ester of THC, and other THC pro‑drugs. The issued patents will expire between 2028 and 2031. Any patentsthat issue from our currently pending patent applications will expire in 2028. Other The rest of our patent portfolio relates to patents and applications owned by us and directed to other potential productcandidates. 14 Table of Contents Trade Secrets and Proprietary Information We seek to protect our proprietary information, including our trade secrets and proprietary know‑how, by requiring ouremployees, consultants and other advisors to execute confidentiality agreements upon the commencement of theiremployment or engagement. These agreements generally provide that all confidential information developed or made knownduring the course of the relationship with us be kept confidential and not be disclosed to third parties except in specificcircumstances. In the case of our employees, the agreements also typically provide that all inventions resulting from workperformed for us, utilizing our property or relating to our business and conceived or completed during employment shall beour exclusive property to the extent permitted by law. Where appropriate, agreements we obtain with our consultants alsotypically contain similar assignment of invention obligations. Further, we require confidentiality agreements from entitiesthat receive our confidential data or materials. Research and Development We incurred research and development expense of $16.8 million, $7.4 million and $2.4 million for the years ended December31, 2016, 2015 and 2014, respectively. Manufacturing The active pharmaceutical ingredients, or APIs, used in ZYN002 and ZYN001 are synthesized by contract manufacturers.These contract manufacturers have sufficient capabilities to meet our projected product requirements through Phase 3clinical trials. The ZYN002 gel is manufactured and filled into unit of use sachets by a contract manufacturer. The ZYN001 transdermalpatch is manufactured by a contract manufacturer. We selected our contract manufacturers for their specific competencies in manufacturing, product design, and materials. FDAregulations require that products be produced under current Good Manufacturing Practices, or cGMPs. Our key supplierscurrently meet cGMPs and have sufficient capacities to meet our projected product requirements through Phase 3 clinicaltrials. Commercial Operations We recently hired a Vice President, Commercial responsible for pre-commercialization activities, including global marketanalysis, strategic optimization and value development associated with ZYN002 and ZYN001, as well as businessdevelopment activities as we evaluate partnering options. However, we do not currently have a fully integrated organizationfor the sales, marketing and distribution of pharmaceutical products. We may rely on licensing and co‑promotion agreementswith strategic collaborators for the commercialization of our products in the United States and other territories. If we chooseto build a commercial infrastructure to support marketing in the United States, such commercial infrastructure could beexpected to include a sales force supported by sales management, internal sales support, an internal marketing group anddistribution support. To develop the appropriate commercial infrastructure internally, we would have to invest financial andmanagement resources, some of which would have to be deployed prior to any confirmation that ZYN002 or ZYN001 will beapproved. Competition The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition,and a strong emphasis on proprietary products. We believe our scientific knowledge, technology, and developmentcapabilities provide us with substantial competitive advantages, but we face potential competition from multiple sources,including major pharmaceutical, specialty pharmaceutical, and biotechnology companies; academic institutions;governmental agencies; and public and private research institutions. Successfully developed and commercialized productcandidates must compete not only with existing therapies, but also with agents that may become available in the future.15 Table of Contents ZYN002 We are studying ZYN002 in adult patients with refractory epileptic focal seizures (formerly known as complex partialseizures) and OA, and in pediatric patients with FXS. Cannabinoid Competition Cannabinoids, such as GW Pharmaceuticals, PLC, or GW’s Epidiolex and CBD more generally, have shown promiseclinically and anecdotally as a treatment for epilepsy. No CBD products or combination THC/CBD products have beenapproved in the United States. GW is currently investigating Epidiolex, a liquid formulation of highly concentrated CBD, inthe United States for the treatment of DS, (severe, infantile‑onset, genetic drug‑resistant epilepsy with no FDA approvedtreatments) and LGS (a rare disorder with onset typically between three and five years of age featuring multiple seizure typeswith slow spike wave complexes on EEG) and childhood epilepsy syndromes. Insys Therapeutics Inc., or Insys, is alsodeveloping a synthetic CBD oral solution compound for the treatment of DS, LGS, childhood epilepsy syndromes andglioblastoma. Further, Kalytera Therapeutics, Inc. is developing an oral formulation of CBD for the treatment of acute graftversus host disease (GvHD). In the combination THC/CBD space, GW’s Sativex, a plant extract combination of THC/CBD for treatment of spasticityassociated with multiple sclerosis, is approved in 30 countries outside the United States as an alternative to baclofen andtizanidine. GW recently reported a successful clinical trial for the treatment of glioblastoma multiforme with a combinationof THC and CBD. Additional activity in this space includes companies supplying synthetic cannabinoids, Cannabis extracts, and herbalCannabis to researchers for preclinical and clinical investigation. General Competition and Standard of Care Within epilepsy, we intend to treat epilepsy patients with focal seizures. Second and third generation AEDs continue toimprove upon first generation therapies, but experts contend that a better understanding of the disorder accompanied byfundamentally innovative treatments will be required to effectively improve treatment outcomes for the high percentage ofpatients undertreated by AEDs. The majority of AEDs have frequent safety concerns including serious CNS adverse eventsand drug‑drug interactions. In OA, our expected type of therapy is monotherapy, first‑line therapy in patients with OA. Patients try a multitude ofprescription and over‑the‑counter medications to relieve pain including traditional NSAIDs, Cox‑2 inhibitors, centrallyacting analgesics / opioids, topical analgesics, intra‑articular corticosteroids, and hyaluronic acid preparations. Though theseproducts offer varying degrees of pain relief, many also have been shown to cause significant adverse effects includingpotential addiction. In FXS, our expected type of therapy is monotherapy, first‑line therapy in patients with FXS. There are no drugs approved forthe treatment of FXS, although various classes of medications are used off‑label for the treatment of behavioral and mentalhealth conditions associated with FXS. Some patients with FXS benefit from medications that treat attention deficit disordersand other patients who experience general anxiety, social anxiety and other chronic conditions may benefit from differenttypes of anti‑anxiety medications. We are aware that Neuren Pharmaceuticals and Marinus Pharmaceuticals are developingcompounds for the treatment of FXS. ZYN001 We intend to study ZYN001in patients with fibromyalgia and peripheral neuropathic pain. 16 ®®Table of Contents Cannabinoid Competition We believe cannabinoids offer a superior treatment paradigm for patients suffering from pain, providing more controlleddelivery and therefore treatment effect along with a much more tolerable safety profile. The Cannabis therapeutic areacurrently includes formulated extracts of the Cannabis sativa plant and synthetic products, all of which use THC, CBD, or acombination of THC/CBD as the active ingredient. In the United States, two oral capsules — Insys’ dronabinol (a syntheticTHC) and Meda AB’s nabilone (a synthetic derivative of THC) — have been approved and distributed for the treatment ofnausea and vomiting associated with cancer chemotherapy in patients who have not responded adequately to conventionalantiemetic treatments. Dronabinol capsules are also approved for anorexia associated with weight loss in patients withacquired immune deficiency syndrome, or AIDS. Insys has obtained FDA approval for an orally administered liquidformulation of dronabinol for treatment of anorexia associated with weight loss in patients with AIDS and nausea andvomiting associated with cancer chemotherapy in patients who have failed to respond adequately to conventional antiemetictreatments and is awaiting a scheduling decision from the DEA. Further, Therapix Biosciences, Ltd. in also exploring thedevelopment of THC + palmidrol for Tourette Syndrome. Exploratory research into the effects of THC formulations in otherindications is also in progress. GW, is also developing Sativex, a plant extract combination of THC/CBD for treatment ofchronic cancer pain and neuropathic pain in an oral mucosal spray. General Competition and Standard of Care In fibromyalgia, we anticipate ZYN001 may be used as first- or second-line monotherapy in patients with fibromyalgia. Thereare only three drugs approved by the FDA: pregabalin, duloxetine, and milnacipran. We intend to treat patients whosecondition is either newly diagnosed or has not responded to previous treatment with these three currently approvedtreatments. There is no known cure for the disease and no single therapy is likely to provide significant relief of allsymptoms. Low‑dose tricyclic antidepressants are prescribed frequently, but are associated with various side‑effects.Fibromyalgia is also treated using opioids, but, in addition to debate about their efficacy, these can be addictive for manypatients. In peripheral neuropathic pain, we anticipate ZYN001 may be used as first- or second-line monotherapy in patients withperipheral neuropathic pain. Peripheral neuropathic pain generally is treated with tricyclic antidepressants, anticonvulsantssuch as duloxetine, depakote, pregabalin, gabapentin and topiramate, and serotonin/norepinephrine reuptake inhibitors, orSNRIs. Although tricyclic antidepressants, anticonvulsants, and SNRIs often show efficacy in treating neuropathic pain, theyalso have many drawbacks, including poor tolerability with side effects in most patients. Government Regulation and Product Approval As a development stage pharmaceutical company that operates in the United States, we are subject to extensive regulation bythe FDA, and other federal, state, and local regulatory agencies. The Federal Food, Drug, and Cosmetic Act, or the FDC Act,and its implementing regulations set forth, among other things, requirements for the research, testing, development,manufacture, quality control, safety, effectiveness, approval, labeling, storage, record keeping, reporting, distribution, import,export, advertising and promotion of our products. Although the discussion below focuses on regulation in the United States,we anticipate seeking approval for, and marketing of, our products in other countries. Generally, our activities in othercountries will be subject to regulation that is similar in nature and scope as that imposed in the United States, although therecan be important differences. Additionally, some significant aspects of regulation in the European Union are addressed in acentralized way through the European Medicines Agency, or EMA, and the European Commission but country‑specificregulation remains essential in many respects. The process of obtaining regulatory marketing approvals and the subsequentcompliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantialtime and financial resources and may not be successful. U.S. Government Regulation The FDA is the primary body that regulates pharmaceuticals in the United States, and its regulatory authority is based in theFDC Act. Pharmaceutical products are also subject to other federal, state and local statutes and regulations. In particular,controlled substances, like CBD and THC, are regulated by the U.S. Drug Enforcement Administration, or17 ®Table of Contents DEA. A failure to comply with any requirements during the product development, approval, or post‑approval periods, maylead to administrative or judicial sanctions, which could include the imposition of a hold on clinical trials, refusal to approvepending marketing applications or supplements, withdrawal of approval, warning letters, product recalls, product seizures,total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. The steps required to obtain approval for commercialization of a new drug in the United States are lengthy, complex andexpensive, and the outcome is far from certain. These steps generally include: ·completion of preclinical studies, animal studies and formulation studies in compliance with the FDA’s goodlaboratory protocols, or GLP, regulations; ·submission to the FDA of an IND to support human clinical testing in the United States; ·approval by an IRB before each trial may be initiated; ·performance of adequate and well‑controlled clinical trials in accordance with federal regulations and withcurrent GCPs to establish the safety and efficacy of the investigational product candidate for each targetindication; ·submission of a New Drug Application, or NDA, to the FDA; ·satisfactory completion of an FDA Advisory Committee review, if applicable; ·satisfactory completion of an FDA inspection of the manufacturing facilities at which the investigationalproduct candidate is produced to assess compliance with cGMP, and to assure that the facilities, methods andcontrols are adequate; and ·FDA review and approval of the NDA. In certain cases, a drug may require scheduling by DEA prior to commercialization. This step is required if the drug has apotential for abuse and is not currently controlled (scheduled) by DEA or is controlled in Schedule I. Pre-clinical Testing Before testing any compound in humans in the United States, a company must develop pre-clinical data, generally includinglaboratory evaluation of product chemistry and formulation, as well as toxicological and pharmacological studies in animalspecies to assess safety and quality. Certain types of animal studies must be conducted in compliance with the FDA’s goodlaboratory practices, or GLP, regulations and the Animal Welfare Act, which is enforced by the Department of Agriculture. Clinical Trials FDA regulations require that the person or entity sponsoring or conducting a clinical study in the United States for thepurpose of investigating a drug candidate’s safety and effectiveness submit to the FDA an IND application, which containspre-clinical testing results and provides a basis for the FDA to conclude that there is an adequate basis for testing the drug inhumans. A 30‑day waiting period after the submission of each IND is required prior to the commencement of clinical testingin humans. If the FDA does not place the proposed clinical trial in the IND application on clinical hold within this 30‑dayperiod, the clinical trial may begin. Clinical trials involve the administration of the investigational product candidate tohealthy volunteers or patients under the supervision of qualified investigators. Clinical trials are conducted under protocolsthat detail, among other things, the parameters to be used in monitoring safety and the efficacy criteria to be evaluated. Eachprotocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of theIND. Clinical trials must be reviewed, approved and conducted18 Table of Contents under the auspices of an Institutional Review Board (IRB). The sponsor, investigators, and IRB must, as applicable, obtainthe informed written consent of each participating subject, comply with the protocol and investigational plan, adequatelymonitor the clinical trial, and timely report adverse events. We have completed our Phase 1, and are conducting our Phase 2,clinical trials for ZYN002 in Australia and New Zealand, and did not file an IND with the FDA prior to the commencement ofthose Phase 1 and Phase 2 clinical trials. In Australia, the approval process for commencing Phase 1 and 2 clinical trials resides with the Human Research EthicsCommittee, or HREC. Prior to commencing a clinical trial, a sponsor must submit to the HREC a study protocol, aninvestigator brochure and a template informed consent for such clinical trial. The HREC approval process generally takesfour to eight weeks. Once a study is approved by the HREC, a Clinical Trial Notification, or CTN, is submitted to the Australian GovernmentDepartment of Health, Therapeutic Goods Administration, or TGA. The CTN is a notification that the HREC has approvedthe safety, efficacy and ethical acceptability of the trial, approved the trial protocol and evaluated the scientific merit of thetrial. The TGA sends the clinical trial site a written acknowledgement of the clinical trial, allowing the clinical trial to begin.TGA response time to acknowledge a clinical trial is approximately two weeks from receipt of the CTN from the clinical trialsite. In addition to filing an IND with the FDA, we must receive approval from the DEA prior to commencement of any clinicaltrials in the United States that involve the use of Schedule I controlled substances. We plan to submit an IND prior toconducting any clinical trials in the United States. We plan to submit NDAs for ZYN002 and ZYN001 to the FDA uponcompletion of all requisite clinical trials. The clinical investigation of an investigational product candidate is generallydivided into three phases. Although the phases are usually conducted sequentially, they may overlap or be combined. Thethree phases of an investigation are as follows: ·Phase 1. Phase 1 involves the initial introduction of a product candidate into humans. Phase 1 clinical trialsmay be conducted in patients with the target disease or condition or healthy volunteers. These studies aredesigned to evaluate the safety, metabolism, PK and pharmacologic actions of the product candidate in humans,the side effects associated with increasing doses, and if possible, to gain early evidence on effectiveness. DuringPhase 1 clinical trials, sufficient information about the product candidate’s safety, PK and pharmacologicaleffects may be obtained to permit the design of Phase 2 clinical trials. The total number of participants includedin Phase 1 clinical trials varies, but is generally in the range of 20 to 80. ·Phase 2. Phase 2 clinical trials are conducted to develop initial data regarding the effectiveness of the productcandidate in the target disease or condition, to determine dosage tolerance and optimal dosage, and to identifypossible adverse side effects and additional safety risks associated with the product candidate. Phase 2 clinicaltrials are typically controlled and conducted in a limited patient population, usually involving no more thanseveral hundred participants. ·Phase 3. Phase 3 clinical trials are controlled clinical trials conducted in an expanded subject population atgeographically dispersed clinical trial sites. They are performed after preliminary evidence suggestingeffectiveness of the investigational product candidate has been obtained, and are intended to further evaluatedosage, clinical effectiveness and safety, to establish the overall benefit‑risk profile of the product candidate,and to provide an adequate basis for labeling. Phase 3 clinical trials usually involve several hundred to severalthousand participants. In most (though not all) cases, the FDA requires two adequate and well controlledPhase 3 clinical trials to support approval of a drug. The decision to terminate development of an investigational product candidate may be made by either a health authoritybody, such as the FDA, or IRB/ethics committees, or by a company for various reasons. The FDA may issue a “clinical hold,”ordering the temporary or permanent discontinuation of a clinical trial, or impose other sanctions, if it believes that theclinical trial is not being conducted in accordance with FDA requirements, presents an unacceptable risk to the clinical trialpatients, or for other reasons. In some cases, clinical trials are overseen by an independent group of qualified expertsorganized by the trial sponsor called a data safety monitoring board, or DSMB, or data monitoring19 Table of Contents committee, or DMC. A DSMB or DMC may provide recommendations on whether or not a trial may move forward atdesignated check points, based on access to data from the ongoing trial. The suspension or termination of development canoccur during any phase of clinical trials if it is determined that the participants or patients are being exposed to anunacceptable health risk. In addition, there are requirements for the registration of ongoing clinical trials of productcandidates on public registries and the disclosure of certain information pertaining to the trials as well as clinical trial resultsafter completion. A sponsor may request a special protocol assessment, or SPA, the purpose of which is to reach agreement with the FDA on thedesign and size of certain clinical trials (including Phase 3 clinical trials), clinical studies, or animal studies to addressapplicable scientific and regulatory requirements. An SPA request must be made before the proposed trial begins, and if areasof agreement are reached, they will be documented in a letter. The agreement generally may not be changed by the sponsor orthe FDA after the trial begins, except with the written agreement of the sponsor and the FDA or if the FDA determines that asubstantial scientific issue essential to determining the safety or efficacy of the product candidate was identified after thetesting began. An SPA is not binding if new circumstances arise, and there is no guarantee that a study will ultimately beadequate to support an approval even if the study is subject to an SPA. We expect to test ZYN002 and ZYN001 in severaladvanced stage clinical trials, and we may request an SPA. Having an SPA does not guarantee that a product will receive FDAapproval. New Drug Applications In order to obtain approval to market a drug in the United States, a marketing application must be submitted to the FDA thatprovides data establishing the safety and effectiveness of the product candidate for the proposed indication. The applicationincludes all relevant data available from pertinent preclinical studies and clinical trials, including negative or ambiguousresults as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing,controls and proposed packaging and labeling, among other things. Data can come from company‑sponsored clinical trialsintended to test the safety and effectiveness of a product, or from a number of alternative sources, including studies initiatedby investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establishthe safety and effectiveness of the product candidate to the satisfaction of the FDA. If the drug has a potential for abuse, theNDA must include a description and analysis of studies or information related to abuse of the drug, including a proposal forscheduling under the federal Controlled Substances Act, or CSA. A description of any studies related to overdosage is alsorequired, including information on dialysis, antidotes, or other treatments, if known. In most cases, the NDA must be accompanied by a substantial user fee; there may be some instances in which the user fee iswaived. The FDA will initially review the NDA for completeness before it accepts the NDA for filing. The FDA has 60 daysfrom its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s thresholddetermination that it is sufficiently complete to permit substantive review. If the application is not sufficiently complete, theFDA may refuse to accept the NDA for filing and request additional information. A refusal to file, which requiresresubmission of the NDA with the requested additional information, delays review of the application. If the NDA submissionis accepted for filing, the FDA begins an in‑depth review. The FDA has agreed to certain performance goals in the review ofNDAs. Most NDAs for standard review product candidates are reviewed within twelve months of submission. The FDA canextend this review to consider certain late‑submitted information or information intended to clarify information alreadyprovided in the submission. The FDA reviews the NDA to determine, among other things, whether the proposed product issafe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP. The FDAmay refer applications for novel product candidates that present challenging questions of safety or efficacy to an advisorycommittee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as towhether the application should be approved and under what conditions. The FDA is not bound by the recommendations ofan advisory committee, but it considers such recommendations carefully when making decisions. Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will notapprove the product unless it determines that the manufacturing processes and facilities are in compliance with cGMPrequirements and adequate to assure consistent production of the product within required specifications. Additionally,20 Table of Contents before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with Good ClinicalPractices, or GCP. After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or, ifthe FDA concludes that an NDA does not meet the regulatory standards for approval, a complete response letter. A completeresponse letter generally outlines the deficiencies in the submission and may require substantial additional testing orinformation in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to theFDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. Notwithstanding the submission ofany requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatorycriteria for approval. Data from clinical trials are not always conclusive, and the FDA’s interpretation of data may differ fromthe sponsor’s. Obtaining approval can take years, requires substantial resources and depends on a number of factors,including the severity of the targeted disease or condition, the availability of alternative treatments, and the risks andbenefits demonstrated in clinical trials. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.As a condition of NDA approval, the FDA may require risk evaluation and mitigation strategies, or REMS, to help ensure thatthe benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans forhealthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, specialtraining or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, andthe use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of thedrug. Moreover, product approval may require substantial post‑approval testing and surveillance to monitor the drug’s safetyor efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained orproblems are identified following initial marketing. Changes to some of the conditions established in an approved application, including certain changes in indications,labeling, or manufacturing processes or facilities, may require submission and FDA approval of a new NDA or NDAsupplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical datasimilar to that in the original application, and the FDA generally applies the same procedures and standards in reviewingNDA supplements as it does in reviewing NDAs. Disclosure of Clinical Trial Information Sponsors of clinical trials of certain FDA‑regulated products, including prescription drugs, are required to register anddisclose certain clinical trial information on a public website maintained by the U.S. National Institutes of Health, or NIH , atwww.clinicaltrials.gov. When a clinical trial is registered on this website, certain information regarding the product, patientpopulation, phase of investigation, study sites and investigator, and other aspects of the clinical trial must be posted.Sponsors are also obligated to disclose the results of many of these trials after completion, although under certaincircumstances disclosure of the results of these trials can be delayed until the product or new indication being studied hasbeen approved. Competitors may use this publicly‑available information to gain knowledge regarding the design andprogress of our development programs. Advertising and Promotion The FDA and other federal agencies closely regulate the marketing and promotion of drugs through, among other things,standards and regulations for direct‑to‑consumer advertising, promotion to healthcare practitioners, communicationsregarding unapproved uses, industry‑sponsored scientific and educational activities, and promotional activities involvingthe Internet. A product cannot be commercially promoted before it is approved. After approval, product promotion caninclude only those claims relating to safety and effectiveness that are consistent with the labeling approved by the FDA.Healthcare providers are permitted to prescribe drugs for “off‑label” uses — that is, uses not approved by the FDA andtherefore not described in the drug’s labeling — because the FDA does not regulate the practice of medicine. However, FDAhistorically has restricted manufacturers’ communications regarding off‑label uses. Broadly speaking, a manufacturer maynot promote a drug for off‑label use, but may engage in non‑promotional, balanced communication regarding off‑label useunder specified conditions. Failure to comply with applicable FDA requirements and restrictions in this area may subject acompany to adverse publicity and enforcement action by the FDA, the DOJ, or the Office of the Inspector General of HHS, aswell as state authorities. This enforcement activity could subject a company to a range21 Table of Contents of penalties that could have a significant commercial impact, including civil and criminal fines and agreements thatmaterially restrict the manner in which a company promotes or distributes drug products. In addition to FDA restrictions onmarketing of pharmaceutical products, state and federal fraud and abuse and consumer protection laws have been applied torestrict certain marketing practices in the pharmaceutical industry in recent years. Some of the pertinent laws have not beendefinitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety ofinterpretations. In addition, these laws and their interpretations are subject to change. Other Post Approval Regulations After a drug receives regulatory approval, its sponsor is required to comply with a number of post‑approval requirements. Forexample, as a condition of approval of an NDA, the FDA may require post‑marketing testing, including Phase 4 clinical trials,and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization. In addition, as aholder of an approved NDA, a company is required to report adverse reactions and production problems to the FDA, toprovide updated safety and efficacy information, and to comply with requirements concerning advertising and promotionallabeling for any of its products. Also, quality control and manufacturing procedures must continue to conform to cGMP afterapproval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. cGMP includesrequirements regarding organization and training of personnel, building and facilities, equipment, control of componentsand drug product containers, closures, production and process controls, packaging and labeling controls, holding anddistribution, laboratory controls and records and reports. In addition, changes to the manufacturing process are strictlyregulated, and, depending on the significance of the change, may require prior FDA approval before it can be implemented.FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting anddocumentation requirements upon a sponsor and any third‑party manufacturers that a sponsor may decide to use.Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control tomaintain compliance with cGMP and other aspects of regulatory compliance. Failure to comply with applicable cGMPrequirements or the conditions of the product’s approval may lead the FDA to take enforcement action, which could result infines, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal of FDAapproval, seizure or recall of products, and criminal prosecution. Although we periodically monitor the compliance of ourthird-party manufacturers, we cannot be certain that our present or future third-party manufacturers will consistently complywith cGMP or other applicable FDA regulatory requirements. Controlled Substances The CSA and its implementing regulations establish a “closed system” of distribution for controlled substances. The CSAimposes registration, security, recordkeeping and reporting, storage, manufacturing, distribution, labeling, importation,exportation, disposal and other requirements under the oversight of the DEA. The DEA is the federal agency responsible forregulating controlled substances, and requires those individuals or entities that manufacture, import, export, distribute,research, or dispense controlled substances to comply with the regulatory requirements to prevent the diversion of controlledsubstances to illicit channels of commerce. Facilities that research, manufacture, distribute, import or export any controlled substance must register annually with theDEA. The DEA registration is specific to the particular location, activity(ies) and controlled substances utilized. For example,separate registrations are required for importation and manufacturing activities, and each registration authorizes whichschedules of controlled substances the registrant may handle. However, certain coincident activities are permitted withoutobtaining a separate DEA registration, such as distribution of controlled substances by the manufacturer that produces them. The DEA categorizes controlled substances into one of five schedules — Schedule I, II, III, IV, or V — with varyingqualifications for listing in each schedule. Schedule I substances by definition have a high potential for abuse, have nocurrently “accepted medical use” in treatment in the United States and lack accepted safety for use under medicalsupervision. They may be used only in federally‑approved research programs and may not be marketed or sold for dispensingto patients in the United States. Pharmaceutical products having a currently accepted medical use may be listed asSchedule II, III, IV or V substances, with Schedule II substances presenting the highest potential for abuse and22 Table of Contents physical or psychological dependence, and Schedule V substances presenting the lowest relative potential for abuse anddependence. The regulatory requirements are more restrictive for Schedule II substances than Schedule III-V substances. Forexample, all Schedule II drug prescriptions must be signed by a physician, physically presented to a pharmacist in mostsituations, and cannot be refilled. While Cannabis and THC are Schedule I controlled substances, products approved formedical use in the United States that contain Cannabis, THC or Cannabis/THC extracts must be placed in Schedules II‑V,since approval by the FDA satisfies the “acceptable medical use” requirement. The DEA inspects all manufacturing facilities to review security, record keeping, reporting and compliance with other DEAregulatory requirements prior to issuing a controlled substance registration. The specific security requirements vary by thetype of business activity and the schedule and quantity of controlled substances handled. The most stringent requirementsapply to manufacturers of Schedule I and Schedule II substances. Required security measures commonly include backgroundchecks on employees and physical control of controlled substances through storage in approved vaults, safes and cages, andthrough use of alarm systems and surveillance cameras. An application for a manufacturing registration as a bulkmanufacturer (not a dosage form manufacturer or a repacker/relabeler) for a Schedule I or II substance must be published inthe Federal Register, and is open for 30 days to permit interested persons to submit comments, objections, or requests for ahearing. A copy of the notice of the Federal Register publication is forwarded by the DEA to all those registered, orapplicants for registration, as bulk manufacturers of that substance. Once registered, manufacturing facilities must maintainrecords documenting the manufacture, receipt and distribution of all controlled substances. Manufacturers must submitperiodic reports to the DEA of the distribution of Schedule I and II controlled substances, Schedule III narcotic substances,and other designated substances. Registrants must also report any controlled substance thefts or significant losses, and mustadhere to certain requirements to dispose of controlled substances. As with applications for registration as a bulkmanufacturer, an application for an importer registration for a Schedule I or II substance must also be published in the FederalRegister, which remains open for 30 days for comments. Imports of Schedule I and II controlled substances for commercialpurposes are generally restricted to substances not already available from a domestic supplier or where there is not adequatecompetition among domestic suppliers. In addition to an importer or exporter registration, importers and exporters mustobtain a permit for every import or export of a Schedule I and II substance, Schedule III, IV and V narcotic, speciallydesignated Schedule III non-narcotics, or Schedule IV or V narcotic controlled in Schedule I or II by the Convention onPsychotropic Substances and submit import or export declarations for Schedule III, IV and V non‑narcotics. For drugs manufactured in the United States, the DEA establishes annually an aggregate quota for the amount of substanceswithin Schedules I and II that may be manufactured or produced in the United States based on the DEA’s estimate of thequantity needed to meet legitimate medical, scientific, research and industrial needs. This limited aggregate amount ofCannabis that the DEA allows to be produced in the United States each year is allocated among individual companies,which, in turn, must annually apply to the DEA for individual manufacturing and procurement quotas. The quotas applyequally to the manufacturing of the active pharmaceutical ingredient and production of dosage forms. The DEA may adjustaggregate production quotas a few times per year, and individual manufacturing or procurement quotas from time to timeduring the year, although the DEA has substantial discretion in whether or not to make such adjustments for individualcompanies. The states also maintain separate controlled substance laws and regulations, including licensing, recordkeeping, security,distribution, and dispensing requirements. State Authorities, including Boards of Pharmacy, regulate use of controlledsubstances in each state. Failure to maintain compliance with applicable requirements, particularly as manifested in the lossor diversion of controlled substances, can result in enforcement action that could have a material adverse effect on ourbusiness, operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary registrations, orinitiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal prosecution. We currently manufacture the API for ZYN002 and ZYN001 in the United States and Canada. We are currently conductingPhase 2 clinical trials for ZYN002 in Australia and New Zealand. We may also choose to conduct clinical trials for ZYN001outside the United States subject to regulatory approval. We may decide to develop, manufacture or commercialize ourproduct candidates in additional countries. As a result, we will also be subject to controlled substance laws and regulationsfrom the Therapeutic Goods Administration in Australia, Health Canada’s Office of Controlled23 Table of Contents Substances in Canada, the New Zealand Medicines and Medical Device Safety Authority in New Zealand, and from otherregulatory agencies in other countries where we develop, manufacture or commercialize ZYN002 or ZYN001 in the future. The Hatch‑Waxman Act Generic Competition Any drug candidates approved for commercial marketing under an NDA would be subject to the provisions of the Drug PriceCompetition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act. Among other things, the Hatch-Waxman Act establishes two abbreviated approval pathways for drug products that are in some way follow-on versions ofalready approved NDA products. The first provides that generic versions of an approved product may be approved under anAbbreviated New Drug Application, or ANDA, by a showing that the generic product is the “same as” the approved productin key respects. An ANDA provides for marketing of a drug product that has the same active ingredient(s), same strength,route of administration and dosage form as a previously approved NDA product (the “ reference listed drug” or RLD) and hasbeen shown through PK testing to be bioequivalent to the listed drug. Other than the requirement for bioequivalence testing,ANDA applicants are generally not required to conduct, or submit results of, preclinical studies or clinical tests to prove thesafety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “therapeuticequivalents” to the RLD, and can often be substituted by pharmacists under prescriptions written for the RLD. 505(b)(2)applications are the second approval pathway for follow-on drug products. 505(b)(2) applications are NDAs and musttherefore contain full reports of safety and effectiveness data; however, in a 505(b)(2) application at least some of therequired data is derived from studies not conducted by or for the applicant. In this regard, a 505(b)(2) application may relyon scientific literature or on the FDA’s previous findings of safety and effectiveness of an approved RLD. Unlike an ANDA, a505(b)(2) may be submitted for a product that differs in active ingredient, strength, route of administration, dosage form, orother conditions of use. The approval of drug products submitted under these abbreviated approval pathways may be prevented by certain periods ofregulatory exclusivity and/or extended patent protection provided by the Hatch-Waxman Act. Impact of Listed Patents An ANDA or 505(b)(2) applicant is required to certify to the FDA concerning any patents listed with the approved RLD inthe FDA’s publication, Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the OrangeBook. Specifically, the applicant must certify: (i) that the required patent information has not been filed; (ii) that the listedpatent has expired; (iii) the date that the listed patent will expire; or (iv) that the listed patent is invalid or will not beinfringed by the new product. The ANDA or 505(b)(2) applicant may also elect to submit a statement certifying that itsproposed ANDA label does not contain (or carves out) any language regarding a patented method of use rather than certify tosuch listed method of use patent. If the applicant does not challenge the listed patents by filing a certification that the listedpatent is invalid or will not be infringed by the new product, the ANDA or 505(b)(2) application will not be approved untilall the listed patents claiming the referenced product have expired. A certification that the new product will not infringe the RLD’s listed patents, or that such patents are invalid, is called aParagraph IV certification. If the ANDA or 505(b)(2) applicant has provided a Paragraph IV certification to the FDA, theapplicant must also send notice of the Paragraph IV certification to the NDA holder and patent owner once the ANDA or505(b)(2) application has been accepted for filing by the FDA. The NDA holder and/or patent owner may then initiate apatent infringement lawsuit in response to the notice of the Paragraph IV certification. If the patent was listed in the OrangeBook before submission of the ANDA or 505(b)(2) NDA, the filing of a patent infringement lawsuit within 45 days of thereceipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA or 505(b)(2) applicationuntil the earliest of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case thatis favorable to the ANDA or 505(b)(2) applicant. This regulatory stay is commonly referred to as a “30-month stay.” 24 Table of Contents Marketing Exclusivity An ANDA or 505(b)(2) application cannot be approved until the expiration of any applicable non‑patent exclusivity listed inthe Orange Book for the RLD. The Hatch-Waxman Act provides certain periods of regulatory exclusivity. These include (1) five years of regulatoryexclusivity for a drug product that contains a new chemical entity (NCE), which generally means an active ingredient thatcontains a novel active moiety; and (2) three years of exclusivity for the approval of an NDA or supplemental NDA thatcontains data from new clinical investigations that were necessary for approval. Three-year exclusivity prevents FDA fromapproving a follow-on product with the same conditions of approval for three years. By contrast, NCE exclusivity preventsFDA from accepting for review an application for a follow-on product that contains the protected active moiety during thefive-year period dating from the product’s approval. However, if the ANDA or 505(b)(2) application contains a Paragraph IVcertification, that application may be submitted four years after approval of the listed drug protected by NCE exclusivity. Inthat case, if timely patent litigation is filed, the regulatory stay will expire seven and a half years after the approval of theRLD, unless it terminates early based on expiration of the patent, a settlement of the patent litigation, or a decision in thelitigation favorable to the ANDA or 505(b)(2) applicant. If there is no patent listed in the Orange Book with the RLD, there can be no Paragraph IV certification; in thesecircumstances, no ANDA or 505(b)(2) may be filed before the expiration of the NCE exclusivity period. Additionally, six months of marketing exclusivity in the United States is available under Section 505A of the FDC Act if, inresponse to a written request from the FDA, a sponsor timely submits and the agency accepts reports of requested studiesrelating to the use of the approved drug in the pediatric population. This six month pediatric exclusivity period is not astandalone exclusivity period, but rather is added to any existing patent or regulatory exclusivity period for which the drugproduct is eligible. Pediatric exclusivity does not extend the term of the patent; instead, it extends by six months thepreclusive effect of the patent on FDA’s authority to approve an ANDA or 505(b)(2) application. Whether pediatricexclusivity will extend a listed patent depends on the type of patent certification provided by the follow-on applicant andthe outcome of any associated litigation arising from that certification. Patent Term Extension The term of a patent that covers an FDA approved drug that contains an active ingredient not previously approved may beeligible for patent term extension, which provides patent term restoration as compensation for the patent term lost during thedevelopment and FDA regulatory review process. The Hatch‑Waxman Act permits a patent term extension of up to five yearsbeyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug is underregulatory review. Patent extension cannot extend the remaining term of a patent beyond a total of 14 years from the date ofproduct approval and only one patent applicable to an approved drug may be extended. Similar provisions are available inthe European Union and other foreign jurisdictions to extend the term of a patent that covers an approved drug. In the future,if and when our pharmaceutical products receive FDA approval, we expect to apply for patent term extensions on patentscovering those products. The Foreign Corrupt Practices Act The Foreign Corrupt Practices Act (FCPA) prohibits any U.S. individual or business from paying, offering, or authorizingpayment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for thepurpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining orretaining business. The FCPA also obligates companies whose securities are listed in the United States to comply withaccounting provisions requiring such companies to maintain books and records that accurately and fairly reflect alltransactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system ofinternal accounting controls for international operations. 25 Table of Contents European and Other International Government Regulation In addition to regulations in the United States, we will be subject to a variety of regulations in other jurisdictions governing,among other things, clinical trials and any commercial sales and distribution of our products. Whether or not we obtain FDAapproval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to thecommencement of clinical trials or marketing of the product in those countries. Some countries outside of the United Stateshave a similar process that requires the submission of a clinical trial application, or CTA, much like the IND prior to thecommencement of human clinical trials. In the European Union, for example, a CTA must be submitted to the national healthauthority of each EU Member State in which the clinical trial is to be conducted and an independent ethics committee, muchlike the FDA and IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trialdevelopment may proceed. To obtain regulatory approval to commercialize a new drug under European Union regulatory systems, we must submit amarketing authorization application, or MAA. In the European Union, marketing authorization for a medicinal product canbe obtained through a centralized, mutual recognition, decentralized procedure, or the national procedure of an individualEU Member State. In accordance with the centralized procedure, the applicant can submit a single application for marketingauthorization to the EMA. The agency will provide a positive opinion regarding the application if it meets certain quality,safety, and efficacy requirements. Following the opinion of the EMA, the European Commission makes a final decision togrant a centralized marketing authorization that permits the marketing of a product in all 28 EU Member States and three ofthe four European Free Trade Association, or EFTA, States, Iceland, Liechtenstein and Norway. The centralized procedure ismandatory for certain medicinal products, including orphan medicinal products, medicinal products derived from certainbiotechnological processes, advanced therapy medicinal products and certain other medicinal products containing a newactive substance for the treatment of certain diseases. This route is optional for certain other products, including medicinalproducts that are a significant therapeutic, scientific or technical innovation, or whose authorization would be in the interestof public or animal health. Unlike the centralized authorization procedure, the decentralized marketing authorization procedure requires a separateapplication to, and leads to separate approval by, the competent authorities of each EU Member State in which the product isto be marketed. This application process is identical to the application that would be submitted to the EMA forauthorization through the centralized procedure. The reference EU Member State prepares a draft assessment and drafts of therelated materials within 120 days after receipt of a valid application. The resulting assessment report is submitted to theconcerned EU Member States who, within 90 days of receipt, must decide whether to approve the assessment report andrelated materials. If a concerned EU Member State cannot approve the assessment report and related materials due toconcerns relating to a potential serious risk to public health, disputed elements may be referred to the European Commission,whose decision is binding on all EU Member States. The mutual recognition procedure is similarly based on the acceptance by the competent authorities of the EU MemberStates of the marketing authorization of a medicinal product by the competent authorities of other EU Member States. Theholder of a national marketing authorization may submit an application to the competent authority of an EU Member Staterequesting that this authority recognize the marketing authorization delivered by the competent authority of another EUMember State. For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, therequirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country tocountry. Internationally, clinical trials are generally required to be conducted in accordance with GCP, applicable regulatoryrequirements of each jurisdiction and the medical ethics principles that have their origin in the Declaration of Helsinki. Compliance During all phases of development (pre‑ and post‑marketing), failure to comply with applicable regulatory requirements mayresult in administrative or judicial sanctions. These sanctions could include the FDA’s imposition of a clinical hold on trials,refusal to approve pending applications, withdrawal of an approval, warning letters, product recalls, product26 Table of Contents seizures, total or partial suspension of production or distribution, product detention or refusal to permit the import or exportof products, injunctions, fines, civil penalties or criminal prosecution. Third country authorities can impose equivalentpenalties. Any agency or judicial enforcement action could have a material adverse effect on us. Data Exclusivity In the European Union if a marketing authorization is granted for a medicinal product containing a new active substance,that product benefits from eight years of data exclusivity, during which generic marketing authorization applicationsreferring to the data of that product may not be accepted by the regulatory authorities, and a further two years of marketexclusivity, during which such generic products may not be placed on the market. The two-year period may be extended tothree years if during the first eight years a new therapeutic indication with significant clinical benefit over existing therapiesis approved. Orphan Drug Designation Under the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease orcondition, which is a disease or condition that affects fewer than 200,000 individuals in the United States. If the disease orcondition affects more than 200,000 individuals in the United States, orphan drug designation may nevertheless be availableif there is no reasonable expectation that the cost of developing and making the drug would be recovered from sales in theUnited States. In the United States, a drug that has received orphan drug designation is eligible for financial incentives, suchas opportunities for grant funding towards clinical trial costs, tax credits for certain research and user fee waivers undercertain circumstances. The Orphan Drug Act provides that, if a designated drug is approved for the rare disease or conditionfor which it was designated, the approved product will be granted seven years of orphan drug exclusivity, which means theFDA generally may not approve any other application for a product containing the same active moiety for the sameindication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over theproduct with orphan drug exclusivity. Orphan drug exclusivity does not prevent the FDA from approving a different drug forthe same disease or condition, or the same drug for a different disease or condition. In the European Union, orphan drugdesignation also entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of marketexclusivity following drug approval. This period may be reduced to six years if the orphan drug designation criteria are nolonger met, including where it is shown that the product is sufficiently profitable not to justify maintenance of marketexclusivity. In the European Union, the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote thedevelopment of products that are intended for the diagnosis, prevention or treatment of life‑threatening or chronicallydebilitating conditions affecting not more than five in 10,000 persons in the European Union. Additionally, orphan drugdesignation is granted for products intended for the diagnosis, prevention or treatment of a life‑threatening, seriouslydebilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in theEuropean Union would be sufficient to justify the necessary investment in developing the drug. The application for orphandesignation must be submitted to the EMA and approved before an application is made for marketing authorization for theproduct. Once authorized, orphan medicinal products are entitled to ten years of market exclusivity. During this ten-yearperiod, with a limited number of exceptions, neither the competent authorities of the EU Member States, the EMA, or theEuropean Commission are permitted to accept applications or grant marketing authorization for other similar medicinalproducts with the same therapeutic indication. However, marketing authorization may be granted to a similar medicinalproduct with the same orphan indication during the ten-year period with the consent of the marketing authorization holderfor the original orphan medicinal product or if the manufacturer of the original orphan medicinal product is unable to supplysufficient quantities. Marketing authorization may also be granted to a similar medicinal product with the same orphanindication if this latter product is safer, more effective or otherwise clinically superior to the original orphan medicinalproduct. The period of market exclusivity may, in addition, be reduced to six years if it can be demonstrated on the basis ofavailable evidence that the original orphan medicinal product is sufficiently profitable not to justify maintenance of marketexclusivity Orphan drug designation must be requested before submission of an application for marketing approval. Products thatqualify for orphan designation may also qualify for other FDA programs that are intended to expedite the development27 Table of Contents and approval process and, as a practical matter, clinical trials for orphan products may be smaller, simply because of thesmaller patient population. Nonetheless, the same approval standards apply to orphan-designated products as for otherdrugs. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review andapproval process. Priority Review, Fast Track, Breakthrough Therapy, and Accelerated Approval (United States) The FDA has programs to expedite submission and consideration of certain drug products that address serious or life-threatening diseases or conditions. An application for a drug will receive priority review designation if it is for a drug thattreats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness. Priorityreview means that FDA will seek to complete its first-cycle review and take action on the application within six monthsrather than the customary 10 month standard review period. An applicant may request priority review at the time it submitsits application. Priority review designation does not change the scientific/medical standard for approval or the quality ofevidence necessary to support approval. Additionally, the fast track program is intended to expedite or facilitate the process for reviewing new drugs that demonstratethe potential to address unmet medical needs involving serious or life-threatening diseases or conditions. If a drug receivesfast track designation, the FDA may consider reviewing sections of the NDA on a rolling basis, rather than requiring theentire application to be submitted to begin the review. Products with fast track designation also may be eligible for morefrequent meetings and correspondence with the FDA about the product’s development. Other FDA programs intended toexpedite development and review include accelerated approval (i.e., approval on the basis of a surrogate endpoint that isreasonably likely to predict clinical benefit) and breakthrough therapy designation, which is available for drugs underdevelopment for serious or life-threatening conditions and where preliminary clinical evidence shows that the drug may havesubstantial improvement on at least one clinically significant endpoint over available therapy. If a drug receivesbreakthrough therapy designation, it will be eligible for all of the benefits of fast track designation, as well as for moreintensive guidance from the FDA on an efficient drug development program and a commitment from the agency to involvesenior FDA managers in such guidance. Even if a product qualifies for fast track designation or breakthrough therapydesignation, the FDA may later decide that the product no longer meets the conditions for these designations, and/or maydetermine that the product does not meet the standards for approval. Accelerated Review (European Union) Under the Centralized Procedure in the European Union, the maximum timeframe for the evaluation of a MAA is 210 days(excluding “clock stops,” when additional written or oral information is to be provided by the applicant in response toquestions asked by the Committee for Medicinal Products for Human Use, or CHMP). Accelerated evaluation might begranted by the CHMP in exceptional cases, when a medicinal product is expected to be of a major public health interest.Three cumulative criteria must be fulfilled in such circumstances: the seriousness of the disease (e.g., heavy disabling orlife‑threatening diseases) to be treated; the absence or insufficiency of an appropriate alternative therapeutic approach; andanticipation of high therapeutic benefit. In this circumstance, EMA ensures that the opinion of the CHMP is given within150 days. Healthcare Reform In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the associatedreconciliation bill, which we refer to collectively as the Affordable Care Act. The Affordable Care Act substantially changesthe way healthcare will be financed by both governmental and private insurers, and significantly impacts the pharmaceuticalindustry. The Affordable Care Act is a sweeping law intended to broaden access to health insurance, reduce or constrain thegrowth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcareand health insurance industries, impose new taxes and fees on the health industry and impose additional health policyreforms. Among the Affordable Care Act’s provisions of importance to the pharmaceutical industry are the following: 28 Table of Contents ·an annual, nondeductible fee on any covered entity engaged in manufacturing or importing certain brandedprescription drugs and biological products, apportioned among such entities in accordance with their respectivemarket share in certain government healthcare programs; ·an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug RebateProgram, retroactive to January 1, 2010, to 23.1% and 13.0% of the average manufacturer price, or AMP, formost branded and generic drugs, respectively; ·expansion of healthcare fraud and abuse laws, including the False Claims Act and the Anti‑Kickback Statute,new government investigative powers, and enhanced penalties for noncompliance; ·a new partial prescription drug benefit for Medicare recipients, or Medicare Part D, coverage gap discountprogram, in which manufacturers must agree to offer 50.0% point‑of‑sale discounts off negotiated prices ofapplicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for themanufacturers’ outpatient drugs to be covered under Medicare Part D; ·extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who areenrolled in Medicaid managed care organizations; ·expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offerMedicaid coverage to additional individuals and by adding new mandatory eligibility categories forindividuals with income at or below 133.0% of the Federal Poverty Level, thereby potentially increasingmanufacturers’ Medicaid rebate liability; ·expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; ·new requirements to report annually specified financial arrangements with physicians and teaching hospitals, asdefined in the Affordable Care Act and its implementing regulations, including reporting any “payments ortransfers of value” made or distributed to prescribers, teaching hospitals, and other healthcare providers andreporting any ownership and investment interests held by physicians and other healthcare providers and theirimmediate family members and applicable group purchasing organizations during the preceding calendar year,with data collection required beginning August 1, 2013 and reporting to the Centers for Medicare and MedicaidServices required beginning March 31, 2014 and by the 90th day of each subsequent calendar year; ·a new requirement to annually report drug samples that manufacturers and distributors provide to physicians; ·a new Patient‑Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparativeclinical effectiveness research, along with funding for such research; and ·a mandatory nondeductible payment for employers with 50 or more full‑time employees (or equivalents) whofail to provide certain minimum health insurance coverage for such employees and their dependents, beginningin 2015 (pursuant to relief enacted by the Treasury Department). The Affordable Care Act also established an Independent Payment Advisory Board, or IPAB, to reduce the per capita rate ofgrowth in Medicare spending. Beginning in 2014, the IPAB was mandated to propose changes in Medicare payments if itdetermines that the rate of growth of Medicare expenditures exceeds target growth rates. The IPAB has broad discretion topropose policies to reduce expenditures, which may have a negative impact on payment rates for pharmaceutical products. Aproposal made by the IPAB is required to be implemented by the U.S. federal government’s Centers for Medicare & MedicaidServices unless Congress adopts a proposal with savings greater than those proposed29 Table of Contents by the IPAB. The IPAB has not yet been called upon to act as the annual determinations by the CMS Office of the Actuaryhave not identified a savings target for implementation years 2015 or 2016. In addition, other legislative changes have been proposed and adopted since passage of the Affordable Care Act. The BudgetControl Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposalsin spending reductions to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of an amountgreater than $1.2 trillion for the fiscal years 2012 through 2021, triggering the legislation’s automatic reductions to severalgovernment programs. These reductions included aggregate reductions to Medicare payments to healthcare providers of upto 2.0% per fiscal year, which went into effect in April 2013. Subsequent litigation extended the 2% reduction, on average, to2025. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among otherthings, reduced Medicare payments to several categories of healthcare providers and increased the statute of limitationsperiod for the government to recover overpayments to providers from three to five years. These laws may result in additionalreductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers andaccordingly, our financial operations. Moreover, legislative changes to the Affordable Care Act remain possible and appear likely in the 115th United StatesCongress and under the Trump Administration. We expect that the Affordable Care Act, as well as other healthcare reformmeasures that have been and may be adopted in the future, may result in more rigorous coverage criteria and in additionaldownward pressure on the price that we receive for any approved product, and could seriously harm our future revenue. Anyreduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments fromprivate payors. The implementation of cost containment measures or other healthcare reforms may compromise our ability togenerate revenue, attain profitability or commercialize our product candidates. Coverage and Reimbursement Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we obtainregulatory approval. In the United States and markets in other countries, sales of any products for which we receiveregulatory approval for commercial sale will depend in part on the availability of reimbursement from third‑party payors.Third‑party payors include government health administrative authorities, managed care providers, private health insurers andother organizations. The process for determining whether a payor will provide coverage for a drug product may be separatefrom the process for setting the price or reimbursement rate that the payor will pay for the drug product. Third‑party payorsmay limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDAapproved drugs for a particular indication. Third‑party payors are increasingly challenging the price and examining themedical necessity and cost‑effectiveness of medical products and services, in addition to their safety and efficacy. We mayneed to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost‑effectivenessof our products, in addition to the costs required to obtain FDA approvals. Our product candidates, if approved, may not beconsidered medically necessary or cost‑effective. A payor’s decision to provide coverage for a drug product does not implythat an adequate reimbursement rate will be approved. Adequate third‑party reimbursement may not be available to enable usto maintain price levels sufficient to realize an appropriate return on our investment in product development. The Medicare Modernization Act, or MMA enacted by the U.S. Congress in 2003, changed the way Medicare covers andpays for pharmaceutical products, including creating the Medicare Part D prescription drug benefit, which became effectiveat the beginning of 2006. Government payment for some of the costs of prescription drugs may increase demand for anyproducts for which we receive marketing approval. However, to obtain payments under this program, we would be required tosell products to Medicare recipients through prescription drug plans operating pursuant to this legislation. These plans willlikely negotiate discounted prices for our products. Existing federal law requires pharmaceutical manufacturers to pay rebates to state governments, based on a statutory formula,on covered outpatient drugs reimbursed by the Medicaid program as a condition of having their drugs paid for by Medicaid.Rebate amounts for a product are determined by a statutory formula that is based on prices defined in the statute: AMP,which must be calculated for all products that are covered outpatient drugs under the Medicaid program, and best price,which must be calculated only for those covered outpatient drugs that are a single source drug or30 Table of Contents innovator multiple source drug, such as biologic products. Manufacturers are required to report AMP and best price for eachof their covered outpatient drugs to the government on a regular basis. Additionally, some state Medicaid programs haveimposed a requirement for supplemental rebates over and above the formula set forth in federal law, as a condition forcoverage. In addition to the Medicaid rebate program, federal law also requires that if a pharmaceutical manufacturer wishesto have its outpatient drugs covered under Medicaid as well as under Medicare Part B, it must sign a “Master Agreement”obligating it to provide a formulaic discount of approximately 24% known as the federal ceiling price for drugs sold to theU.S. Departments of Defense (including the TRICARE retail pharmacy program), Veterans Affairs, the Public Health Serviceand the Coast Guard, and also provide discounts through a drug pricing agreement meeting the requirements of Section 340Bof the Public Health Service Act, for outpatient drugs sold to certain specified eligible healthcare organizations. The formulafor determining the discounted purchase price under the 340B drug pricing program is defined by statute and is based on theAMP and rebate amount for a particular product as calculated under the Medicaid drug rebate program, discussed above. Different pricing and reimbursement schemes exist in other countries. In the European Union, each EU Member States canrestrict the range of medicinal products for which its national health insurance system provides reimbursement and cancontrol the prices of medicinal products for human use marketed on its territory. As a result, following receipt of marketingauthorization in an EU Member State, through any application route, the applicant is required to engage in pricingdiscussions and negotiations with the competent pricing authority in the individual EU Member State. The governments ofthe EU Member States influence the price of pharmaceutical products through their pricing and reimbursement rules andcontrol of national healthcare systems that fund a large part of the cost of those products to consumers. Some EU MemberStates operate positive and negative list systems under which products may only be marketed once a reimbursement price hasbeen agreed upon. To obtain reimbursement or pricing approval, some of these countries may require the completion ofclinical trials that compare the cost‑effectiveness of a particular product candidate to currently available therapies. Other EUMember States allow companies to fix their own prices for medicines, but monitor and control company profits. Others adopta system of reference pricing, basing the price or reimbursement level in their territories either on the pricing andreimbursement levels in other countries or on the pricing and reimbursement levels of medicinal products intended for thesame therapeutic indication. Further, some EU Member States approve a specific price for the medicinal product or mayinstead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on themarket. The downward pressure on healthcare costs in general, particularly prescription drugs, has become more intense. As aresult, increasingly high barriers are being erected to the entry of new products. In addition, we may face competition for ourproduct candidates from lower‑priced products in foreign countries that have placed price controls on pharmaceuticalproducts. In addition, in some countries, cross‑border imports from low‑priced markets exert a commercial pressure on pricingwithin a country. Health Technology Assessment, or HTA, of medicinal products, however, is becoming an increasingly common part of thepricing and reimbursement procedures in some EU Member States. These EU Member States include the United Kingdom,France, Germany, Ireland, Italy and Sweden. HTA is the procedure according to which the assessment of the public healthimpact, therapeutic impact and the economic and societal impact of use of a given medicinal product in the nationalhealthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness,safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the healthcaresystem. Those elements of medicinal products are compared with other treatment options available on the market. The outcome of HTA regarding specific medicinal products will often influence the pricing and reimbursement status grantedto these medicinal products by the competent authorities of individual EU Member States. The extent to which pricing andreimbursement decisions are influenced by the HTA of the specific medicinal product varies between EU Member States. In addition, pursuant to Directive 2011/24/EU on the application of patients’ rights in cross-border healthcare, a voluntarynetwork of national authorities or bodies responsible for HTA in the individual EU Member States was established. Thepurpose of the network is to facilitate and support the exchange of scientific information concerning HTAs. This may lead toharmonization of the criteria taken into account in the conduct of HTAs between EU Member States and in pricing andreimbursement decisions and may negatively affect price in at least some EU Member States.31 Table of Contents The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the governmentand third‑party payors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on managedcare in the United States has increased and will continue to increase the pressure on pharmaceutical pricing. Coveragepolicies and third‑party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatoryapproval, less favorable coverage policies and reimbursement rates may be implemented in the future. Other Healthcare Laws and Compliance Requirements In the United States, our activities are potentially subject to additional regulation, particularly once third-partyreimbursement becomes available for one or more of our products, by various federal, state and local authorities in additionto the FDA, including the Centers for Medicare and Medicaid Services, other divisions of HHS (for example, the Office ofInspector General), the DOJ and individual U.S. Attorney offices within the DOJ, and state and local governments. The federal Anti‑Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting orreceiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order ofany healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. Thisstatute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers,purchasers, and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safeharbors protecting some business arrangements from prosecution, the exemptions and safe harbors are drawn narrowly andpractices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutinyif they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harborprotection from federal Anti‑Kickback Statute liability. The reach of the Anti‑Kickback Statute was broadened by theAffordable Care Act, which, among other things, amends the intent requirement of the federal Anti‑Kickback Statute.Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specificintent to violate it in order to have committed a violation. In addition, the Affordable Care Act provides that the governmentmay assert that a claim including items or services resulting from a violation of the federal Anti‑Kickback Statute constitutesa false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute,which imposes penalties against any person who is determined to have presented or caused to be presented a claim to afederal health program that the person knows or should know is for an item or service that was not provided as claimed or isfalse or fraudulent. The federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false orfraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false recordor statement material to an obligation to pay money to the government, or knowingly and improperly avoiding, decreasingor concealing an obligation to pay money to the federal government. Pharmaceutical and other healthcare companies havebeen investigated and reached substantial financial settlements under these laws for, among other things, allegedly providingfree product to customers with the expectation that the customers would bill federal programs for the product. Othercompanies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the productfor unapproved, and thus non‑reimbursable, uses. Pharmaceutical and other healthcare companies also are subject to otherfederal false claims laws, including, among others, federal criminal healthcare fraud and false statement statutes that extendto non-government health benefit programs. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health InformationTechnology for Economic and Clinical Health Act, or HITECH, imposes criminal and civil liability for executing a schemeto defraud any healthcare benefit program, including private third‑party payors and knowingly and willfully falsifying,concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation,or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulentstatement or entry in connection with the delivery of or payment for healthcare benefits, items or services.32 Table of Contents The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, which requires certainpharmaceutical and biological manufacturers to engage in extensive tracking of payments or transfers of value to physiciansand teaching hospitals and public reporting of the payment data. Pharmaceutical and biological manufacturers with productsfor which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program are required tohave started tracking such payments on August 1, 2013, and must submit a report on or before the 90th day of each calendaryear disclosing reportable payments made in the previous calendar year. Also, many states have similar fraud and abuse statutes or regulations that apply to items and services reimbursed underMedicaid and other state programs, or, in several states, apply regardless of the payor. Some state laws also requirepharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and toreport gifts and payments to certain health care providers in those states. Some of these states also prohibit certain marketing-related activities including the provision of gifts, meals, or other items to certain health care providers. In addition,California, Connecticut, Nevada and Massachusetts require pharmaceutical companies to implement compliance programs ormarketing codes of conduct. In addition, we are subject to data protection laws and regulations (i.e., laws and regulations that address privacy and datasecurity). In the U.S., numerous federal and state laws and regulations, including state data breach notification laws, statehealth information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the FTC Act), govern thecollection, use, disclosure and protection of health-related and other personal information. Failure to comply with dataprotection laws and regulations could result in government enforcement actions and create liability for us (which couldinclude civil and/or criminal penalties), private litigation and/or adverse publicity that could negatively affect our operatingresults and business. HIPAA, as amended by HITECH, and its implementing regulations, among other things, imposescriminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations,including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individuallyidentifiable health information. HIPAA also prohibits knowingly and willfully falsifying, concealing or covering up amaterial fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any falsewriting or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry inconnection with the delivery of or payment for healthcare benefits, items or services. Although we are not directly subject toHIPAA other than with respect to providing certain employee benefits, we potentially could be subject to criminal penaltiesif we knowingly obtain or disclose individually identifiable health information maintained by a HIPAA-covered entity (e.g.,a healthcare provider or a health plan) in a manner that is not authorized or permitted by HIPAA. Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible thatsome of our business activities could be subject to challenge under one or more of such laws. If our operations are found to bein violation of any of the federal and state laws described above or any other governmental regulations that apply to us, wemay be subject to penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment,exclusion from participation in government programs, injunctions, recall or seizure of products, total or partial suspension ofproduction, denial or withdrawal of pre‑marketing product approvals, private “qui tam” actions brought by individualwhistleblowers in the name of the government or refusal to allow us to enter into supply contracts, including governmentcontracts, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operateour business and our results of operations. To the extent that any of our products are sold in a foreign country, we may besubject to similar foreign laws and regulations, which may include, for instance, applicable post‑marketing requirements,including safety surveillance, anti‑fraud and abuse laws, and implementation of corporate compliance programs andreporting of payments or transfers of value to healthcare professionals. In addition, at the federal level, the Drug Supply Chain Security Act, or DSCA, regulates the distribution and tracing ofprescription drugs. The DSCA imposes requirements to ensure accountability in prescription drug distribution, for example,it requires manufacturers to affix a product identifier to each package and case of a prescription drug product intended forsale by November 27, 2017. A product identifier is an electronically-readable graphic that contains information includingthe product’s unique numerical identifier, lot number, and expiration date. The DSCA also requires relevant parties and toidentify and remove illegitimate products from the market, including products that are33 Table of Contents counterfeit, stolen, intentionally contaminated, or otherwise harmful. The Prescription Drug Marketing Act, itsimplementing regulations and state laws also regulate the distribution of prescription drug product samples. In order to distribute products commercially, we must also comply with state law requirements for registration ofmanufacturers and wholesale distributors of pharmaceutical products, including, in some states, manufacturers anddistributors who ship products into the state even if such manufacturers or distributors have no place of business within thestate Several states have enacted legislation requiring pharmaceutical companies to, among other things, establish marketingcompliance programs, file periodic reports with the state, register their sales representatives, and/or limit other specified salesand marketing practices. All of our activities are potentially subject to federal and state consumer protection and unfaircompetition laws. Government Contracts and Grants To date we have been awarded approximately $7.9 million in state and federal grants which have provided us with fundingand resources to continue the development of our product candidates and contributed to research and development effortsoutside of our primary therapeutic focus. Approximately $6.0 million of our grant funds have been received from the NIH,and some of these funds support research related to ZYN001. Scientific Advisors We have established a clinical advisory board and we regularly seek advice and input from these experienced clinical leaderson matters related to our research and development programs. The members of our clinical advisory board consist of expertsacross a range of key disciplines relevant to our programs. We intend to continue to leverage the broad expertise of ouradvisors by seeking their counsel on important topics relating to our product development and clinical developmentprograms. Our scientific advisors are not our employees and may have commitments to, or consulting or advisory contractswith, other entities that may limit their availability to us. In addition, our clinical advisors may have arrangements with othercompanies to assist those companies in developing products or technologies that may compete34 Table of Contents with ours. All of our clinical advisors are affiliated with other entities and devote only a small portion of their time to us. Ourcurrent clinical advisors are set forth in the table below: Name Title Jacqueline French, MD* Professor of Neurology, NYU Langone Medical Center John Messenheimer, MD* Consultant, Neurologist/Epileptologist, John Messenheimer PLLC Michael Rogawski, MD, PhD* Professor of Neurology, UC Davis Center for Neuroscience Rodney Radtke, MD* Professor of Neurology, Duke University Medical Center Randi J. Hagerman, MD† Medical Director, UC Davis MIND Institute; Distinguished Professor, Endowed Chair inFragile X Research, Department of Pediatrics, UC Davis School of Medicine Steven J. Siegel, MD, PhD† Chair, Department of Psychiatry and Behavioral Sciences, Keck School of Medicine,University of Southern California Nicole Tartaglia, MD† Associate Professor, Pediatrics-Developmental Pediatrics, University of Colorado DenverSchool of Medicine/Children’s Hospital of Colorado Daniel Clauw, MD◊ Professor of Anesthesiology, Medicine (Rheumatology) and Psychiatry, University ofMichigan Philip Mease, MD◊ Clinical Professor, University of Washington, Seattle; Director of RheumatologyResearch, Swedish Medical Center Lesley Arnold, MD◊ Professor of Psychiatry and Behavioral Neuroscience, University of Cincinnati Donald Abrams, MD^ Professor of Clinical Medicine, University of California San Francisco School ofMedicine; Chief of Hematology/Oncology, San Francisco General Hospital Miroslav Backonja, MD^ Clinical Professor, University of Wisconsin School of Medicine and Public Health;Medical Director, CRILifetree Steven P. Cohen, MD^ Professor Anesthesiology & Critical Care Medicine, Johns Hopkins School of Medicine Mark Wallace, MD^ Professor of Clinical Anesthesia, University of California San Diego * Epilepsy † FXS ◊ OA and Fibromyalgia ^ Pain Corporate Information We were incorporated in Delaware in January 2007. Our primary executive offices are located at 80 W. Lancaster Avenue, Suite 300, Devon, PA 19333 and our telephone numberis (484) 581‑7505. Our website address is www.zynerba.com. The information contained in, or that can be accessed through,our website is not part of this Report. Zynerba is a registered U.S. trademark. All other trademarks, trade names or service marks referred to in this Report are theproperty of their respective owners. Employees As of March 24, 2017, we had 12 full-time employees. In addition to our full‑time employees, we contract with third‑partiesfor the conduct of certain preclinical, manufacturing, accounting and administrative activities. We have no collectivebargaining agreements with our employees and none are represented by labor unions. Implications of Being an Emerging Growth Company We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the SecuritiesAct, as modified by the Jumpstart Our Business Startups Act of 2012, or JOBS Act. We will remain an “emerging growthcompany” until the earliest of (1) the beginning of the first fiscal year following the fifth anniversary of our initial publicoffering, or January 1, 2021, (2) the beginning of the first fiscal year after our annual gross revenue35 Table of Contents is $1.0 billion or more, (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion innon-convertible debt securities and (4) as of the end of any fiscal year in which the market value of our common stock heldby non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. For as long as we remain an“emerging growth company”, we may take advantage of certain exemptions from various disclosure and reportingrequirements that are applicable to other public companies that are not “emerging growth companies” including, but notlimited to: ·an exemption from the auditor attestation requirements of Section 404(b) of the Sarbanes‑Oxley Act of 2002; ·being permitted to present only two years of audited financial statements and only two years of relatedManagement’s Discussion and Analysis of Financial Condition and Results of Operations, in each case, insteadof three years for any Securities Act filings; ·being permitted to present the same number of years of selected financial data as the years of audited financialstatements presented, instead of five years; ·reduced disclosure obligations regarding executive compensation, including no Compensation Disclosure andAnalysis; ·an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Boardregarding mandatory audit firm rotation or a supplement to the auditor’s report providing additionalinformation about the audit and the financial statements; and ·an exemption from the requirements of holding a nonbinding advisory vote on executive compensation andstockholder approval of any golden parachute payments not previously approved. We may rely on these provisions until December 31, 2020. However, if certain events occur prior to the end of such period,including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.0 billion or we issue more than$1.0 billion of non‑convertible debt in any three‑year period, we will cease to be an “emerging growth company” prior to theend of such period. We have elected to take advantage of certain of the reduced disclosure obligations in this Report and may elect to takeadvantage of other reduced reporting requirements in future filings. As a result, the information that we provide to ourstockholders may be different than you might receive from other public reporting companies in which you hold equityinterests. The JOBS Act provides that an “emerging growth company” can take advantage of an extended transition period forcomplying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this exemptionand, therefore, we are subject to the same new or revised accounting standards as other public companies that are not“emerging growth companies.” Available information Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to thosereports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of charge through ourwebsite. We make these reports available through our website as soon as reasonably practicable after we electronically filesuch reports with, or furnish such reports to, the Securities and Exchange Commission, or SEC. The reports filed with the SECby our executive officers and directors pursuant to Section 16 under the Exchange Act are also made available, free of chargeon our website, as soon as reasonably practicable after copies of those filings are provided to us by those persons. Theinformation contained on, or that can be accessed through, our website is not a part of or incorporated by reference in thisReport. 36 Table of Contents Item 1A. Risk Factors You should consider carefully the following risks and uncertainties when reading this Annual Report. If any of thefollowing risks actually occurs, our business, financial condition and results of operations could be materially andadversely affected. In that event, the trading price of our common stock could decline. Although we believe that we haveidentified and discussed below the key risk factors affecting our business, there may be additional risks and uncertaintiesthat are not presently known or that are not currently believed to be significant that may adversely affect our performanceor financial condition. Risks Related to Our Financial Position and Capital Needs We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future. We are a clinical stage specialty pharmaceutical company dedicated to developing and commercializing innovativetransdermal synthetic cannabinoid treatments for patients with high unmet needs. Since our inception in January 2007, wehave devoted substantially all of our resources to the development of our product candidates, ZYN002 and ZYN001. Wehave generated significant operating losses since our inception. Our net losses for the years ended December 31, 2016, 2015,and 2014 were approximately $23.4 million, $12.6 million and $5.8 million, respectively. As of December 31, 2016, we hadan accumulated deficit of $46.0 million. Substantially all of our losses have resulted from expenses incurred in connectionwith our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate theselosses will increase as we continue the research and development of, and clinical trials for, our product candidates. Inaddition to budgeted expenses, we may encounter unforeseen expenses, difficulties, complications, delays and otherunknown factors that may adversely affect our business. If either of our product candidates fails in clinical trials or does notgain regulatory approval, or even if approved, fails to achieve market acceptance, we may never become profitable. Even ifwe achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Due to our limited operating history and history of losses, any predictions about our future success, performance or viabilitymay not be accurate. We currently have no commercial revenue and may never become profitable. To date, the only revenue we have generated has been from the receipt of research grants and payments for research services.Our ability to generate revenue and become profitable depends upon our ability to obtain regulatory approval for, andsuccessfully commercialize, ZYN002, ZYN001 or other product candidates that we may develop, in‑license or acquire in thefuture. Even if we are able to successfully achieve regulatory approval for these product candidates, we do not know what thereimbursement status of our product candidates will be or when any of these products will generate revenue for us, if at all.We have not generated, and do not expect to generate, any product revenue for the foreseeable future, and we expect tocontinue to incur significant operating losses for the foreseeable future due to the cost of research and development,preclinical studies and clinical trials and the regulatory approval process for our product candidates. The amount of futurelosses is uncertain and will depend, in part, on the rate of growth of our expenses. Our ability to generate revenue from our product candidates also depends on a number of additional factors, including ourability to: ·successfully complete development activities, including the remaining preclinical studies and plannedclinical trials for our product candidates; 37 Table of Contents ·complete and submit NDAs to the FDA and MAAs to the EMA, and obtain regulatory approval forindications for which there is a commercial market; ·complete and submit applications to, and obtain regulatory approval from, other foreign regulatoryauthorities; ·manufacture any approved products in commercial quantities and on commercially reasonable terms; ·develop a commercial organization, or find suitable partners, to market, sell and distribute approvedproducts in the markets in which we have retained commercialization rights; ·achieve acceptance among patients, clinicians and advocacy groups for any products we develop; ·obtain coverage and adequate reimbursement from third parties, including government payors; and ·set a commercially viable price for any products for which we may receive approval. We are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintainprofitability. Even if we are able to complete the processes described above, we anticipate incurring significant costsassociated with commercializing our product candidates. We will require additional capital to fund our operations and if we fail to obtain necessary financing, we will not be ableto complete the development and commercialization of ZYN002 or ZYN001. Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial andincreasing amounts to conduct further research and development, preclinical testing and clinical trials of our productcandidates, to seek regulatory approvals and reimbursement for our product candidates and to launch and commercialize anyproduct candidates for which we receive regulatory approval. As of December 31, 2016, we had approximately $31.0 millionin cash and cash equivalents, and in early 2017 we completed an underwritten public offering of shares of our common stockwhich provided an additional $54.3 million in net proceeds. We believe that current cash and cash equivalents, includingproceeds from our follow-on public offering in the first quarter of 2017, are sufficient to develop five Phase 3 ready programsand, assuming feedback from the FDA supports a decision to move forward, initiate at least one Phase 3 program and fundoperations and capital requirements into 2019. The progress of ZYN002 and ZYN001 for each target indication is uncertainbecause it is difficult to predict our spending for our product candidates prior to obtaining FDA approval due to numerousfactors, including, without limitation, the rate of progress of clinical trials, the results of preclinical studies and clinical trialsfor such indication, the costs and timing of seeking and obtaining FDA and other regulatory approvals for clinical trials andFDA guidance regarding clinical trials for such indication. Moreover, changing circumstances may cause us to expend cashsignificantly faster than we currently anticipate, and we may need to spend more cash than currently expected because ofcircumstances beyond our control. For these reasons, we are unable to estimate the actual funds we will require fordevelopment and any approved marketing and commercialization activities. Our future funding requirements, both near andlong‑term, will depend on many factors, including, but not limited to: ·the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our productcandidates; ·any change in the clinical development plans for these product candidates; ·the number and characteristics of product candidates that we develop or may in‑license; ·the terms of any collaboration agreements we may choose to execute; 38 Table of Contents ·the outcome, timing and cost of meeting regulatory requirements established by the DEA, the FDA, theEMA or other comparable foreign regulatory authorities; ·the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual propertyrights; ·the cost of defending intellectual property disputes, including patent infringement actions brought by thirdparties against us; ·the effect of competing product and market developments; ·the costs and timing of the implementation of commercial scale manufacturing activities; and ·the cost of establishing, or outsourcing, sales, marketing and distribution capabilities for any productcandidates for which we may receive regulatory approval in regions where we choose to commercialize ourproducts on our own. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raiseadditional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back ordiscontinue the development or commercialization of one or more of our product candidates or one or more of our otherresearch and development initiatives. Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us torelinquish rights to our technologies or product candidates. We may seek additional capital through a combination of private and public equity offerings, debt financings, strategicpartnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale ofequity or convertible debt securities, existing ownership interests will be diluted and the terms of such financings mayinclude liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financings may becoupled with an equity component, such as warrants to purchase shares, which could also result in dilution of our existingstockholders’ ownership. The incurrence of indebtedness would result in increased fixed payment obligations and could alsoresult in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability toacquire or license intellectual property rights and other operating restrictions that could adversely impact our ability toconduct our business and may result in liens being placed on our assets and intellectual property. If we were to default onsuch indebtedness, we could lose such assets and intellectual property. If we raise additional funds through strategicpartnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to ourproduct candidates, or grant licenses on terms that are not favorable to us. We receive Australian government research and development income tax concession refunds. If our research anddevelopment expenditures are not deemed to be eligible for the refund or the tax concession program is modified ordiscontinued by the Australian government, it could have a negative effect on our future cash flows and the funding offuture research and development projects. Our subsidiary is incorporated in Australia where we are currently engaged in research and development activities forZYN002 and where we expect to engage in such activities for ZYN001 in the future. Our subsidiary is eligible to participatein the Australian Federal Government’s Research and Development Tax Incentive program, under which the governmentprovides a cash refund for a portion of eligible research and development expenditures (45% for fiscal years beginning priorto July 1, 2016 and 43.5% for fiscal years beginning on or after July 1, 2016) by small Australian entities, which are definedas Australian entities with less than A$20 million in revenue, having a tax loss. The Research and Development TaxIncentive refund is offered by the Australian federal government for eligible research and development purposes based on thefiling of an annual application. As part of this program, our subsidiary applied for and received cash refunds from theAustralian Taxation Office for a percentage of the research and development costs expended by our subsidiary in Australia.39 Table of Contents We received a Research and Development Tax Incentive refund in the fiscal year ended December 31, 2016 related toresearch and development expenditures made during 2015, and we expect to continue to receive refunds under this programfor eligible research and development expenditures in Australia. However, to the extent that some or all of our research anddevelopment expenditures are deemed to be “ineligible,” then our refunds may decrease or be eliminated. In addition, theAustralian government may in the future modify the requirements of, reduce the amounts of the refunds available under, ordiscontinue the Research and Development Tax Incentive program. Any such change in the Research and Development TaxIncentive program would have a negative effect on our future cash flows. Our federal and state government grants could subject us to audits and could require us to repay funds previously awardedto us. Prior to our initial public offering, or IPO, most of our revenue was from the receipt of state and federal research grants. As ofDecember 31, 2016 we have been granted approximately $7.9 million in federal and state research grants (all of which wasgranted prior to 2016). In connection with these grants, we may be subject to routine audits by government agencies. As partof an audit, these agencies may review our performance, cost structures and compliance with applicable laws, regulations,policies and standards and the terms and conditions of the grant. If any of our expenditures are found to be unallowable orallocated improperly or if we have otherwise violated terms of the grant, the expenditures may not be reimbursed and/or wemay be required to repay funds already disbursed. Accordingly, an audit could result in a material adjustment to our results ofoperations and financial condition. Risks Related to our Business and Industry We are largely dependent on the success of our product candidates, ZYN002 and ZYN001, which are still in clinicaldevelopment, and will require significant capital resources and years of clinical development effort. We currently have no products on the market, and our most advanced product candidate, ZYN002, is in Phase 2 clinicaltrials. Our business depends almost entirely on the successful clinical development, regulatory approval andcommercialization of ZYN002 and ZYN001, and substantial additional clinical development and regulatory approval effortswill be required before we are permitted to commence commercialization, if ever. It will be several years before we cancommence and complete a pivotal study for ZYN002 or ZYN001, if ever. The clinical trials and manufacturing andmarketing of ZYN002 and ZYN001 will be subject to extensive and rigorous review and regulation by numerous governmentauthorities in the United States, Australia, the European Union, Canada, and other jurisdictions where we intend to test and, ifapproved, market our product candidates. Before obtaining regulatory approvals for the commercial sale of any productcandidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe and effectivefor use in each target indication, and potentially in specific patient populations. This process can take many years and mayinclude post‑marketing studies and surveillance, which would require the expenditure of substantial resources beyond ourexisting funds. Of the large number of drugs in development for approval in the United States and the European Union, onlya small percentage successfully complete the FDA regulatory approval process or is granted a marketing authorisation by theEuropean Commission or the other competent authorities in the EU Member States, as applicable, and are commercialized.Accordingly, even if we are able to obtain the requisite financing to continue to fund our research, development and clinicalprograms, we cannot assure you that any of our product candidates will be successfully developed or commercialized. Because the results of preclinical studies and earlier clinical trials are not necessarily predictive of future results, ZYN002and ZYN001 may not have favorable results in our planned clinical trials. Any positive results from our preclinical testing of ZYN002 and ZYN001 and Phase 1 clinical trials of ZYN002 may notnecessarily be predictive of the results from our ongoing Phase 2 clinical trials and our planned additional clinical trials. Inaddition, our interpretation of third-party clinical data or our conclusions based on our preclinical in vitro and in vivomodels may prove inaccurate. Many companies in the pharmaceutical and biotechnology industries have suffered significantsetbacks in clinical trials after achieving positive results in preclinical and early clinical development, and we cannot becertain that we will not face similar setbacks. These setbacks have been caused by, among other things,40 Table of Contents preclinical findings while clinical trials were underway or safety or efficacy observations in clinical trials, including adverseevents. Moreover, preclinical and clinical data can be susceptible to varying interpretations and analyses, and manycompanies that believed their product candidates performed satisfactorily in preclinical studies and clinical trialsnonetheless failed to obtain FDA approval or a marketing authorization granted by the European Commission. If we fail toproduce positive results in our clinical trials of ZYN002 and ZYN001, the development timeline and regulatory approval andcommercialization prospects for ZYN002 and ZYN001, and, correspondingly, our business and financial prospects, would bematerially adversely affected. Even if ZYN002 and ZYN001 advance through pre-clinical studies and clinical trials, we may experience difficulties inmanaging our growth and expanding our operations. We have limited resources to carry out objectives for our current and future pre-clinical studies and clinical trials. Prior to thecommencement of the ZYN002 Phase 1 clinical trials in October 2015, our company had no history of conducting clinicaltrials, which is a time‑consuming, expensive and uncertain process. In addition, while we have experienced management andexpect to contract out many of the activities related to conducting these programs, we are a small company with only 12employees and therefore have limited internal resources both to conduct pre-clinical studies and clinical trials and to monitorthird‑party providers. As our product candidates advance through pre-clinical studies and clinical trials, we will need toexpand our development, regulatory and manufacturing operations, either by expanding our internal capabilities orcontracting with other organizations to provide these capabilities for us. In the future, we expect to have to manageadditional relationships with collaborators or partners, suppliers and other organizations. Our ability to manage ouroperations and future growth will require us to continue to improve our operational, financial and management controls,reporting systems and procedures. Failures or delays in our clinical trials of ZYN002 or ZYN001 could result in increased costs to us and could delay, preventor limit our ability to generate revenue and continue our business. ZYN002, our most advanced product candidate, is in Phase 2 clinical trials, and we have not yet commenced clinical trialsfor ZYN001. Successful completion of clinical trials is a prerequisite to submitting an NDA to the FDA or an MAA to theEMA. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain asto outcome. A product candidate can unexpectedly fail at any stage of clinical development. The historic failure rate forproduct candidates is high due to scientific feasibility, findings related to safety and efficacy, changing regulatory standardsand standards of medical care and other variables. We do not know whether our clinical trials will begin or be completed onschedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number ofreasons, including, among others: ·delays in reaching or failing to reach agreement on acceptable terms with prospective clinical trial sites, theterms of which can be subject to extensive negotiation and may vary significantly among different clinicaltrial sites; ·clinical sites or investigators deviating from trial protocol, failing to conduct the trial in accordance withapplicable regulatory requirements, or dropping out of a trial or failure of third-party clinical trial managersto meet their contractual obligations or deadlines; ·delays or inability in manufacturing or obtaining sufficient quantity or quality of a product candidate orother materials necessary to conduct clinical trials due to regulatory and manufacturing constraints; ·delay or failure in reaching agreement with the FDA or a foreign regulatory authority on the design of agiven trial, or in obtaining authorization to commence a trial; ·difficulties obtaining IRB, DEA or comparable foreign regulatory authority, or ethics committee approvalto conduct a clinical trial; ·challenges in recruiting and enrolling patients to participate in clinical trials, including the size and natureof the patient population, the proximity of patients to clinical trial sites, eligibility criteria for41 Table of Contents the clinical trial, the nature of the clinical trial protocol, the availability of approved effective treatmentsfor the relevant indication and competition from other clinical trial programs for similar indications; ·severe or unexpected toxicities or drug‑related side effects experienced by patients in our clinical trials orby individuals using drugs similar to our product candidates; ·DEA or comparable foreign regulatory authority‑related recordkeeping, reporting or security violations at aclinical trial site, leading the DEA, state authorities or comparable foreign regulatory authorities to suspendor revoke the site’s controlled substance registration and causing a delay or termination of planned orongoing clinical trials; ·regulatory concerns with cannabinoid products generally and the potential for abuse of those products; ·difficulties retaining patients who have enrolled in a clinical trial who may withdraw due to lack ofefficacy, side effects, personal issues or loss of interest and difficulties having subjects return for post-treatment follow-up; ·ambiguous or negative interim results; or ·lack of adequate funding to continue the clinical trial. In addition, a clinical trial may be suspended or terminated by us, the FDA, an IRB, an ethics committee, a data safetymonitoring board or other foreign regulatory authorities overseeing the clinical trial at issue due to a number of factors,including, among others: ·failure to conduct the clinical trial in accordance with regulatory requirements or our clinical trialprotocols; ·inspection of the clinical trial operations or clinical trial sites by the FDA, the DEA, the EMA or otherforeign regulatory authorities that reveals deficiencies or violations that require us to undertake correctiveaction, including the imposition of a clinical hold; ·unforeseen safety issues, including any safety issues that could be identified in our ongoing toxicologystudies; ·adverse side effects or lack of effectiveness; and ·changes in government regulations or administrative actions. If our clinical trials fail or are delayed for any of the above reasons, our development costs may increase, our approval processcould be delayed and our ability to commercialize our product candidates could be materially harmed, which could have amaterial adverse effect on our business, financial condition or results of operations. We intend to expend our limited resources to pursue ZYN002 and ZYN001 for certain indications, and may fail tocapitalize on other product candidates or other indications for ZYN002 or ZYN001 that may be more profitable or forwhich there is a greater likelihood of success. Because we have limited financial and managerial resources, we are focusing on research programs relating to ZYN002 andZYN001 for certain indications, which concentrates the risk of product failure in the event ZYN002 or ZYN001 proves to beunsafe or ineffective or inadequate for clinical development or commercialization. In particular, we are studying ZYN002 inpatients with refractory epileptic focal seizures, OA and FXS and we intend to study ZYN001 in patients with fibromyalgiaand peripheral neuropathic pain. As a result, we may forego or delay pursuit of opportunities with other product candidates orfor other indications for ZYN002 or ZYN001 that could later prove to have greater42 Table of Contents commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products orprofitable market opportunities. Our spending on proprietary research and development programs relating to ZYN002 andZYN001 may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or targetmarket for ZYN002 and ZYN001, we may relinquish valuable rights to ZYN002 or ZYN001 through collaboration, licensingor other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development andcommercialization rights to ZYN002 or ZYN001. The regulatory approval processes of the FDA, the EMA and other comparable foreign regulatory authorities are lengthy,time‑consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for ourproduct candidates, our business will be substantially harmed. We are not permitted to market our product candidates in the United States or the European Union until we receive approvalof an NDA, from the FDA or an MAA from the European Commission, respectively, or in any foreign countries until wereceive the requisite approval from such countries. Prior to submitting an NDA to the FDA or an MAA to the EMA forapproval of our product candidates we will need to complete our preclinical studies and clinical trials. Successfullycompleting our clinical program and obtaining approval of an NDA or MAA is a complex, lengthy, expensive and uncertainprocess, and the FDA or EMA may delay, limit or deny approval of our product candidates for many reasons, including,among others, because: ·we may not be able to demonstrate that our product candidates are safe and effective in treating patients to thesatisfaction of the FDA or EMA; ·the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDAor EMA for marketing approval; ·the FDA or EMA may disagree with the number, design, size, conduct or implementation of our clinical trials; ·the FDA or EMA may require that we conduct additional clinical trials; ·the FDA or EMA or other applicable foreign regulatory authorities may not approve the formulation, labeling orspecifications of our product candidates; ·the CROs and other contractors that we may retain to conduct our clinical trials may take actions outside of ourcontrol that materially adversely impact our clinical trials; ·the FDA or EMA may find the data from preclinical studies and clinical trials insufficient to demonstrate thatZYN002 or ZYN001 are safe and effective for their proposed indications; ·the FDA or EMA may disagree with our interpretation of data from our preclinical studies and clinical trials; ·the FDA or EMA may not accept data generated at our clinical trial sites or may disagree with us over whether toaccept efficacy results from clinical trial sites outside the United States or outside the European Union, asapplicable, where the standard of care is potentially different from that in the United States or in the EuropeanUnion, as applicable; ·if and when our NDAs or MAAs are submitted to the FDA or EMA, as applicable, the regulatory authorities mayhave difficulties scheduling the necessary review meetings in a timely manner, may recommend againstapproval of our application or may recommend or require, as a condition of approval, additional preclinicalstudies or clinical trials, limitations on approved labeling or distribution and use restrictions; 43 Table of Contents ·the FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, which would userisk minimization strategies to ensure that the benefits of certain prescription drugs outweigh their risks, as acondition of approval or post‑approval, and the European Commission may grant only conditional marketingauthorization or impose specific obligations as a condition for marketing authorization, or may require us toconduct post‑authorization safety studies; ·the FDA, DEA, European Commission or other applicable foreign regulatory agencies may not approve themanufacturing processes or facilities of third‑party manufacturers with which we contract or DEA or otherapplicable foreign regulatory agency quotas may limit the quantities of controlled substances available to ourmanufacturers; or ·the FDA, European Commission or other applicable foreign regulatory agencies may change their approvalpolicies or adopt new regulations. Any of these factors, many of which are beyond our control, could increase development costs, jeopardize our ability toobtain regulatory approval for and successfully market ZYN002 or ZYN001 and generate product revenue. Moreover,because our business is almost entirely dependent upon these two product candidates, any such setback in our pursuit ofregulatory approval would have a material adverse effect on our business and prospects. We are currently conducting Phase 2 clinical trials for ZYN002 outside the United States, expect to conduct Phase 1clinical trials for ZYN001 outside the United States and may choose to conduct additional clinical trials for ZYN002 andZYN001 outside the United States, and the FDA may not accept data from such trials. We are currently conducting Phase 2 clinical trials for ZYN002 in Australia and New Zealand. We expect to conduct Phase 1clinical trials for ZYN001 in Australia, subject to applicable regulatory approval. We may choose to conduct additionalclinical trials for ZYN002 and ZYN001 in countries outside the United States, including Australia and New Zealand, subjectto applicable regulatory approval. We plan to submit NDAs for ZYN002 and ZYN001 to the FDA upon completion of allrequisite clinical trials. Although the FDA may accept data from clinical trials conducted outside the United States,acceptance of such study data by the FDA is subject to certain conditions. For example, the clinical trial must be conductedin accordance with GCP requirements and the FDA must be able to validate the data from the clinical trial through an onsiteinspection if it deems such inspection necessary. Where data from foreign clinical trials are intended to serve as the sole basisfor marketing approval in the United States, the FDA will not approve the application on the basis of foreign data aloneunless those data are considered applicable to the U.S. patient population and U.S. medical practice, the clinical trials wereperformed by clinical investigators of recognized competence, and the data is considered valid without the need for anon‑site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate thedata through an on‑site inspection or other appropriate means. In addition, such clinical trials would be subject to theapplicable local laws of the foreign jurisdictions where the clinical trials are conducted. There can be no assurance the FDAwill accept data from clinical trials conducted outside of the United States. If the FDA does not accept any such data, it wouldlikely result in the need for additional clinical trials, which would be costly and time‑consuming and delay aspects of ourdevelopment plan. In addition, the conduct of clinical trials outside the United States could have a significant impact on us. Risks inherent inconducting international clinical trials include: ·foreign regulatory requirements that could burden or limit our ability to conduct our clinical trials; ·administrative burdens of conducting clinical trials under multiple foreign regulatory schema; ·foreign currency fluctuations which could negatively impact our financial condition since certain payments arepaid in local currencies; ·manufacturing, customs, shipment and storage requirements; 44 Table of Contents ·cultural differences in medical practice and clinical research; and ·diminished protection of intellectual property in some countries. Even if ZYN002 or ZYN001 receive regulatory approval, they may still face future development and regulatory difficulties. If we obtain regulatory approval for ZYN002 or ZYN001, such approval would be subject to extensive ongoing requirementsby the DEA, FDA, EMA and other foreign regulatory authorities, including requirements related to the manufacture, qualitycontrol, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising,promotion, recordkeeping and reporting of safety and other post‑market information. The safety profile of any product willcontinue to be closely monitored by the FDA, EMA and other comparable foreign regulatory authorities. If the FDA, EMA,DEA or any other comparable foreign regulatory authority becomes aware of new safety information after approval of any ofour product candidates, these regulatory authorities may require labeling changes or establishment of a REMS, imposesignificant restrictions on a product’s indicated uses or marketing, initiate a change in the drug’s controlled substanceschedule, impose ongoing requirements for potentially costly post‑approval studies or post‑market surveillance, impose arecall or seek to withdraw marketing approval altogether. In addition, manufacturers of therapeutic products and their facilities are subject to continual review and periodic inspectionsby the FDA, the EMA and other comparable foreign regulatory authorities for compliance with cGMP. Further, manufacturersof controlled substances must obtain and maintain necessary DEA and state registrations and registrations with applicableforeign regulatory authorities, and must establish and maintain processes to ensure compliance with DEA and staterequirements and requirements of applicable foreign regulatory authorities governing, among other things, the storage,handling, security, recordkeeping and reporting for controlled substances. If we or a regulatory agency discover previouslyunknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with thefacility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturingfacility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we,our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatoryrequirements, a regulatory agency may, among other things: ·issue untitled letters, letters of administration or warning letters; ·mandate modifications to promotional materials or require us to provide corrective information to healthcarepractitioners; ·require us to enter into a consent decree, which can include imposition of various fines, reimbursements forinspection costs, required due dates for specific actions and penalties for noncompliance; ·seek an injunction or impose civil or criminal penalties or monetary fines; ·suspend or withdraw regulatory approval or suspend or revoke the facility’s controlled substance registration; ·suspend any ongoing clinical trials; ·require us to enter into a Memorandum of Agreement settling administrative or civil claims which can requirethe implementation of costly compliance programs; ·refuse to approve pending applications or supplements to applications filed by us; or ·seize or detain products or require us to initiate a product recall. 45 Table of Contents The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates andmay otherwise have a material adverse effect on our business, financial condition and results of operations. ZYN002 and ZYN001 will be subject to controlled substance laws and regulations; failure to receive necessary approvalsmay delay the launch of our products and failure to comply with these laws and regulations may adversely affect the resultsof our business operations. ZYN002 and ZYN001 contain controlled substances as defined in the CSA. Controlled substances that are pharmaceuticalproducts are subject to a high degree of regulation under the CSA, which establishes, among other things, certain registration,manufacturing quotas, security, recordkeeping, reporting, import, export and other requirements administered by the DEA.The DEA classifies controlled substances into five schedules: Schedule I, II, III, IV or V substances. Schedule I substances bydefinition have a high potential for abuse, have no currently “accepted medical use” in the United States, lack acceptedsafety for use under medical supervision, and may not be prescribed, marketed or sold in the United States. Pharmaceuticalproducts approved for use in the United States may be listed as Schedule II, III, IV or V, with Schedule II substancesconsidered to present the highest potential for abuse or dependence and Schedule V substances the lowest relative risk ofabuse among such substances. Schedule I and II drugs are subject to the strictest controls under the CSA, includingmanufacturing and procurement quotas, security requirements and criteria for importation. In addition, dispensing ofSchedule II drugs is further restricted. For example, they may not be refilled without a new prescription. While Cannabis and certain of its derivatives are Schedule I controlled substances, products approved for medical use in theUnited States that contain Cannabis or Cannabis extracts must be placed in Schedules II ‑ V, since approval by the FDAsatisfies the “accepted medical use” requirement. If and when ZYN002 or ZYN001 receives FDA approval, the DEA willmake a scheduling determination and place it in a schedule other than Schedule I in order for it to be prescribed to patients inthe United States. If approved by the FDA, we expect the finished dosage forms of ZYN002 and ZYN001 to be listed by theDEA as a Schedule II or III controlled substance. Consequently, their manufacture, importation, exportation, domesticdistribution, storage, sale and legitimate use will be subject to a significant degree of regulation by the DEA. The schedulingprocess may take one or more years beyond FDA approval, thereby significantly delaying the launch of ZYN002 orZYN001. However, DEA must issue a temporary order scheduling the drug within 90 days after FDA approves the drug andDEA receives a scientific and medical evaluation and scheduling recommendation from the Department of Health andHuman Services. Furthermore, if the FDA, DEA or any foreign regulatory authority determines that ZYN002 or ZYN001 mayhave potential for abuse, it may require us to generate more clinical data than that which is currently anticipated, whichcould increase the cost and/or delay the launch of ZYN002 or ZYN001. Because ZYN002 and ZYN001 contain active ingredients of Cannabis, which are Schedule I substances, to conductpreclinical studies and clinical trials with ZYN002 and ZYN001 in the United States prior to approval, each of our researchsites must submit a research protocol to the DEA and obtain and maintain a DEA researcher registration that will allow thosesites to handle and dispense ZYN002 and ZYN001 and to obtain the product from our manufacturer. If the DEA delays ordenies the grant of a research registration to one or more research sites, the preclinical studies or clinical trials could besignificantly delayed, and we could lose and be required to replace clinical trial sites, resulting in additional costs. We expect that ZYN002 and ZYN001 will be scheduled as Schedule II or III, as a result of which we will also need to identifywholesale distributors with the appropriate DEA registrations and authority to distribute the products to pharmacies andother healthcare providers, and these distributors would need to obtain Schedule II or III distribution registrations. The failureto obtain, or delay in obtaining, or the loss of any of those registrations could result in increased costs to us. If ZYN002 orZYN001 is a Schedule II drug, pharmacies would have to maintain enhanced security with alarms and monitoring systemsand they must adhere to additional recordkeeping and inventory requirements. This may discourage some pharmacies fromcarrying the product. Furthermore, state and federal enforcement actions, regulatory requirements, and legislation intended toreduce prescription drug abuse, such as the requirement that physicians consult a state prescription drug monitoring program,may make physicians less willing to prescribe, and pharmacies to dispense, Schedule II products. Further, if ZYN002 orZYN001 is a Schedule II drug, DEA must establish an annual46 Table of Contents aggregate quota for the amount that may be manufactured or produced in the United States based on the DEA’s estimate ofthe quantity needed to meet legitimate medical, scientific, research and industrial needs. This limited aggregate amount thatthe DEA allows to be produced in the United States each year is allocated among individual companies, which, in turn, mustannually apply to the DEA for individual manufacturing and procurement quotas. The quotas apply equally to themanufacturing of the active pharmaceutical ingredient and production of dosage forms. The DEA may adjust aggregateproduction quotas a few times per year, and individual manufacturing or procurement quotas from time to time during theyear, although the DEA has substantial discretion in whether or not to make such adjustments for individual companies. Afailure by us to obtain adequate quota could have a material adverse effect on our business, financial condition, results ofoperations and cash flows. We may manufacture the commercial supply of ZYN002 and ZYN001 outside of the United States. If ZYN002 or ZYN001 isapproved by the FDA and classified as a Schedule II or III substance, an importer can import for commercial purposes if itobtains from the DEA an importer registration and files an application with the DEA for an import permit for each import. Thefailure to identify an importer or obtain the necessary import authority, including specific quantities, could affect theavailability of ZYN002 or ZYN001 and have a material adverse effect on our business, results of operations and financialcondition. In addition, an application for a Schedule II importer registration must be published in the Federal Register, andthere is a waiting period for third party comments to be submitted. Individual states have also established controlled substance laws and regulations. Though state‑controlled substance lawsoften mirror federal law, because the states are separate jurisdictions, they may separately schedule our product candidates aswell. While some states automatically schedule a drug based on federal action, other states schedule drugs throughrulemaking or a legislative action. State scheduling may delay commercial sale of any product for which we obtain federalregulatory approval and adverse scheduling could have a material adverse effect on the commercial attractiveness of suchproduct. We or our partners must also obtain separate state registrations, permits or licenses in order to be able to obtain,handle, and distribute controlled substances for clinical trials or commercial sale, and failure to meet applicable regulatoryrequirements could lead to enforcement and sanctions by the states in addition to those from the DEA or otherwise arisingunder federal law. We currently manufacture the API for ZYN002 and ZYN001 in the United States and Canada and Europe. We are currentlyconducting Phase 2 clinical trials for ZYN002 in Australia and New Zealand. In addition, we may decide to develop,manufacture or commercialize our product candidates in additional countries. As a result, we will also be subject tocontrolled substance laws and regulations from the Therapeutic Goods Administration in Australia, Health Canada’s Office ofControlled Substances in Canada, the New Zealand Medicines and Medical Device Safety Authority in New Zealand andfrom other regulatory agencies in other countries where we develop, manufacture or commercialize ZYN002 or ZYN001 inthe future. We plan to submit NDAs for ZYN002 and ZYN001 to the FDA upon completion of all requisite clinical trials andwill require additional DEA approvals at such time as well. Product shipment delays could have a material adverse effect on our business, results of operations and financialcondition. The shipment, import and export of ZYN002 and ZYN001 and the API used to manufacture ZYN002 and ZYN001 willrequire import and export licenses. In the United States, the FDA, U.S. Customs and Border Protection, and the DEA; inCanada and Europe, where our API is also manufactured, the Canada Border Services Agency, Health Canada, the EMA andthe European Commission; in Australia and New Zealand, where we are currently conducting clinical trials, the AustralianCustoms and Board Protection Service the Therapeutic Goods Administration, the New Zealand Medicines and MedicalDevice Safety Authority and the New Zealand Customs Service; and in other countries, similar regulatory authorities,regulate the import and export of pharmaceutical products that contain controlled substances. Specifically, the import andexport process requires the issuance of import and export licenses by the relevant controlled substance authority in both theimporting and exporting country. We may not be granted, or if granted, maintain, such licenses from the authorities in certaincountries. Even if we obtain the relevant licenses, shipments of API and our product candidates may be held up in transit,which could cause significant delays and may lead to product batches being stored outside required temperature ranges.Inappropriate storage may damage the product shipment resulting in delays in clinical trials or, upon commercialization, apartial or total loss of revenue from one or more shipments of API or47 Table of Contents ZYN002 or ZYN001. A delay in a clinical trial or, upon commercialization, a partial or total loss of revenue from one or moreshipments of API or ZYN002 or ZYN001 could have a material adverse effect on our business, results of operations andfinancial condition. Failure to obtain regulatory approval in jurisdictions outside the United States and the European Union would prevent ourproduct candidates from being marketed in those jurisdictions. In order to market and sell our products in jurisdictions other than the United States and the European Union, we must obtainseparate marketing approvals and comply with numerous and varying regulatory requirements. The regulatory approvalprocess outside the United States and the European Union generally includes all of the risks associated with obtaining FDAapproval or the approval from the European Commission, but can involve additional testing. We may need to partner withthird parties in order to obtain approvals outside the United States and the European Union. In addition, in many countriesworldwide, it is required that the product be approved for reimbursement before the product can be approved for sale in thatcountry. We may not obtain approvals from regulatory authorities outside the United States and the European Union on atimely basis, if at all. Even if we were to receive approval in the United States or the European Union, approval by the FDA orthe European Commission does not ensure approval by regulatory authorities in other countries or jurisdictions. Similarly,approval by one regulatory authority outside the United States and the European Union would not ensure approval byregulatory authorities in other countries or jurisdictions or by the FDA or the European Commission. We may not be able tofile for marketing approvals and may not receive necessary approvals to commercialize our products in any market. If we areunable to obtain approval of our product candidates by regulatory authorities in other foreign jurisdictions, the commercialprospects of those product candidates may be significantly diminished and our business prospects could decline. Healthcare legislation, including potentially unfavorable pricing regulations or other healthcare reform initiatives, mayincrease the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates. In the United States there have been a number of legislative and regulatory changes and proposed changes regarding thehealthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulatepost‑approval activities or affect our ability to profitably sell any product candidates for which we obtain marketingapproval. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, orAffordable Care Act, among other things, imposes a significant annual fee on companies that manufacture or import brandedprescription drug products. It also contains substantial provisions intended to broaden access to health insurance, reduce orconstrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparencyrequirements for the healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medicaldevice manufacturers, and impose additional health policy reforms, any of which could negatively impact our business. Asignificant number of provisions are not yet, or have only recently become effective, but the Affordable Care Act is likely tocontinue the downward pressure on pharmaceutical and medical device pricing, especially under the Medicare program, andmay also increase our regulatory burdens and operating costs. In addition, other legislative changes have been proposed and adopted since passage of the Affordable Care Act. The BudgetControl Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend toCongress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of anamount greater than $1.2 trillion for the fiscal years 2012 through 2021, triggering the legislation’s automatic reduction toseveral government programs. This included aggregate reductions to Medicare payments to healthcare providers of up to2.0% per fiscal year, which went into effect in April 2013. Subsequent legislation extended the 2% reduction, on average, to2025. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among otherthings, reduced Medicare payments to several categories of healthcare providers and increased the statute of limitationsperiod for the government to recover overpayments to providers from three to five years. If we ever obtain regulatoryapproval and successfully commercialize ZYN002, ZYN001 or other product48 Table of Contents candidates that we may develop, these new laws may result in additional reductions in Medicare and other healthcarefunding, which could have a material adverse effect on our customers and accordingly, our financial operations. Legislative changes to the Affordable Care Act remain possible and appear likely in the 115th United States Congress andunder the Trump Administration. We expect that the Affordable Care Act, as well as other healthcare reform measures thathave been and may be adopted in the future, may result in more rigorous coverage criteria and in additional downwardpressure on the price that we receive for any approved product, and could seriously harm our future revenue. Any reductionin reimbursement from Medicare or other government programs may result in a similar reduction in payments from privatepayors. The implementation of cost containment measures or other healthcare reforms may compromise our ability togenerate revenue, attain profitability or commercialize our products. We have been granted orphan drug status by the FDA for ZYN002 for the treatment of FXS, but we may be unable tomaintain the benefits associated orphan drug status, including market exclusivity, which may cause our revenue, if any, tobe reduced. Regulatory authorities in some jurisdictions, including the United States and European Union, may designate drugs forrelatively small patient populations as orphan drugs. The FDA may grant orphan drug designation to drugs intended to treata rare disease or condition that affects fewer than 200,000 individuals annually in the United States, or, if the disease orcondition affects more than 200,000 individuals annually in the United States, if there is no reasonable expectation that thecost of developing and making the drug would be recovered from sales in the United States. In the European Union, theEMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of productsthat are intended for the diagnosis, prevention or treatment of life‑threatening or chronically debilitating conditions affectingnot more than five in 10,000 persons in the European Union. Additionally, designation is granted for products intended forthe diagnosis, prevention or treatment of a life‑threatening, seriously debilitating or serious and chronic condition and when,without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessaryinvestment in developing the drug. In the United States, orphan drug designation entitles a party to financial incentives, such as opportunities for grant fundingtowards clinical trial costs, tax credits for certain research and user fee waivers under certain circumstances. In addition, if aproduct receives the first FDA approval for the drug and indication for which it has orphan drug designation, the product isentitled to seven years of market exclusivity, which means the FDA may not approve any other application for the same drugfor the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiorityover the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent the FDA from approving a differentdrug for the same disease or condition, or the same drug for a different disease or condition. In the European Union, orphandrug designation also entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of marketexclusivity following drug approval. This period may be reduced to six years if the orphan drug designation criteria are nolonger met, including where it is shown that the product is sufficiently profitable so that market exclusivity is no longerjustified. As a result, even though ZYN002 has received orphan drug exclusivity in FXS in the United States, the FDA can still approveother drugs that have a different active ingredient for use in treating the same indication. If ZYN002 receives orphan drugexclusivity in the European Union, the European Commission could also, in defined circumstances, approve a competingproduct. Furthermore, the FDA can waive orphan drug exclusivity if we are unable to manufacture sufficient supply ofZYN002 or if the FDA finds that a subsequent applicant for FXS demonstrates clinical superiority to ZYN002. In addition,the European Commission could reduce the term of exclusivity if ZYN002 is sufficiently profitable. We have received orphan drug designation for ZYN002 in FXS from the FDA and may seek orphan drug designation in thefuture with the EMA, but exclusive marketing rights in the United States may be limited if we seek approval for an indicationbroader than the orphan designated indication and may be lost if the FDA or EMA later determines that the request fordesignation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet theneeds of patients with the rare disease or condition. 49 Table of Contents Even if we are able to commercialize ZYN002 or ZYN001, the products may not receive coverage and adequatereimbursement from third‑party payors, which could harm our business. The availability of reimbursement by governmental and private payors is essential for most patients to be able to affordexpensive treatments. Sales of our product candidates, if approved, will depend substantially on the extent to which the costsof these product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcaremanagement organizations, or reimbursed by government health administration authorities, private health coverage insurersand other third‑party payors. If reimbursement is not available, or is available only to limited levels, we may not be able tosuccessfully commercialize ZYN002 or ZYN001. Even if coverage is provided, the approved reimbursement amount may notbe high enough to allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment. In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MedicareModernization Act, established the Medicare Part D program and provided authority for limiting the number of drugs thatwill be covered in any therapeutic class thereunder. The Medicare Modernization Act, including its cost reductioninitiatives, could decrease the coverage available for any of our approved products. Furthermore, private payors often followMedicare in setting their own coverage policies. Therefore, any reduction in coverage that results from the MedicareModernization Act may result in a similar reduction from private payors. There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In theUnited States, the principal decisions about reimbursement for new medicines are typically made by the Centers forMedicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, or HHS, asCMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payorstend to follow CMS to a substantial degree. The intended use of a drug product by a physician can also affect pricing. For example, CMS could initiate a NationalCoverage Determination administrative procedure, by which the agency determines which uses of a therapeutic productwould and would not be reimbursable under Medicare. This determination process can be lengthy, thereby creating a longperiod during which the future reimbursement for a particular product may be uncertain. Outside the United States, particularly in EU Member States, the pricing of prescription drugs is subject to governmentalcontrol. In these countries, pricing negotiations or the successful completion of HTA procedures with governmentalauthorities can take considerable time after receipt of marketing authorization for a product. In addition, there can beconsiderable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of costcontainment measures. Certain countries allow companies to fix their own prices for medicines, but monitor and controlcompany profits. Political, economic and regulatory developments may further complicate pricing negotiations, and pricingnegotiations may continue after reimbursement has been obtained. Reference pricing used by various EU Member States andparallel distribution, or arbitrage between low‑priced and high‑priced EU member states, can further reduce prices. In somecountries, we or our collaborators may be required to conduct a clinical trial or other studies that compare thecost‑effectiveness of our product candidates to other available therapies in order to obtain or maintain reimbursement orpricing approval. Publication of discounts by third‑party payors or authorities may lead to further pressure on the prices orreimbursement levels within the country of publication and other countries. If reimbursement of any product candidateapproved for marketing is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business,financial condition, results of operations or prospects could be adversely affected. Our relationships with customers and third‑party payors will be subject to applicable anti‑kickback, fraud and abuse andother healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages,reputational harm and diminished profits and future earnings. Healthcare providers, physicians and third‑party payors play a primary role in the recommendation and prescription of anyproduct candidates for which we obtain marketing approval. Our future arrangements with third‑party payors and customersmay expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain thebusiness or financial arrangements and relationships through which we market, sell and distribute our50 Table of Contents products for which we obtain marketing approval. As a pharmaceutical company, even though we do not and will not controlreferrals of healthcare services or bill directly to Medicare, Medicaid or other third‑party payors, certain federal and statehealthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business.Restrictions under applicable federal and state healthcare laws and regulations that may affect our ability to operate includethe following: ·the U.S. federal healthcare Anti‑Kickback Statute impacts our marketing practices, educational programs,pricing policies and relationships with healthcare providers or other entities, by prohibiting, among otherthings, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directlyor indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or thepurchase, order or recommendation of, any good or service, for which payment may be made under a federalhealthcare program such as Medicare and Medicaid; ·federal civil and criminal false claims laws and civil monetary penalty laws impose criminal and civil penalties,including through civil whistleblower or qui tam actions, against individuals or entities for, among other things,knowingly presenting, or causing to be presented, false or fraudulent claims for payment of government funds(including through reimbursement by Medicare or Medicaid or other federal health care programs), which hasbeen applied to impermissible promotion of pharmaceutical products for off‑label uses, or making a falsestatement or record to avoid, decrease or conceal an obligation to pay money to the federal government; ·HIPAA, as amended by HITECH, among other things, imposes criminal and civil liability for executing ascheme to defraud any healthcare benefit program and also prohibits knowingly and willfully falsifying,concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement orrepresentation, or making or using any false writing or document knowing the same to contain any materiallyfalse, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcarebenefits, items or services; ·HIPAA, as amended by HITECH, among other things, also imposes obligations, including mandatorycontractual terms, with respect to safeguarding the privacy, security and transmission of individuallyidentifiable health information, and imposes notification obligations in the event of a breach of the privacy orsecurity individually identifiable health information; ·the federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requiresapplicable manufacturers of covered drugs, devices, biologics and medical supplies to report annually to HHSinformation related to payments and other transfers of value to physicians and teaching hospitals, andownership and investment interests held by physicians and their immediate family members; ·numerous federal and state laws and regulations that address privacy and data security, including state databreach notification laws, state health information privacy laws, and federal and state consumer protection laws(e.g., Section 5 of the FTC Act), govern the collection, use, disclosure and protection of health-related and otherpersonal information; ·analogous state laws and regulations, such as state anti‑kickback laws, false claims laws and privacy andsecurity of health information laws, may apply to sales or marketing arrangements, claims involving healthcareitems or services reimbursed by non‑governmental third‑party payors, including private insurers, or healthinformation; and ·certain state laws require pharmaceutical companies to adopt codes of conduct consistent with thepharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgatedby the federal government; restrict certain marketing-related activities including the provision of gifts, meals, orother items to certain health care providers; and/or require drug manufacturers to report51 Table of Contents information related to payments and other transfers of value to physicians and certain other healthcare providersor marketing expenditures. Comparable laws and regulations exist in the countries within the European Economic Area, or EEA. Although such laws arepartially based upon European Union law, they may vary from country to country. Healthcare specific, as well as generalEuropean Union and national laws, regulations and industry codes constrain, for example, our interactions with governmentofficials and healthcare professionals, and the collection and processing of personal health data. Non‑compliance with any ofthese laws or regulations could lead to criminal or civil liability. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws andregulations will involve substantial costs. It is possible that governmental authorities will conclude that our businesspractices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse orother healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any othergovernmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties,damages, fines, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, andthe curtailment or restructuring of our operations. If any physicians or other healthcare providers or entities with whom weexpect to do business are found to not be in compliance with applicable laws, they may be subject to criminal, civil oradministrative sanctions, including exclusions from government funded healthcare programs. Also, the U.S. Foreign Corrupt Practices Act and similar worldwide anti‑bribery laws generally prohibit companies and theirintermediaries from making improper payments to non‑U.S. officials for the purpose of obtaining or retaining business. Ourinternal control policies and procedures may not protect us from reckless or negligent acts committed by our employees,future distributors, licensees or agents. Violations of these laws, or allegations of such violations, could result in fines,penalties or prosecution and have a negative impact on our business, results of operations and reputation. Recent federal legislation and actions by state and local governments may permit reimportation of drugs from foreigncountries into the United States, including foreign countries where the drugs are sold at lower prices than in the UnitedStates, which could materially adversely affect our business and financial condition. We may face competition for ZYN002 and ZYN001, if approved, from cheaper cannabinoid therapies sourced from foreigncountries that have placed price controls on pharmaceutical products. The Medicare Modernization Act contains provisionsthat may change U.S. importation laws and expand pharmacists' and wholesalers' ability to import cheaper versions of anapproved drug and competing products from Canada, where there are government price controls. These changes to U.S.importation laws will not take effect unless and until the Secretary of Health and Human Services certifies that the changeswill pose no additional risk to the public's health and safety and will result in a significant reduction in the cost of productsto consumers. The Secretary of Health and Human Services has so far declined to approve a reimportation plan. Proponents ofdrug reimportation may attempt to pass legislation that would directly allow reimportation under certain circumstances.Legislation or regulations allowing the reimportation of drugs, if enacted, could decrease the price we receive for anyproducts that we may develop, including ZYN002 and ZYN001, and adversely affect our future revenues and prospects forprofitability. Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standardsand requirements, which could subject us to significant liability and harm our reputation. We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentionalfailures to comply with DEA, FDA or EMA regulations or similar regulations of other foreign regulatory authorities or toprovide accurate information to the DEA, FDA, EMA or other foreign regulatory authorities. In addition, misconduct byemployees could include intentional failures to comply with certain manufacturing standards, to comply with U.S. federaland state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced bycomparable foreign regulatory authorities, to report financial information or data accurately or to disclose unauthorizedactivities to us. Employee misconduct could also involve the improper use of information obtained in the course of clinicaltrials, which could result in regulatory sanctions and serious harm to our reputation. We have implemented, and will enforce,a Code of Business Conduct and Ethics, but it is not always possible to identify and deter52 Table of Contents employee misconduct, and the precautions we take to detect and prevent this activity, such as employee training onenforcement of the Code of Business Conduct and Ethics, may not be effective in controlling unknown or unmanaged risksor losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be incompliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defendingourselves or asserting our rights, those actions could have a significant impact on our business and results of operations,including the imposition of significant fines or other sanctions. If we are unable to develop sales, marketing and distribution capabilities or enter into agreements with third parties toperform these functions on acceptable terms, we may be unable to generate revenue. We do not currently have any sales, marketing or distribution capabilities. If ZYN002 or ZYN001 is approved, we will needto develop internal sales, marketing and distribution capabilities to commercialize such products, which would be expensiveand time‑consuming, or enter into collaborations with third parties to perform these services. If we decide to market ourproducts directly, we will need to commit significant financial and managerial resources to develop a marketing and salesforce with technical expertise and supporting distribution, administration and compliance capabilities. If we rely on thirdparties with such capabilities to market our products or decide to co‑promote products with collaborators, we will need toestablish and maintain marketing and distribution arrangements with third parties, and there can be no assurance that we willbe able to enter into such arrangements on acceptable terms or at all. In entering into third‑party marketing or distributionarrangements, any revenue we receive will depend upon the efforts of the third parties and there can be no assurance that suchthird parties will establish adequate sales and distribution capabilities or be successful in gaining market acceptance of anyapproved product. If we are not successful in commercializing any product approved in the future, either on our own orthrough third parties, our business, financial condition and results of operations could be materially adversely affected. Our product candidates, if approved, may be unable to achieve broad market acceptance and, consequently, limit ourability to generate revenue from new products. Even when product development is successful and regulatory approval has been obtained, our ability to generate significantrevenue depends on the acceptance of our products by physicians and patients. The market acceptance of any productdepends on a number of factors, including but not limited to awareness of a product’s availability and benefits, the indicationstatement and warnings approved by regulatory authorities in the product label, continued demonstration of efficacy andsafety in commercial use, perceptions by members of the health care community, including physicians, about the safety andeffectiveness of our drugs, physicians’ willingness to prescribe the product, reimbursement from third‑party payors such asgovernment healthcare systems and insurance companies, the price of the product, pharmacological benefit and cost-effectiveness of our products relative to competing products; the nature of any post‑approval risk management plansmandated by regulatory authorities, competition, and the effectiveness of marketing and distribution efforts. Any factorspreventing or limiting the market acceptance of our product candidates could have a material adverse effect on our business,results of operations and financial condition. If we receive regulatory approvals, we intend to market ZYN002 and ZYN001 in multiple jurisdictions where we havelimited or no operating experience and may be subject to increased business and economic risks that could affect ourfinancial results. If we receive regulatory approvals, we plan to market ZYN002 and ZYN001 in jurisdictions where we have limited or noexperience in marketing, developing and distributing our products. Certain markets have substantial legal and regulatorycomplexities that we may not have experience navigating. We are subject to a variety of risks inherent in doing businessinternationally, including risks related to the legal and regulatory environment in non‑U.S. jurisdictions, including withrespect to privacy and data security, trade control laws and unexpected changes in laws, regulatory requirements andenforcement, as well as risks related to fluctuations in currency exchange rates and political, social and economic instabilityin foreign countries. If we are unable to manage our international operations successfully, our financial results could beadversely affected. 53 Table of Contents In addition, controlled substance legislation may differ in other jurisdictions and could restrict our ability to market ourproducts internationally. Most countries are parties to the Single Convention on Narcotic Drugs 1961, which governsinternational trade and domestic control of narcotic substances, including Cannabis extracts. Countries may interpret andimplement their treaty obligations in a way that creates a legal obstacle to us obtaining marketing approval for ZYN002 orZYN001 in those countries. These countries may not be willing or able to amend or otherwise modify their laws andregulations to permit ZYN002 or ZYN001 to be marketed, or achieving such amendments to the laws and regulations maytake a prolonged period of time. We would be unable to market ZYN002 or ZYN001 in countries with such obstacles in thenear future or perhaps at all without modification to laws and regulations. ZYN002 and ZYN001 contain controlled substances, the use of which may generate public controversy. Since our product candidates contain controlled substances, their regulatory approval may generate public controversy.Political and social pressures and adverse publicity could lead to delays in approval of, and increased expenses for, ourproduct candidates. These pressures could also limit or restrict the introduction and marketing of our product candidates.Adverse publicity from Cannabis misuse or adverse side effects from Cannabis or other cannabinoid products may adverselyaffect the commercial success or market penetration achievable by our product candidates. The nature of our business attractsa high level of public and media interest, and in the event of any resultant adverse publicity, our reputation may be harmed. Any inability to attract and retain qualified key management and technical personnel would impair our ability toimplement our business plan. Our success largely depends on the continued service of key management and other specialized personnel, includingArmando Anido, our chairman and chief executive officer, Terri B. Sebree, our president, James Fickenscher, our chieffinancial officer, and Suzanne M. Hanlon, our general counsel and vice president of human resources. The loss of one or moremembers of our management team or other key employees could delay our research and development programs andmaterially harm our business, financial condition, results of operations and prospects. The relationships that our team hascultivated within the life sciences industry makes us particularly dependent upon their continued employment with us.Because our management team is not obligated to provide us with continued service, they could terminate their employmentor services with us at any time without penalty, subject to providing any required advance notice. We do not maintain keyperson life insurance policies for any members of our management team. Our future success and growth will depend in largepart on our continued ability to attract and retain other highly qualified scientific, technical and management personnel, aswell as personnel with expertise in clinical testing, manufacturing, governmental regulation and commercialization. We facecompetition for personnel from other companies, universities, public and private research institutions, government entitiesand other organizations. We face substantial competition, which may result in others discovering, developing or commercializing products before ormore successfully than we do. The development and commercialization of drugs is highly competitive. We compete with a variety of multinationalpharmaceutical companies and specialized biotechnology companies, as well as products and processes being developed atuniversities and other research institutions. Our competitors have developed, are developing or will develop productcandidates and processes competitive with our product candidates. Competitive therapeutic treatments include those thathave already been approved and accepted by the medical community and any new treatments that may enter the market. Webelieve that a significant number of products are currently available, under development, and may become commerciallyavailable in the future, for the treatment of indications for which we may try to develop product candidates. If either of ourproduct candidates, ZYN002 or ZYN001, is approved for the indications we are currently pursuing, it will compete with arange of therapeutic treatments that are either in development or currently marketed. We are aware of multiple companies that are working in the Cannabis therapeutic area, including pharmaceutical companiessuch as GW, which markets Sativex, a botanical cannabinoid oral mucosal for the treatment of spasticity due to multiplesclerosis and which is also in development in neuropathic pain in several foreign countries and is seeking FDA approval inthe United States, and is developing Epidiolex, a liquid formulation of highly purified CBD extract, as54 Table of Contents a treatment for DS, LGS and various childhood epilepsy syndromes; Insys, which is seeking FDA approval for anorally‑administered liquid formulation of its synthetic CBD compound as a treatment for DS, LGS, childhood epilepsysyndromes and glioblastoma; and Kalytera Therapeutics, Inc. which is developing an oral formulation of CBD for thetreatment of acute GvHD, along with several other companies in early stage discovery and preclinical development utilizingCBD and/or THC. More established companies may have a competitive advantage over us due to their greater size, cash flows and institutionalexperience. Compared to us, many of our competitors may have significantly greater financial, technical and humanresources. As a result of these factors, our competitors may have an advantage in marketing their approved products and mayobtain regulatory approval of their product candidates before we are able to, which may limit our ability to develop orcommercialize our product candidates. Our competitors may also develop drugs that are safer, more effective, more widelyused and less expensive than ours, and may also be more successful than us in manufacturing and marketing their products.These advantages could materially impact our ability to develop and, if approved, commercialize ZYN002 or ZYN001successfully. Our product candidates may compete with non‑synthetic cannabinoid drugs, including therapies such as GW’s Sativex orEpidiolex. Our product candidates may also compete with medical and recreational marijuana, in markets where therecreational and/or medical use of marijuana is legal. There is support in the United States for further legalization ofmarijuana. In markets where recreational and/or medical marijuana is not legal, our product candidates may compete withmarijuana purchased in the illegal drug market. We cannot assess the extent to which patients may utilize marijuana obtainedillegally for the treatment of the indications for which we are developing ZYN002 and ZYN001. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources beingconcentrated among a smaller number of our competitors. Smaller and other early‑stage companies may also prove to besignificant competitors, particularly through collaborative arrangements with large and established companies. Thesecompanies compete with us in recruiting and retaining qualified scientific, management and commercial personnel,establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies complementaryto, or necessary for, our programs. Product liability lawsuits against us could cause us to incur substantial liabilities. Our use of ZYN002 and ZYN001 in clinical trials and the sale of ZYN002 and ZYN001, if approved, exposes us to the risk ofproduct liability claims. Product liability claims might be brought against us by patients, healthcare providers or othersselling or otherwise coming into contact with ZYN002 or ZYN001. For example, we may be sued if any product we developallegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Anysuch product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn ofdangers inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability,and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject toproduct liability claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. Inaddition, regardless of merit or eventual outcome, product liability claims may result in, among other things: ·withdrawal of patients from our clinical trials; ·substantial monetary awards to patients or other claimants; ·decreased demand for ZYN002 or ZYN001 following marketing approval, if obtained; ·damage to our reputation and exposure to adverse publicity; ·increased FDA warnings on product labels or increased warnings imposed by the European Commission; ·litigation costs;55 Table of Contents ·distraction of management’s attention from our primary business; ·loss of revenue; and ·the inability to successfully commercialize ZYN002 or ZYN001, if approved. Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we maysuffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintaininsurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when weobtain marketing approval for our product candidates, we intend to expand our insurance coverage to include the sale ofcommercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms orin adequate amounts. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated sideeffects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial,particularly in light of the size of our business and financial resources. A product liability claim or series of claims broughtagainst us could cause our share price to decline and, if we are unsuccessful in defending such a claim or claims and theresulting judgments exceed our insurance coverage, our financial condition, results of operations, business and prospectscould be materially adversely affected. Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches,service interruptions, or data corruption could significantly disrupt our operations and adversely affect our business andoperating results. We rely on information technology, telephone networks and systems, including the internet, to process and transmit sensitiveelectronic information and to manage or support a variety of business processes and activities. We use enterprise informationtechnology systems to record, process, and summarize financial information and results of operations for internal reportingpurposes and to comply with regulatory, financial reporting, legal, and tax requirements. Despite the implementation ofsecurity measures, our information technology systems, and those of our third-party contractors and consultants, arevulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy or other significantdisruption. Any such successful attacks could result in the theft of intellectual property or other misappropriation of assets,or otherwise compromise our confidential or proprietary information and disrupt our operations. Cyber-attacks are becomingmore sophisticated and frequent, and our systems could be the target of malware and other cyber-attacks. We have invested inour systems and the protection of our data to reduce the risk of an intrusion or interruption, and we monitor our systems on anongoing basis for any current or potential threats. We can give no assurances that these measures and efforts will preventinterruptions or breakdowns. If we are unable to detect or prevent a security breach or cyber-attack or other disruption fromoccurring, then we could incur losses or damage to our data, or inappropriate disclosure of our confidential information orthat of others; and we could sustain damage to our reputation, suffer disruptions to our research and development and incurincreased operating costs including costs to mitigate any damage caused and protect against future damage, and be exposedto additional regulatory scrutiny or penalties and to civil litigation and possible financial liability. For instance, the loss ofpreclinical or clinical data could result in delays in our development and regulatory filing efforts and significantly increaseour costs. Our failure to comply with data protection laws and regulations could lead to government enforcement actions andsignificant penalties against us, and adversely impact our operating results. We are subject to U.S. data protection laws and regulations (i.e., laws and regulations that address privacy and data security)at both the federal and state levels. The legislative and regulatory landscape for data protection continues to evolve, and inrecent years there has been an increasing focus on privacy and data security issues. Numerous federal and state laws,including state data breach notification laws, state health information privacy laws, and federal and state consumerprotection laws, govern the collection, use, and disclosure of health-related and other personal information. In addition, wemay obtain health information from third parties (e.g., healthcare providers who prescribe our products) that are subject toprivacy and security requirements under HIPAA. 56 Table of Contents EU Member States, Switzerland and other countries have also adopted data protection laws and regulations, which imposesignificant compliance obligations. For example, the collection and use of personal health data in the European Union isgoverned by the provisions of the EU Data Protection Directive, or the Directive. The Directive and the nationalimplementing legislation of the EU Member States impose strict obligations and restrictions on the ability to collect, analyzeand transfer personal data, including health data from clinical trials and adverse event reporting. In particular, theseobligations and restrictions concern the consent of the individuals to whom the personal data relates, the informationprovided to the individuals, notification of data processing obligations to the competent national data protection authoritiesand the security and confidentiality of the personal data. Data protection authorities from the different EU Member Statesmay interpret the Directive and national laws differently and impose additional requirements, which add to the complexity ofprocessing personal data in the EU. Our failure to comply with these laws, or changes in the way in which these laws are implemented, could lead to governmentenforcement actions and significant penalties against us, and adversely impact our operating results. Risks Related to Our Dependence on Third Parties We rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carryout their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for orcommercialize our product candidates. We rely on CROs, clinical data management organizations and consultants to design, conduct, supervise and monitor ourpreclinical studies and clinical trials. We and our CROs are required to comply with various regulations, including GCP,which are enforced by the FDA, and guidelines of the Competent Authorities of Member States of the EEA and comparableforeign regulatory authorities to ensure that the health, safety and rights of patients are protected in clinical development andclinical trials, and that trial data integrity is assured. Regulatory authorities ensure compliance with these requirementsthrough periodic inspections of trial sponsors, principal investigators and trial sites. Our reliance on third parties that we donot control does not relieve us of these responsibilities and requirements. If we or any of our CROs fail to comply withapplicable requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, theEuropean Commission or other comparable foreign regulatory authorities may require us to perform additional clinical trialsbefore approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority,such regulatory authority will determine that any of our clinical trials comply with such requirements. In addition, ourclinical trials must be conducted with products produced under cGMP requirements, which mandate, among other things, themethods, facilities and controls used in manufacturing, processing and packaging of a drug product to ensure its safety andidentity. Failure to comply with these regulations may require us to repeat preclinical studies and clinical trials, which woulddelay the regulatory approval process. Our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannotcontrol whether or not they devote sufficient time and resources to our ongoing clinical and preclinical programs. If CROs donot successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy ofthe clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements orfor other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatoryapproval for or successfully commercialize our product candidates. As a result, our operations and the commercial prospectsfor our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed orreduced. In addition, operations of our CROs could be affected by earthquakes, power shortages, telecommunicationsfailures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other naturalor man‑made disasters or business interruptions. If their facilities are unable to operate because of an accident or incident,even for a short period of time, some or all of our research and development programs may be harmed or delayed and ouroperations and financial condition could suffer. Because we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing thesefunctions involves risk that third parties may not perform to our standards, may not produce results in a timely manner or mayfail to perform at all. In addition, the use of third‑party service providers requires us to disclose our proprietary information tothese parties, which could increase the risk that this information will be misappropriated. We currently57 Table of Contents have a small number of employees, which limits the internal resources we have available to identify and monitor ourthird‑party providers. To the extent we are unable to identify and successfully manage the performance of third‑party serviceproviders in the future, our business may be adversely affected. Though we carefully manage our relationships with ourCROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays orchallenges will not have a material adverse impact on our business, financial condition and prospects. We rely on third‑party manufacturers and suppliers to produce preclinical and clinical supplies, and intend to rely onthird-party manufacturers for commercial supplies, of APIs and final dosage forms for ZYN002 and ZYN001, if approved. We rely on third parties to supply the materials for, and manufacture, our research and development, and preclinical andclinical trial APIs. We do not own manufacturing facilities or supply sources for such components and materials. There can beno assurance that our supply of research and development, preclinical and clinical development drugs and other materialswill not be limited, interrupted, restricted in certain geographic regions or of satisfactory quality or continue to be availableat acceptable prices. In particular, any replacement of our API manufacturer could require significant effort and expertisebecause there may be a limited number of qualified manufacturers. The manufacturing process for our product candidates is subject to review by the FDA, EMA, DEA and other foreignregulatory authorities. Suppliers and manufacturers must meet applicable manufacturing requirements and undergo rigorousfacility and process validation tests required by regulatory authorities in order to comply with regulatory standards such ascGMP. In addition, our manufacturers must ensure consistency among batches, including preclinical, clinical and, ifapproved, marketing batches. Demonstrating such consistency may require typical manufacturing controls as well as clinicaldata. Our manufacturers must also ensure that our batches conform to complex release specifications. Further, manufacturersof controlled substances must obtain and maintain necessary DEA and state registrations and registrations with applicableforeign regulatory authorities, and must establish and maintain processes to ensure compliance with DEA and staterequirements and requirements of applicable foreign regulatory authorities governing, among other things, the storage,handling, security, recordkeeping and reporting for controlled substances. In the event that any of our suppliers ormanufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing orotherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, we may beforced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter intoan agreement with another third party, which we may not be able to do on reasonable terms, if at all. In some cases, thetechnical skills or technology required to manufacture our product candidates may be unique or proprietary to the originalmanufacturer and we may have difficulty, or there may be contractual restrictions prohibiting us from, transferring such skillsor technology to another third party and a feasible alternative may not exist. These factors would increase our reliance onsuch manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufactureour product candidates. If we are required to change manufacturers for any reason, we will be required to verify that the newmanufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations andguidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to developproduct candidates in a timely manner or within budget. We expect to continue to rely on third‑party manufacturers if we receive regulatory approval for any product candidate. Tothe extent that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend on thesethird parties to perform their obligations in a timely manner consistent with contractual and regulatory requirements,including those related to quality control and assurance. If we are unable to obtain or maintain third‑party manufacturing forproduct candidates, or to do so on commercially reasonable terms, we may not be able to develop and commercialize ourproduct candidates successfully. Our or a third party’s failure to execute on our manufacturing requirements could adverselyaffect our business in a number of ways, including: ·an inability to initiate or continue preclinical studies or clinical trials of product candidates underdevelopment; ·delay in submitting regulatory applications, or receiving regulatory approvals, for product candidates;58 Table of Contents ·loss of the cooperation of a collaborator; ·subjecting our product candidates to additional inspections by regulatory authorities; and ·in the event of approval to market and commercialize a product candidate, an inability to meet commercialdemands for our products. In addition, our ability to obtain materials from these suppliers could be disrupted if the operations of these manufacturers areaffected by earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires,extreme weather conditions, medical epidemics and other natural or man‑made disasters or business interruptions. If theirfacilities are unable to operate because of an accident or incident, even for a short period of time, some or all of our researchand development programs may be harmed or delayed and our operations and financial condition could suffer. Ourthird‑party manufacturers also may use hazardous materials, including chemicals and compounds that could be dangerous tohuman health and safety or the environment, and their operations may also produce hazardous waste products. In the event ofcontamination or injury, our third‑party manufacturers could be held liable for damages or be penalized with fines in anamount exceeding their resources, which could result in our clinical trials or regulatory approvals being delayed orsuspended. If a collaborative partner terminates or fails to perform its obligations under an agreement with us, the commercializationof ZYN002 or ZYN001, if approved, could be delayed or terminated. We are not currently party to any collaborative arrangements for the commercialization of ZYN002 or ZYN001, if approved,or similar arrangements, although we may pursue such arrangements before any commercialization of ZYN002 or ZYN001, ifapproved. If we enter into future collaborative arrangements for the commercialization of any product candidate or similararrangements and any of our collaborative partners does not devote sufficient time and resources to a collaborationarrangement with us, we may not realize the potential commercial benefits of the arrangement, and our results of operationsmay be materially adversely affected. In addition, if any such future collaboration partner were to breach or terminate itsarrangements with us, the commercialization of any product candidate could be delayed, curtailed or terminated. Much of the potential revenue from future collaborations may consist of contingent payments, such as payments forachieving regulatory milestones or royalties payable on sales of drugs. The milestone and royalty revenue that we mayreceive under these collaborations will depend upon our collaborators’ ability to successfully develop, introduce, market andsell new products. In addition, collaborators may decide to enter into arrangements with third parties to commercializeproducts developed under collaborations using our technologies, which could reduce the milestone and royalty revenue thatwe may receive, if any. Future collaboration partners may fail to develop or effectively commercialize products using ourproducts or technologies, which could have a material adverse effect on our operating results and financial condition. Risks Related to Our Intellectual Property If we are unable to protect our intellectual property rights or if our intellectual property rights are inadequate for ourtechnology and product candidates, our competitive position could be harmed. Our commercial success will depend in large part on our ability to obtain and maintain patent and other intellectual propertyprotection in the U.S. and other countries with respect to our proprietary technology and products. We rely on trade secret,patent, copyright and trademark laws, and confidentiality and other agreements with employees and third parties, all ofwhich offer only limited protection. We seek to protect our proprietary position by filing and prosecuting patent applicationsin the United States and abroad related to our novel technologies and products that are important to our business. 59 Table of Contents The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legaland factual questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity,enforceability and commercial value of our patents are highly uncertain. The steps we have taken to protect our proprietaryrights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectualproperty rights, both inside and outside the United States. Our pending applications cannot be enforced against third partiespracticing the technology claimed in such applications unless and until a patent issues from such applications. Further, theexamination process may require us to narrow the claims for our pending patent applications, which may limit the scope ofpatent protection that may be obtained if these applications issue. We do not know whether any of the pending patentapplications for any of our product candidates will result in the issuance of patents that protect our technology or products,or if any of our issued patents will effectively prevent others from commercializing competitive technologies and products.The rights already granted under any of our currently issued patents and those that may be granted under future issuedpatents may not provide us with the proprietary protection or competitive advantages we are seeking. If we are unable toobtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained isnot sufficient, our competitors could develop and commercialize technology and products similar or superior to ours, and ourability to successfully commercialize our technology and products may be adversely affected. It is also possible that we willfail to identify patentable aspects of inventions made in the course of our development and commercialization activitiesbefore it is too late to obtain patent protection on them. Because the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, our issued patentsmay be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in the loss of patentprotection, the narrowing of claims in such patents or the invalidity or unenforceability of such patents, which could limitour ability to stop others from using or commercializing similar or identical technology and products, or limit the duration ofthe patent protection for our technology and products. Publications of discoveries in the scientific literature often lag behindthe actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until18 months after filing. Therefore we cannot be certain that we were the first to make the inventions claimed in our ownedpatents or pending patent applications, or that we were the first to file for patent protection of such inventions. Protecting against the unauthorized use of our patented technology, trademarks and other intellectual property rights isexpensive, difficult and may in some cases not be possible. In some cases, it may be difficult or impossible to detectthird‑party infringement or misappropriation of our intellectual property rights, even in relation to issued patent claims, andproving any such infringement may be even more difficult. Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission,fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reducedor eliminated for non‑compliance with these requirements. The United States Patent and Trademark Office, or U.S. PTO, and various foreign national or international patent agenciesrequire compliance with a number of procedural, documentary, fee payment and other similar provisions during the patentapplication process. Periodic maintenance fees on any issued patent are due to be paid to the U.S. PTO and various foreignnational or international patent agencies in several stages over the lifetime of the patent. While an inadvertent lapse can inmany cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situationsin which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial orcomplete loss of patent rights in the relevant jurisdiction. Non‑compliance events that could result in abandonment or lapseof patent rights include, but are not limited to, failure to timely file national and regional stage patent applications based onour international patent application, failure to respond to official actions within prescribed time limits, non‑payment of feesand failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applicationscovering our product candidates, our competitors might be able to enter the market, which would have a material adverseeffect on our business. 60 Table of Contents We may become subject to claims by third parties asserting that we or our employees have misappropriated theirintellectual property, or claiming ownership of what we regard as our own intellectual property. Our commercial success depends upon our ability to develop, manufacture, market and sell our product candidates, and touse our related proprietary technologies without violating the intellectual property rights of others. We may become party to,or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to ourproduct candidates, including interference or derivation proceedings before the U.S. PTO. Third parties may assertinfringement claims against us based on existing patents or patents that may be granted in the future. If we are found toinfringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continuecommercializing our product candidates. However, we may not be able to obtain any required license on commerciallyreasonable terms or at all. Under certain circumstances, we could be forced, including by court order, to ceasecommercializing the applicable product candidate. In addition, in any such proceeding or litigation, we could be foundliable for monetary damages. A finding of infringement could prevent us from commercializing our product candidates orforce us to cease some of our business operations, which could materially harm our business. Any claims by third parties thatwe have misappropriated their confidential information or trade secrets could have a similar negative impact on our business. While our preclinical studies and clinical trials are ongoing, we believe that the use of ZYN002 and ZYN001 in thesepreclinical studies and clinical trials falls within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in theUnited States, which exempts from patent infringement liability activities reasonably related to the development andsubmission of information to the FDA, or the Clinical Development Exemption. As ZYN002 and ZYN001 progress towardcommercialization, the possibility of a patent infringement claim against us increases. We attempt to ensure that our productcandidates and the methods we employ to manufacture them, as well as the methods for their uses we intend to promote, donot infringe other parties’ patents and other proprietary rights. There can be no assurance they do not, however, andcompetitors or other parties may assert that we infringe their proprietary rights in any event. We are aware of an issued U.S. patent and corresponding foreign patent owned by a third party with claims that are directedto a method of treating partial seizures by administering CBD to a patient where the CBD is present in an amount to providea daily dose of at least 400mg. This patent could be construed to cover ZYN002 for our refractory epilepsy developmentprogram if the therapeutic dose for CBD contained in ZYN002 is determined to be at or above 400mg. If and when ZYN002is approved by the FDA for treatment of refractory epileptic focal seizures, if it has a label that contains dosing of ZYN002with CBD at or above 400mg, such third party may then seek to enforce its patent by filing a patent infringement lawsuitagainst us. In such lawsuit, we may incur substantial expenses defending our rights to commercialize ZYN002 for refractoryepilepsy, and in connection with such lawsuit and under certain circumstances, it is possible that we could be required tocease or delay the commercialization of ZYN002 for refractory epilepsy and/or be required to pay monetary damages or otheramounts, including royalties on the sales of ZYN002 for refractory epilepsy. Moreover, such lawsuit may also consumesubstantial time and resources of our management team and board of directors. The threat or consequences of such a lawsuitmay also result in royalty and other monetary obligations, which may adversely affect our results of operations and financialcondition. We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, timeconsuming and unsuccessful and have a material adverse effect on the success of our business. Competitors may infringe our patents or misappropriate or otherwise violate our intellectual property rights. To counterinfringement or unauthorized use, litigation may be necessary in the future to enforce or defend our intellectual propertyrights, to protect our trade secrets or to determine the validity and scope of our own intellectual property rights or theproprietary rights of others. Also, third parties may initiate legal proceedings against us to challenge the validity or scope ofintellectual property rights we own. These proceedings can be expensive and time consuming. Many of our current andpotential competitors have the ability to dedicate substantially greater resources to defend their intellectual property rightsthan we can. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon ormisappropriating our intellectual property. Litigation could result in substantial costs and diversion of managementresources, which could harm our business and financial results. In addition, in an infringement proceeding, a court maydecide that a patent owned by us is invalid or unenforceable, or may refuse to stop the other party from using the61 Table of Contents technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in anylitigation proceeding could put one or more of our patents at risk of being invalidated, held unenforceable or interpretednarrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual propertylitigation, there is a risk that some of our confidential information could be compromised by disclosure during this type oflitigation. There could also be public announcements of the results of hearings, motions or other interim proceedings ordevelopments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effecton the price of shares of our common stock. If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of ourtechnology and products could be significantly diminished. We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection isappropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements withour current and former employees, consultants, outside scientific collaborators, sponsored researchers, contractmanufacturers, vendors and other advisors to protect our trade secrets and other proprietary information. These agreementsmay not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event ofunauthorized disclosure of confidential information. In addition, we cannot guarantee that we have executed theseagreements with each party that may have or have had access to our trade secrets. Any party with whom we or they haveexecuted such an agreement may breach that agreement and disclose our proprietary information, including our trade secrets,and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive andtime‑consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are lesswilling or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independentlydeveloped by a competitor, we would have no right to prevent them, or those to whom they disclose such trade secrets, fromusing that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independentlydeveloped by a competitor or other third‑party, our competitive position would be harmed. We may not be able to protect our intellectual property rights throughout the world. Filing, prosecuting and defending patents on all of our product candidates throughout the world would be prohibitivelyexpensive. Therefore, we have filed applications and/or obtained patents only in key markets such as the United States,Canada, Japan and Europe. Competitors may use our technologies in jurisdictions where we have not obtained patentprotection to develop their own products and, further, may be able to export otherwise infringing products to territories wherewe have patent protection but where enforcement is not as strong as that in the United States. These products may competewith our products in jurisdictions where we do not have any issued patents and our patent claims or other intellectualproperty rights may not be effective or sufficient to prevent them from so competing. Many companies have encountered significant problems in protecting and defending intellectual property rights in certainforeign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor theenforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, which couldmake it difficult for us to stop the infringement of our patents or marketing of competing products in violation of ourproprietary rights generally. For example, an April 2016 report from the Office of the United States Trade Representativeidentified a number of countries, including India and China, where challenges to the procurement and enforcement of patentrights have been reported. Several countries, including India and China, have been listed in the report every year since 1989.As a result, proceedings to enforce our patent rights in certain foreign jurisdictions could result in substantial cost and divertour efforts and attention from other aspects of our business and could be unsuccessful. 62 Table of Contents Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount oftime. Given the amount of time required for the development, testing and regulatory review of new product candidates, patentsprotecting such candidates might expire before or shortly after such candidates are commercialized. We expect to seekextensions of patent terms in the United States and, if available, in other countries where we are prosecuting patents. In theUnited States, the Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up tofive years beyond the normal expiration of the patent, which is limited to the approved indication (or any additionalindications approved during the period of extension). However, the applicable authorities, including the FDA and the U.S.PTO, and any equivalent regulatory authorities in other countries, may not agree with our assessment of whether suchextensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than werequest. If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials byreferencing our clinical and preclinical data and launch their product earlier than might otherwise be the case. Intellectual property rights do not necessarily address all potential threats to our competitive advantage. The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rightshave limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. Thefollowing examples are illustrative: ·others may be able to make compounds that are the same as or similar to our product candidates but that are notcovered by the claims of the patents that we own; ·we might not have been the first to make the inventions covered by the issued patents or pending patentapplications that we own; ·we might not have been the first to file patent applications covering certain of our inventions; ·others may independently develop similar or alternative technologies or duplicate any of our technologieswithout infringing our intellectual property rights; ·it is possible that our pending patent applications will not lead to issued patents; ·issued patents that we own may not provide us with any competitive advantages, or may be held invalid orunenforceable as a result of legal challenges; ·our competitors might conduct research and development activities in the United States and other countries thatprovide a safe harbor from patent infringement claims for certain research and development activities, as well asin countries where we do not have patent rights and then use the information learned from such activities todevelop competitive products for sale in our major commercial markets; ·we may not develop additional proprietary technologies that are patentable; and ·the patents of others may have an adverse effect on our business. Risks Related to Ownership of Our Common Stock The market price and trading volume of our stock may be volatile. The trading price of our common stock has been, and may continue to be, volatile and could be subject to wide fluctuationsin response to various factors, some of which are beyond our control. In addition, the trading volume of our63 Table of Contents common stock may fluctuate and cause significant price variations to occur. In addition to the factors discussed in this “RiskFactors” section and elsewhere in this Report, these factors include: ·the success of competitive products; ·regulatory actions with respect to our product candidates or our competitors’ products and product candidates; ·actual or anticipated changes in our growth rate relative to our competitors; ·announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures,collaborations or capital commitments; ·results of clinical trials of ZYN002, ZYN001 or product candidates of our competitors; ·regulatory or legal developments in the United States and other countries; ·developments or disputes concerning patent applications, issued patents or other proprietary rights; ·the recruitment or departure of key personnel; ·the level of expenses related to our preclinical and clinical development programs; ·the results of our efforts to in‑license or acquire additional product candidates or products; ·actual or anticipated changes in estimates as to financial results, development timelines or recommendations bysecurities analysts; ·variations in our financial results or those of companies that are perceived to be similar to us; ·fluctuations in the valuation of companies perceived by investors to be comparable to us; ·share price and volume fluctuations attributable to inconsistent trading volume levels of our common stock; ·announcement or expectation of additional financing efforts; ·sales of our common stock by us, our insiders or our other stockholders; ·changes in the structure of healthcare payment systems; ·market conditions in the pharmaceutical sector; and ·general economic, industry and market conditions. These broad market and industry factors may decrease the market price of our common stock, regardless of our actualoperating performance. The stock market in general has, from time to time, experienced extreme price and volume fluctuations, including in recentmonths. In addition, in the past, following periods of volatility in the overall market and decreases in the market price of acompany’s securities, securities class action litigation has often been instituted against these companies. This litigation, ifinstituted against us, could result in substantial costs and a diversion of our management’s attention and resources.64 Table of Contents Insiders have substantial influence over us and could delay or prevent a change in corporate control. Our executive officers, directors, and holders of 5.0% or more of our capital stock collectively beneficially ownapproximately 39% of our voting stock at March 24, 2017. This concentration of ownership could harm the market price ofour common stock by: ·delaying, deferring or preventing a change in control of our company; ·impeding a merger, consolidation, takeover or other business combination involving our company; or ·discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of ourcompany. The interests of this group of stockholders may not always coincide with the interests of our other stockholders and they mayact in a manner that advances their best interests and not necessarily those of other stockholders, including by seeking apremium value for their common stock, and might negatively affect the prevailing market price for our common stock. For as long as we are an “emerging growth company” we intend to take advantage of reduced disclosure and governancerequirements applicable to emerging growth companies, which could result in our common stock being less attractive toinvestors and could make it more difficult for us to raise capital as and when we need it. We are an “emerging growth company,” as defined in the JOBS Act, and we have taken advantage, and intent to continue totake advantage, of certain exemptions from various reporting requirements that are applicable to other public companies thatare not emerging growth companies including, but not limited to, not being required to comply with the auditor attestationrequirements of Section 404 of the Sarbanes‑Oxley Act of 2002, as amended, or the Sarbanes‑Oxley Act, reduced disclosureobligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from therequirements of holding a non‑binding advisory vote on executive compensation and stockholder approval of any goldenparachute payments not previously approved. Investors may find our common stock less attractive because we rely on these exemptions, which could contribute to a lessactive trading market for our common stock or volatility in our stock price. In addition, we may be less attractive to investorsand it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare ourbusiness with other companies in our industry if they believe that our financial accounting is not as transparent as othercompanies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition andresults of operations may be materially and adversely affected. We may take advantage of these reporting exemptions until we are no longer an emerging growth company, which in certaincircumstances could be for up to five years. See “Item 1. Business — Corporate Information — Implications of Being anEmerging Growth Company” above. If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able toaccurately report our financial condition, results of operations or cash flows, which may adversely affect investorconfidence in us and, as a result, the value of our common stock. The Sarbanes‑Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting anddisclosure controls and procedures. We are required, under Section 404 of the Sarbanes‑Oxley Act, to furnish a report bymanagement on, among other things, the effectiveness of our internal control over financial reporting. This assessmentincludes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results inmore than a reasonable possibility that a material misstatement of annual or interim financial statements will not beprevented or detected on a timely basis. Section 404 of the Sarbanes‑Oxley Act also generally65 Table of Contents requires an attestation from our independent registered public accounting firm on the effectiveness of our internal controlover financial reporting. However, for as long as we remain an emerging growth company as defined in the JOBS Act, weintend to take advantage of the exemption permitting us not to comply with the independent registered public accountingfirm attestation requirement. Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant managementefforts. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During theevaluation and testing process, if we identify one or more material weaknesses in our internal control over financialreporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you thatthere will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future.Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report ourfinancial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financialreporting is effective, or if our independent registered public accounting firm determines we have a material weakness orsignificant deficiency in our internal control over financial reporting once that firm begins its Section 404 reviews, we couldlose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stockcould decline, and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the SEC, or otherregulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or toimplement or maintain other effective control systems required of public companies, could also restrict our future access tothe capital markets. Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us inreports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed,summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosurecontrols and procedures or internal controls and procedures, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision‑making can be faulty, and that breakdowns canoccur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons,by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherentlimitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not bedetected. We have incurred, and will continue to incur, increased costs as a result of operating as a public company, and ourmanagement has been required, and will continue to be required, to devote substantial time to new compliance initiatives. As a public company, we have incurred and are continuing to incur significant legal, accounting and other expenses that wedid not incur as a private company, and these expenses may increase even more after we are no longer an “emerging growthcompany.” We are subject to the reporting requirements of the Exchange Act, the Sarbanes‑Oxley Act, the Dodd‑Frank WallStreet Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC and NASDAQ Stock Market. Ourmanagement and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have substantially increased our legal and financial compliance costs and made someactivities more time‑consuming and costly. The increased costs have increased our net loss. These rules and regulations maymake it more difficult and more expensive for us to maintain sufficient directors and officers liability insurance coverage. Wecannot predict or estimate the amount or timing of additional costs we may continue to incur to respond to theserequirements. The ongoing impact of these requirements could also make it more difficult for us to attract and retain qualifiedpersons to serve on our board of directors, our board committees or as executive officers. 66 Table of Contents Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capitalappreciation, if any, will be our stockholders’ sole source of gain. We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, ifany, to finance the growth and development of our business. In addition, the terms of any future debt agreements maypreclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be our stockholders’sole source of gain for the foreseeable future. Future sales and issuances of our common stock or rights to purchase common stock pursuant to our equity incentive plancould result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall. We expect that significant additional capital will be needed in the future to continue our planned operations. To raisecapital, we may sell substantial amounts of common stock or securities convertible into or exchangeable for common stock.These future issuances of common stock or common stock-related securities, together with the exercise of outstandingoptions and any additional shares issued in connection with acquisitions, if any, may result in material dilution to ourinvestors. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights,preferences and privileges senior to those of holders of our common stock. Pursuant to our equity incentive plan, our compensation committee is authorized to grant equity‑based incentive awards toour directors, executive officers and other employees and service providers. As of March 24, 2017, there were 786,700 sharesof our common stock available for future grant under our 2014 Equity Plan. Future equity incentive grants and issuances ofcommon stock under the 2014 Equity Plan may result in material dilution to our stockholders and may have an adverse effecton the market price of our common stock. Some provisions of our charter documents and Delaware law may have anti‑takeover effects that could discourage anacquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by ourstockholders to replace or remove our current management. Provisions in our sixth amended and restated certificate of incorporation and amended and restated bylaws, as well asprovisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us,even if doing so would benefit our stockholders, or remove our current management. These include provisions that: ·permit our board of directors to issue up to 10 million shares of preferred stock, with any rights, preferences andprivileges as it may designate; ·provide that all vacancies on our board of directors, including as a result of newly created directorships, may,except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office,even if less than a quorum; ·require that any action to be taken by our stockholders must be effected at a duly called annual or specialmeeting of stockholders and not be taken by written consent; ·provide that stockholders seeking to present proposals before a meeting of stockholders or to nominatecandidates for election as directors at a meeting of stockholders must provide advance notice in writing, andalso specify requirements as to the form and content of a stockholder’s notice; ·require that the amendment of certain provisions of our certificate of incorporation and bylaws relating toanti‑takeover measures may only be approved by a vote of 66 2/3% of our outstanding capital stock; ·not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of commonstock entitled to vote in any election of directors to elect all of the directors standing for election; and67 Table of Contents ·provide that special meetings of our stockholders may be called only by the board of directors or by such personor persons designated by a majority of the board of directors to call such meetings. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management bymaking it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing themembers of our management. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 ofthe Delaware General Corporation Law, which may discourage, delay or prevent someone from acquiring us or merging withus whether or not it is desired by or beneficial to our stockholders. Under Delaware law, a corporation may not, in general,engage in a business combination with any holder of 15.0% or more of its capital stock unless the holder has held the stockfor three years or, among other things, the board of directors has approved the transaction. Any provision of our certificate ofincorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit theopportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the pricethat some investors are willing to pay for our common stock. Our certificate of incorporation also provides that the Court of Chancery of the State of Delaware will be the exclusiveforum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtaina favorable judicial forum for disputes with us or our directors, officers or employees. Our sixth amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware isthe exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciaryduty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our sixth amendedand restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that isgoverned by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim ina judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which maydiscourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find thechoice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, wemay incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect ourbusiness and financial condition. If securities or industry analysts publish inaccurate or unfavorable research about our business, our stock price andtrading volume could decline. The trading market for our common stock depends in part on the research and reports that securities or industry analystspublish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate orunfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverageof our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stockprice and trading volume to decline. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our company headquarters are located in Devon, Pennsylvania where we occupy approximately 7,300 square feet of officespace pursuant to a five‑year lease which expires on May 31, 2020. In addition, one of our employees works in Covington,Kentucky where we lease office space and a shared conference room and business facilities pursuant to a lease agreement;that lease agreement is month-to-month. 68 Table of Contents Item 3. Legal Proceedings We are not currently a party to any legal proceedings. Item 4. Mine Safety Disclosure None. 69 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities Market Information Our common stock has been traded on the NASDAQ Global Market since August 5, 2015 under the symbol “ZYNE.” Prior tosuch time, there was no public market for our common stock. The following table sets forth the high and low sales price ofour common stock, as reported by the NASDAQ Global Market for the period indicated: High Low2016 Fourth Quarter $16.91 $10.56Third Quarter $14.44 $6.62Second Quarter $11.68 $6.02First Quarter $21.56 $4.642015 Fourth Quarter $18.25 $9.33Third Quarter (August 4, 2015 - September 30, 2015) $43.00 $12.00 Holders of Common Stock As of March 24, 2017, there were 41 holders of record of our common stock. Dividend Policy We have never declared or paid any cash dividends on our capital stock. We do not anticipate declaring or paying, in theforeseeable future, any cash dividends on our capital stock. We expect to continue to incur significant expenses andoperating losses for the foreseeable future. We intend to retain all available funds and any future earnings, to support ouroperations and finance the growth and development of our business. Any future determination related to our dividend policywill be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations,financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directorsmay deem relevant. Issuer Repurchases of Equity Securities None. Securities Authorized for Issuance Under Equity Compensation Plans Other information about our equity compensation plans is incorporated herein by reference to Part III, Item 12 of this AnnualReport on Form 10-K. Recent Sales of Unregistered Securities None. Use of Proceeds Our IPO was effected through a Registration Statement on Form S-1 (File No. 333-205355) that was declared effective by theSEC on August 4, 2015, which registered an aggregate of 3,450,000 shares of our common stock. On August 10, 2015, wereceived net proceeds from the IPO of $42.1 million. 70 Table of Contents As of December 31, 2016, we have used approximately $21.2 million of the net offering proceeds from our IPO to fund thedevelopment efforts of ZYN002 (including funding of our Phase 1 and Phase 2 clinical trials), development efforts ofZYN001, working capital, research and development and general corporate purposes. None of the net proceeds have beenpaid directly or indirectly to (i) our directors, officers or any of their associates; (ii) persons owning 10% or more of ourcommon stock; or (iii) our affiliates, other than payments in the ordinary course of business to our wholly-owned subsidiary,to officers for salaries and bonuses and to non-employee directors as compensation for board service. Our use of net proceeds to date is consistent with the use and proceeds described in our prospectus filed with the SECpursuant to Rule 424(b)(4) on August 5, 2015, or the prospectus, and there has been no material change in our planned use ofthe balance of the net proceeds from the IPO described in the prospectus. Performance Graph This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 ofthe Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under thatSection, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or theExchange Act. The following graph illustrates a comparison of the total cumulative stockholder return for our common stock since August5, 2015, which is the first trading day for our stock, to two indices: the NASDAQ Composite Index and the NASDAQBiotechnology Index. The graph assumes an initial investment of $100 on August 5, 2015, in our common stock, the stockscomprising the NASDAQ Composite Index, and the stocks comprising the NASDAQ Biotechnology Index. Historicalstockholder return is not necessarily indicative of the performance to be expected for any future periods. 71 Table of Contents Item 6. Selected Financial Data This section should be read together with our consolidated financial statements and accompanying notes and“Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in thisReport. We derived the selected consolidated statements of operations data for the years ended December 31, 2016, 2015 and2014 and the selected consolidated balance sheet data as of December 31, 2016 and 2015 from our audited consolidatedfinancial statements and accompanying notes appearing elsewhere in this Report. The selected consolidated statements ofoperations data for the year ended December 31, 2013 and the selected consolidated balance sheet data as of December 31,2014 and 2013 has been derived from financial statements not included in this Annual Report on Form 10-K. The selectedconsolidated financial data in this section are not intended to replace our consolidated financial statements and the relatednotes. Our historical consolidated results are not necessarily indicative of the results that may be expected in the future. Statements of Operation Data: Year Ended December 31, 2016 2015 2014 2013 Revenue $7,250 $278,900 $810,012 $943,904 Operating expenses: Research and development 16,784,626 7,445,669 2,401,406 1,134,041 General and administrative 6,430,252 5,364,390 4,076,339 444,302 Total operating expenses 23,214,878 12,810,059 6,477,745 1,578,343 Loss from operations (23,207,628) (12,531,159) (5,667,733) (634,439) Other income (expense): Interest income (expense), net 80,222 7,352 (1,844) (2,351) Foreign exchange loss (189,497) — — — Loss on disposal of equipment (99,147) — — — Total other income (expense) (208,422) 7,352 (1,844) (2,351) Loss before income taxes (23,416,050) (12,523,807) (5,669,577) (636,790) Income tax (benefit) expense (27,543) 27,543 — — Net loss (23,388,507) (12,551,350) (5,669,577) (636,790) Accretion of redeemable convertible preferred stock — — (87,954) (161,834) Net loss applicable to common stockholders $(23,388,507) $(12,551,350) $(5,757,531) $(798,624) Per share information: Net loss per share basic and diluted $(2.58) $(2.82) $(6.44) $(1.63) Basic and diluted weighted average shares outstanding 9,070,232 4,457,719 894,575 490,760 (1)Refer to note 2(m) of our audited financial statements for a description of the method used to calculate net loss pershare, basic and diluted, and the basic and diluted weighted average shares outstanding. As of December 31, 2016 2015 2014 2013 BALANCE SHEET DATA: Cash and cash equivalents $30,965,791 $41,513,060 $9,330,681 $154,695 Total assets 36,554,274 43,643,541 11,616,671 1,860,840 Total liabilities 6,966,966 3,937,617 3,145,535 3,057,546 Convertible preferred stock — — 16,522,811 3,162,373 Total stockholders’ equity (deficit) 29,587,308 39,705,924 (8,051,675) (4,359,079) 72 (1)Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion summarizes the significant factors affecting the operating results, financial condition, liquidityand cash flows of our company as of and for the periods presented below. The following discussion and analysis should beread in conjunction with the financial statements and the related notes thereto included elsewhere in this Report. Thestatements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity andcapital resources and all other non‑historical statements in this discussion are forward‑looking statements and are basedon the beliefs of our management, as well as assumptions made by, and information currently available to, our management.Actual results could differ materially from those discussed in or implied by forward‑looking statements as a result of variousfactors, including those discussed below and elsewhere in this Report, particularly in the section entitled “Risk Factors.” Overview Company Overview We are a clinical stage specialty pharmaceutical company dedicated to developing and commercializing innovativetransdermal synthetic cannabinoid treatments for patients with high unmet needs. We are evaluating two patent protectedproduct candidates, ZYN002 and ZYN001, in five indications. We are studying ZYN002 in adult patients with refractoryepileptic focal seizures (formerly known as complex partial seizures) and OA, and in pediatric patients with FXS. We intendto study ZYN001 in patients with fibromyalgia and peripheral neuropathic pain. We believe these product candidates willprovide new treatment options for patients, as well as additional treatment options for patients not currently receivingadequate relief from current treatment regimens. In 2016, we completed a Phase 1 program for ZYN002 in which it wasdemonstrated to be safe and well tolerated in both healthy volunteers and patients with epilepsy. We are currentlyconducting Phase 2 clinical trials for ZYN002 in adult patients with refractory epileptic focal seizures, adult patients with OAand pediatric patients with FXS. We expect to initiate Phase 1 clinical trials for ZYN001 in the first half of 2017. Cannabinoids are a class of compounds derived from Cannabis plants. The two primary cannabinoids contained in Cannabisare CBD and THC. Clinical and preclinical data suggest that CBD has positive effects on treating epilepsy, arthritis and FXS,and THC has positive effects on treating pain. We believe ZYN002 may potentially offer first‑line therapies to patientssuffering from epilepsy, OA and FXS, and ZYN001 may potentially offer first-line therapies to patients suffering fromfibromyalgia and peripheral neuropathic pain. ZYN002 is the first and only synthetic CBD formulated as a permeation‑enhanced gel for transdermal delivery, and ispatent‑protected through 2030. CBD is the primary non‑psychoactive component of Cannabis. In preclinical animal studies,ZYN002’s permeation enhancer increased delivery of CBD through the layers of the skin and into the circulatory system.These preclinical studies suggest increased bioavailability, consistent plasma levels and the avoidance of first‑pass livermetabolism of CBD when delivered transdermally. In addition, an in vitro study published in Cannabis and CannabinoidResearch in April 2016 demonstrated that CBD is degraded to THC in an acidic environment such as the stomach. Webelieve such degradation may lead to increased psychoactive effects if CBD is delivered orally and may be avoided with thetransdermal delivery of ZYN002, which maintains CBD in a neutral pH. ZYN002, which is being developed as a clear gelwith once- or twice-daily dosing, is targeting treatment of epilepsy, OA and FXS, which collectively affect millions ofpatients using treatments that currently comprise a multi‑billion dollar market. We have been granted orphan drugdesignation from the U.S. Food and Drug Administration, or FDA, for ZYN002 for the treatment of FXS. ZYN001 is a pro‑drug of THC that enables effective transdermal delivery of THC via a patch and is patent‑protected through2031. A pro‑drug is a drug administered in an inactive or less active form and designed to enable more effective delivery,which is then converted into an active form through a normal enzymatic process. In addition, we expect that ZYN001 will beclassified by the FDA as a NCE. We are working with a development partner, LTS, to optimize the formulation of ZYN001into a state of the art drug-adhesive matrix transdermal patch to be used in clinical studies. 73 Table of Contents In our preclinical animal studies, ZYN001 demonstrated effective skin permeation with sustained delivery and rapidconversion of ZYN001 to THC. These preclinical studies suggest increased bioavailability, consistent plasma levels and theavoidance of first‑pass liver metabolism of ZYN001. In addition, preclinical testing has shown no genotoxicity findings andsafety pharmacology findings consistent with those seen with THC. ZYN001 is targeting two pain indications, fibromyalgiaand peripheral neuropathic pain, which collectively represent multi-billion dollar markets. Our key development programs and expected timelines for the development of ZYN002 and ZYN001 are shown in the chartbelow: We have never been profitable and have incurred net losses since inception. Our net losses were $23.4 million, $12.6 millionand $5.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, ouraccumulated deficit was $46.0 million. We expect to incur losses for the foreseeable future, and we expect these losses toincrease as we continue our development of, and seek regulatory approvals for, our product candidates. Because of thenumerous risks and uncertainties associated with product development, we are unable to predict the timing or amount ofincreased expenses or when, or if, we will be able to achieve or maintain profitability. Financial Operations Overview The following discussion sets forth certain components of our statements of operations as well as factors that impact thoseitems. Revenue — Our revenue consists of state and federal research grants and fees received from research services for third‑partyproduct development. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred orservices have been rendered, the price is fixed or determinable and collectability is reasonably assured. Research and Development Expenses — Our research and development expenses relating to our product candidates consist ofthe following: ·expenses associated with preclinical development and clinical trials; ·personnel‑related expenses, such as salaries, benefits, travel and other related expenses, including stock‑basedcompensation; 74 Table of Contents ·payments to third‑party CROs, 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 asignificant component of our current research and development expenses. Expenses associated with clinical trials willincrease as our clinical trials progress. Product candidates in later stage clinical development generally have higher researchand development expenses than those in earlier stages of development, primarily due to increased size and duration of theclinical trials. We track and record information regarding external research and development expenses for each grant, studyor trial that we conduct. We use third‑party CROs, contractor laboratories and independent contractors in preclinical studiesand clinical trials. We recognize the expenses associated with third parties performing these services for us in our preclinicalstudies and clinical trials based on the percentage of each study completed at the end of each reporting period. We incurred research and development expenses of $16.8 million, $7.4 million and $2.4 million for the years endedDecember 31, 2016, 2015 and 2014, respectively. Our research and development expenses in 2016 were higher than in past years as a result of our Phase 1 and Phase 2 clinicaltrials of ZYN002 as well as preclinical development of ZYN001 in advance of our expected initiation of our Phase 1 clinicaltrials for ZYN001 in the first half of 2017; we expect research and development expenses in future years to continue toincrease as we continue our clinical trials and begin new phases for each of our product candidates. Our research anddevelopment expenses in 2016 were net of $4.1 million related to an Australian tax incentive and the Goods and ServicesTax, or GST, paid to Australian vendors, related to certain research and development costs and GST incurred in Australia. Ofthis amount, we received a refund of $0.5 million during the year ended December 31, 2016 related to GST and we expect toreceive a refund of $3.6 million during the year ended December 31, 2017. Our research and development expenses in 2015were net of $0.4 million related to the Australian tax incentive, for which we received a refund during the year endedDecember 31, 2016. Our research and development expenditures are subject to numerous uncertainties regarding timing and cost to completion.Completion of our preclinical development and clinical trials may take several years or more and the length of time generallyvaries according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials mayvary significantly over the life of a project as a result of differences arising during clinical development, including, amongothers: ·the number of sites included in the clinical trials; ·the length of time required to enroll suitable patients; ·the size of patient populations participating in the clinical trials; ·the duration of patient follow‑ups; ·the development stage of the product candidates; and ·the efficacy and safety profile of the product candidates. Due to the early stages of our research and development, we are unable to determine the duration or completion costs of ourdevelopment of ZYN002 and ZYN001. As a result of the difficulties of forecasting research and development costs ofZYN002 and ZYN001 as well as the other uncertainties discussed above, we are unable to determine when and to what extentwe 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 otherrelated costs, including stock‑based compensation, for personnel serving in our executive, finance, accounting,75 Table of Contents legal and human resource functions. Our general and administrative expenses also include facility and related costs notincluded in research and development expenses, professional fees for legal services, including patent‑related expenses,consulting, tax and accounting services, insurance and general corporate expenses. We expect that our general andadministrative expenses will increase with the continued development and potential commercialization of our productcandidates. We expect that our general and administrative expenses in 2017 and for the next several years will be higher than in pastyears as we increase our headcount. We also anticipate increased expenses relating to our operations as a public company,including increased costs for the hiring of additional personnel, and for payment to outside consultants, including lawyersand accountants, to comply with additional regulations, corporate governance, internal control and similar requirementsapplicable to public companies, as well as increased costs for insurance. Interest Income (Expense), net — Interest income consists primarily of interest earned on our money market bank account.Interest expense consists of interest expense on our note payable that was paid off during 2014. Income Taxes — As of December 31, 2016, we had $36.5 million of federal operating loss carryforwards and $1.3 million ofresearch tax credit carryforwards available to offset future taxable income. These operating loss and research tax creditcarryforwards will begin to expire in 2028 and 2027, respectively. At December 31, 2016 and 2015, we concluded that a fullvaluation allowance is necessary for our deferred tax assets. For the years ended December 31, 2016 and 2015, there was$27,543 of income tax benefit and $27,543 of income tax expense, respectively, associated with our Australian subsidiary. The closing of our IPO in August 2015, together with private placements and other transactions that have occurred since ourinception, may trigger, or may have already triggered, an “ownership change” pursuant to Section 382 of the InternalRevenue Code of 1986. If an ownership change is triggered, it will limit our ability to use some of our net operating losscarryforwards. In addition, since we will need to raise substantial additional funding to finance our operations, we mayundergo further ownership changes in the future, which could further limit our ability to use net operating loss carryforwards.As a result, if we generate taxable income, our ability to use some of our net operating loss carryforwards to offset U.S. federaltaxable income may be subject to limitations, which could result in increased future tax liability to us. Additionally, U.S. taxlaws limit the time during which these carryforwards may be applied against future taxes; therefore, we may not be able totake full advantage of these carryforwards for federal income tax purposes. Critical Accounting Policies and Use of Estimates We have based our management’s discussion and analysis of financial condition and results of operations on our financialstatements, which have been prepared in accordance with accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reportedrevenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, includingthose related to preclinical development expenses and stock‑based compensation. We base our estimates on historicalexperience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions. While our significant accounting policies are more fully discussed in note 2 to our audited consolidated financial statementsappearing elsewhere in this Report, we believe that the following accounting policies are critical to the process of makingsignificant judgments and estimates in the preparation of our financial statements. Research and Development Expenses We rely on third parties to conduct our preclinical studies and clinical trials, and to provide services, including datamanagement, statistical analysis and electronic compilation. At the end of each reporting period, we compare the paymentsmade to each service provider to the estimated progress towards completion of the related project. Factors that we willconsider in preparing these estimates include the number of patients enrolled in studies, milestones achieved and76 Table of Contents other criteria related to the efforts of our vendors. These estimates will be subject to change as additional informationbecomes available. Depending on the timing of payments to vendors and estimated services provided, we will record netprepaid or accrued expenses related to these costs. Fair Value of Common Stock and Stock‑Based Compensation We account for grants of stock options and restricted stock to employees based on their grant date fair value and recognizecompensation expense over the vesting periods. We estimate the fair value of stock options as of the date of grant using theBlack‑Scholes option pricing model, which requires management to apply judgment and make estimates including thevolatility of our common stock, the expected term of our stock options, the expected dividend yield and the fair value of ourcommon stock on the date of grant. We estimate the fair value of restricted stock based on the closing price of our commonstock on the date of grant. We account for stock options and restricted stock awards to non‑employees, if any, using the fairvalue approach. Stock options and restricted stock awards to non‑employees are subject to periodic revaluation over theirvesting terms; there were no stock options or restricted stock awards to non-employees as of December 31, 2016. Prior to our IPO in August 2015, in the absence of a public trading market for our common stock, on each grant date, wedeveloped an estimate of the fair value of our common stock for the option and restricted stock grants based in part on inputfrom an independent third‑party valuation firm. We determined the fair value of our common stock using methodologies,approaches and assumptions consistent with the AICPA Practice Guide, Valuation of Privately‑Held Company EquitySecurities Issued as Compensation. In addition, our board of directors considered various objective and subjective factors,along with input from management and an independent third‑party valuation firm, to estimate the fair value of our commonstock, including external market conditions affecting the pharmaceutical industry, trends within the pharmaceutical industry,the prices at which we sold shares of our different series of preferred stock, the superior rights and preferences of each series ofpreferred stock relative to our common stock at the time of each grant, our results of operations and financial position, thestatus of our research and development efforts and progress of our preclinical programs, our stage of development andbusiness strategy, the lack of an active public market for our common and our preferred stock, and the likelihood ofachieving a liquidity event. Results of Operations Comparison of the Years Ended December 31, 2016 and December 31, 2015 Year Ended Increase December 31, (Decrease) 2016 2015 $ % Revenue $7,250 $278,900 $(271,650) (97)%Operating expenses: Research and development 16,784,626 7,445,669 9,338,957 125%General and administrative 6,430,252 5,364,390 1,065,862 20%Total operating expenses 23,214,878 12,810,059 10,404,819 81%Loss from operations (23,207,628) (12,531,159) (10,676,469) 85%Other income (expense) (208,422) 7,352 (215,774) (2,935)%Income tax (benefit) expense (27,543) 27,543 (55,086) (200)%Net loss $(23,388,507) $(12,551,350) $(10,837,157) 86% Revenue Revenue in 2016 and 2015 was entirely related to work performed in connection with grants received prior to 2015; grantsreceived were recorded as deferred revenue and recognized as revenue as the designated preclinical study progresses andamounts are earned. Revenue decreased $271,650, or 97%, to $7,250 for the year ended December 31, 2016 from $278,900for the year ended December 31, 2015. The decrease from 2015 reflected reduced research activities associated with ourremaining grants.77 Table of Contents Research and Development Expenses Research and development expenses increased by $9.3 million, or 125%, to $16.8 million for the year ended December 31,2016 from $7.4 million for the year ended December 31, 2015. The increase was primarily related to an increase in thenumber and size of our non-clinical studies and clinical trials for ZYN002 and ZYN001. Additionally, personnel costs,including stock-based compensation expense, also increased from the prior-year period. No stock-based compensationexpense was recorded prior to our IPO in August 2015 since the vesting of the stock-based compensation awards prior to theIPO was contingent on the closing of the IPO. Stock-based compensation expense was recorded for the full year endedDecember 31, 2016. General and Administrative Expenses General and administrative expenses increased by $1.1 million, or 20%, to $6.4 million for the year ended December 31,2016 from $5.4 million for the year ended December 31, 2015. The increase primarily relates to increases in personnel costs,primarily stock-based compensation expense, related to increased headcount. No stock-based compensation expense wasrecorded prior to our IPO in August 2015 since the vesting of the stock-based compensation awards prior to the IPO wascontingent on the closing of the IPO. Stock-based compensation expense was recorded for the full year ended December 31,2016. Other Income (Expense) During the years ended December 31, 2016 and 2015, we recognized $80,222 and $7,352, respectively, in interestincome. During the year ended December 31, 2016, we recognized foreign currency losses of $189,497 due primarily to thetranslation of certain assets and liabilities related to our Australian subsidiary that are denominated in the local currency tothe U.S. dollar functional currency. During the year ended December 31, 2016, we recognized a loss on the disposal ofresearch and development equipment of $99,147. There was no foreign currency gain or loss, or gain or loss on disposal ofequipment, for the same period in 2015. Comparison of the Years Ended December 31, 2015 and December 31, 2014 Year Ended Increase December 31, (Decrease) 2015 2014 $ % Revenue $278,900 $810,012 $(531,112) (66)%Operating expenses: Research and development 7,445,669 2,401,406 5,044,263 210%General and administrative 5,364,390 4,076,339 1,288,051 32%Total operating expenses 12,810,059 6,477,745 6,332,314 98%Loss from operations (12,531,159) (5,667,733) (6,863,426) 121%Other income (expense) 7,352 (1,844) 9,196 (499)%Income tax (benefit) expense 27,543 — 27,543 100%Net loss $(12,551,350) $(5,669,577) $(6,881,773) 121% Revenue Revenue in 2015 was entirely related to work performed in connection with grants received prior to 2015; grants receivedwere recorded as deferred revenue and is recognized as revenue as the designated preclinical study progresses and amountsare earned. Revenue decreased $531,112, or 66%, to $278,900 for the year ended December 31, 2015 from $810,012 for theyear ended December 31, 2014. The decrease from 2014 primarily related to the termination of work on two grants, andreflected reduced research activities associated with our remaining grants. Also in 2014, we recorded $0.1 million of researchservices revenue. There was no research services revenue in 2015. 78 Table of Contents Research and Development Expenses Research and development expenses increased by $5.0 million, or 210%, to $7.4 million for the year ended December 31,2015 from $2.4 million for the year ended December 31, 2014. The increase was primarily related to an increase in thenumber and size of our non-clinical studies and clinical trials for ZYN002 and ZYN001, as well as increased personnel costsdue to an increase in headcount and the recognition of stock-based compensation expense beginning in the second half of2015. General and Administrative Expenses General and administrative expenses increased by $1.3 million, or 32%, to $5.4 million for the year ended December 31,2015 from $4.1 million for the year ended December 31, 2014. These increases were largely the result of our efforts toestablish an infrastructure to support our product development activities and fees associated with becoming a publiccompany, and were primarily related to increased personnel costs including stock-based compensation expense. Other Income (Expense) During the years ended December 31, 2015 and 2014, we recognized $7,352 in interest income and $1,844 in interestexpense. Liquidity and Capital Resources Since our inception in 2007, we have devoted most of our cash resources to research and development and general andadministrative activities. We have financed our operations primarily with the proceeds from the sale of equity securities(most notably our IPO in 2015, sales under our “at-the-market” offering in 2016 and our recent follow-on offering in 2017,which are described below) and convertible promissory notes, state and federal grants and research services. To date, we have not generated any revenue from the sale of products, and we do not anticipate generating any revenue fromthe sales of products for the foreseeable future. We have incurred losses and generated negative cash flows from operationssince inception. As of December 31, 2016, our principal sources of liquidity were our cash and cash equivalents, whichtotaled $31.0 million. Our working capital was $29.4 million as of December 31, 2016. Management believes that current cash and cash equivalents, including proceeds from our follow-on public offering in thefirst quarter of 2017, are sufficient to develop five Phase 3 ready programs and, assuming feedback from the FDA supports adecision to move forward, initiate at least one Phase 3 program and fund operations and capital requirements into 2019.However, it is difficult to predict our spending for our product candidates prior to obtaining FDA approval. Moreover,changing circumstances may cause us to expend cash significantly faster than we currently anticipate, and we may need tospend more cash than currently expected because of circumstances beyond our control. Equity Financings During the year ended December 31, 2014, we received net proceeds of $13.2 million from the sale of convertible preferredstock. In August 2015, we completed our IPO, selling 3,450,000 shares at an offering price of $14.00 per share resulting in grossproceeds of $48.3 million. Net proceeds received after deducting underwriting and commissions and offering expenses were$42.1 million. In connection with the closing of the IPO, all outstanding shares of our Series 1 convertible preferred stockwere converted into an aggregate of 3,704,215 shares of common stock. During the year ended December 31, 2016, we entered into an Open Market Sales Agreement (the “Sales Agreement”) withJefferies LLC (“Jefferies”) pursuant to which we sold and issued 794,906 shares of our common stock in the open market at aweighted average selling price of $13.39 per share, for gross proceeds of $10.6 million. Net proceeds received after deductingcommissions and offering expenses were $10.0 million.79 Table of Contents In the first quarter of 2017, we completed an additional follow-on public offering, selling 3,220,000 shares of our commonstock at an offering price of $18.00 per share, resulting in gross proceeds of $58.0 million. Net proceeds received afterdeducting underwriting and commissions and offering expenses were $54.3 million. Debt We had no debt outstanding as of December 31, 2016 or 2015. Future Capital Requirements During the year ended December 31, 2016, net cash used in operating activities was $20.4 million, and our accumulateddeficit as of December 31, 2016 was $46.0 million. Our expectations regarding future cash requirements do not reflect thepotential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we make in the future.We have no current understandings, agreements or commitments for any material acquisitions or licenses of any products,businesses or technologies. We may need to raise substantial additional capital in order to engage in any of these types oftransactions.We expect to continue to incur substantial additional operating losses for at least the next several years as we continue todevelop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventualcommercialization of our product candidates. If we obtain marketing approval for either of our product candidates, we willincur significant sales, marketing and outsourced manufacturing expenses. In addition, we expect to incur additionalexpenses to add operational, financial and information systems and personnel, including personnel to support our plannedproduct commercialization efforts. We also expect to incur significant costs to comply with corporate governance, internalcontrols and similar requirements applicable to us as a public company. Our future use of operating cash and capital requirements will depend on many forward‑looking factors, including thefollowing: ·the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our productcandidates; ·the clinical development plans we establish for these product candidates; ·the number and characteristics of product candidates that we develop or may in‑license; ·the terms of any collaboration agreements we may choose to execute; ·the outcome, timing and cost of meeting regulatory requirements established by the DEA, the FDA, the EMA orother comparable foreign regulatory authorities; ·the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights; ·the cost of defending intellectual property disputes, including patent infringement actions brought by thirdparties against us; ·costs and timing of the implementation of commercial scale manufacturing activities; and ·the cost of establishing, or outsourcing, sales, marketing and distribution capabilities for any productcandidates for which we may receive regulatory approval in regions where we choose to commercialize ourproducts on our own. 80 Table of Contents To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need tofinance our cash needs through public or private equity offerings, debt financings, collaboration and licensing arrangementsor other financing alternatives. We have no committed external sources of funds. Additional equity or debt financing orcollaboration and licensing arrangements may not be available on acceptable terms, if at all. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Cash Flows Years Ended December 31, 2016 and December 31, 2015 — The following table summarizes our cash flows from operating,investing and financing activities for the years ended December 31, 2016 and December 31, 2015. Year Ended December 31, 2016 2015 Statement of Cash Flows Data: Total net cash (used in) provided by: Operating activities $(20,438,166) $(9,786,799) Investing activities (109,628) (216,335) Financing activities 10,000,525 42,185,513 Net (decrease) increase in cash and cash equivalents $(10,547,269) $32,182,379 Operating Activities For the year ended December 31, 2016, cash used in operating activities was $20.4 million, compared to $9.8 million for theyear ended December 31, 2015. The increase from the comparable 2015 period was primarily related to an increase in projectand research and development costs associated with our preclinical studies and clinical trials that both increased our vendorpayments during the year and increased our incentive and tax receivables associated with research and development costsexpended in Australia and GST paid to Australian vendors. An increase in public company administrative costs as comparedto 2015 also contributed. We expect cash used in operating activities to continue to increase in 2017 as compared to 2016 due to an expected increasein our operating losses associated with ongoing development of our product candidates. Investing Activities For the year ended December 31, 2016, cash used in investing activities was $0.1 million and related to fabricationequipment located in Australia. For the year ended December 31, 2015, cash used in investing activities was $0.2 million,representing the cost of certain fabrication equipment, computer equipment, and furniture and fixtures associated with theestablishment of our new corporate headquarters. Financing Activities Cash provided by financing activities was $10.0 million and $42.2 million for the years ended December 31, 2016 and 2015,respectively, primarily representing the net proceeds from our equity offerings. During 2016, net proceeds of $10.0 millionresulted from sales of our common stock under the Sales Agreement with Jefferies completed in the second half of 2016.During 2015, net proceeds of $42.2 million resulted from our IPO and the exercise of employee stock options. 81 Table of Contents Years Ended December 31, 2015 and December 31, 2014 — The following table summarizes our cash flows from operating,investing and financing activities for the years ended December 31, 2015 and December 31, 2014. Year ended December 31, 2015 2014 Statement of Cash Flows Data: Total net cash provided by (used in): Operating activities $(9,786,799) $(3,540,655) Investing activities (216,335) (19,717) Financing activities 42,185,513 12,736,358 Increase (decrease) in cash and cash equivalents $32,182,379 $9,175,986 Operating Activities For the year ended December 31, 2015, cash used in operations was $9.8 million compared to $3.5 million for the year endedDecember 31, 2014. The increase from the comparable 2014 period was related to higher professional service costs incurredin connection with the preparation for our IPO, an increase in project and research and development costs associated with ourpreclinical studies and clinical trials that both reduced our prepaid preclinical trial expenses and increased our vendorpayables, and an increase in accrued compensation, primarily associated with accrued bonuses at December 31, 2015. Investing Activities For the year ended December 31, 2015, cash used in investing activities was $0.2 million representing the cost of certainfabrication equipment, computer equipment, and furniture and fixtures associated with the establishment of our newcorporate headquarters. Financing Activities Cash provided by financing activities was $42.2 million for the year ended December 31, 2015, primarily representing thenet proceeds from our IPO. In the year ended December 31, 2014, cash provided by financing activities was $12.7 million,resulting from the issuance of shares of our Series 1 convertible preferred stock and Series B redeemable convertible preferredstock, partially offset by the repayment of a forgivable loan. Off‑Balance Sheet Arrangements We do not have any off‑balance sheet arrangements, except for operating leases, or relationships with unconsolidated entitiesor financial partnerships, such as entities often referred to as structured finance or special purpose entities. Contractual Obligations The following table summarizes our contractual obligations as of December 31, 2016: Payments Due by Period Total 2017 2018 and 2019 2020 and 2021 2022 and Thereafter Operating lease obligations $646,786 $157,414 $403,837 85,535 $ - Recent Accounting Pronouncements In August 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU,No. 2014‑15, Presentation of Financial Statements‑Going Concern (Subtopic 205‑40): Disclosure of Uncertainties82 Table of Contents about an Entity’s Ability to Continue as a Going Concern, which defines management’s responsibility to assess an entity’sability to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about itsability to continue as a going concern. The pronouncement was effective for annual reporting periods ending afterDecember 15, 2016 with early adoption permitted. The adoption of this guidance did not have a material impact on ourconsolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires that lease arrangements longer than 12 monthsresult in an entity recognizing an asset and liability. The pronouncement is effective for interim and annual periodsbeginning after December 15, 2018 with early adoption permitted. The adoption of this guidance is not expected to have amaterial impact on our consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which isintended to simplify the accounting and reporting for employee share-based payment transactions. The pronouncement iseffective for interim and annual periods beginning after December 31, 2016 with early adoption permitted. The adoption ofthis guidance is not expected to have a material impact on our consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, whichprovides specific guidance related to eight cash flow classification issues. The pronouncement is effective for interim andannual periods beginning after December 15, 2017 with early adoption permitted. The adoption of this guidance is notexpected to have a material impact on our consolidated financial statements. In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which requires changes in restricted cash andrestricted cash equivalents to be explained on the statement of cash flows by including restricted cash and restricted cashequivalents in the beginning-of-period and end-of-period total cash and cash equivalents shown on the statement of cashflows. The pronouncement is effective for interim and annual periods beginning after December 15, 2017 with early adoptionpermitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. Item 7A. 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 orspeculative purposes and 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 Canada and Europe and to conduct clinical trials forour product candidates in Australia. Manufacturing and research costs related to these operations are paid for in acombination of U.S. dollars and local currencies. Accordingly, we are subject to limited foreign currency exchange raterisk. For example, we recognized a loss of $0.2 million related to foreign currency transactions during the year endedDecember 31, 2016. We do not believe foreign currency exchange rate risk is a substantial risk at this time due to the limitedextent of our operations, however, if we conduct clinical trials and seek to manufacture a more significant portion of ourproduct candidates outside of the United States in the future, we could incur significant foreign currency exchange rate risk. As of December 31, 2016, we had cash and cash equivalents of $31.0 million consisting primarily of cash and money marketaccounts. We do not engage in any hedging activities against changes in interest rates or foreign currency exchange rates.Because of the short-term maturities of our cash and cash equivalents, we do not believe that an immediate 10% increase ininterest rates would have any significant impact on the realized value of our investments.83 Table of Contents Item 8. Financial Statements and Supplementary Data The following financial statements are filed as a part of this Annual Report on Form 10-K:Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm 85 Consolidated Balance Sheets as of December 31, 2016 and 2015 86 Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014 87 Consolidated Statements of Redeemable Convertible Preferred Stock, Convertible Preferred Stock and Stockholders’Equity (Deficit) for the years ended December 31, 2016, 2015 and 2014 88 Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014 89 Notes to Consolidated Financial Statements 90 84 Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and StockholdersZynerba Pharmaceuticals, Inc.: We have audited the accompanying consolidated balance sheets of Zynerba Pharmaceuticals, Inc. and subsidiary as ofDecember 31, 2016 and 2015, and the related consolidated statements of operations, redeemable convertible preferred stock,convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year periodended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financialposition of Zynerba Pharmaceuticals, Inc. and subsidiary as of December 31, 2016 and 2015, and the results of theiroperations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity withU.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, PennsylvaniaMarch 27, 2017 85 Table of Contents ZYNERBA PHARMACEUTICALS, INC.CONSOLIDATED BALANCE SHEETS December 31, December 31, 2016 2015 Assets Current assets: Cash and cash equivalents $30,965,791 $41,513,060 Incentive and tax receivables 3,613,943 356,718 Prepaid expenses and other current assets 1,830,958 1,545,917 Total current assets 36,410,692 43,415,695 Property and equipment, net 143,382 227,646 Other assets 200 200 Total assets $36,554,274 $43,643,541 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $1,848,084 $823,401 Accrued expenses 4,284,907 2,272,991 Deferred grant revenue 833,975 841,225 Total current liabilities 6,966,966 3,937,617 Commitments and contingencies (note 11) Stockholders' equity: Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued oroutstanding — — Common stock, $0.001 par value; 200,000,000 shares authorized; 9,994,825 sharesissued and outstanding at December 31, 2016 and 9,199,919 shares issued andoutstanding at December 31, 2015 9,995 9,200 Additional paid-in capital 75,545,875 62,276,779 Accumulated deficit (45,968,562) (22,580,055) Total stockholders' equity 29,587,308 39,705,924 Total liabilities and stockholders' equity $36,554,274 $43,643,541 See accompanying notes to consolidated financial statements.86 Table of Contents ZYNERBA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 2016 2015 2014 Revenue $7,250 $278,900 $810,012 Operating expenses: Research and development 16,784,626 7,445,669 2,401,406 General and administrative 6,430,252 5,364,390 4,076,339 Total operating expenses 23,214,878 12,810,059 6,477,745 Loss from operations (23,207,628) (12,531,159) (5,667,733) Other income (expense): Interest income (expense) 80,222 7,352 (1,844) Foreign exchange loss (189,497) — — Loss on disposal of equipment (99,147) — — Total other income (expense) (208,422) 7,352 (1,844) Loss before income taxes (23,416,050) (12,523,807) (5,669,577) Income tax (benefit) expense (27,543) 27,543 — Net loss (23,388,507) (12,551,350) (5,669,577) Accretion of redeemable convertible preferred stock — — (87,954) Net loss applicable to common stockholders $(23,388,507) $(12,551,350) $(5,757,531) Net loss per share basic and diluted $(2.58) $(2.82) $(6.44) Basic and diluted weighted average shares outstanding 9,070,232 4,457,719 894,575 See accompanying notes to consolidated financial statements. 87 Table of Contents ZYNERBA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, CONVERTIBLE PREFERRED STOCKAND STOCKHOLDERS’ EQUITY (DEFICIT)YEARS ENDED DECEMBER 31, 2014, 2015 and 2016 Stockholders' equity Redeemable convertible preferred stock Convertible preferred stock Total Series A Series B Series 1 Common stock Additional Accumulated stockholders' Shares Amount Shares Amount Shares Amount Shares Amount paid-capital deficit equity Balance atDecember 31,2013 720,002 $1,646,179 998,109 $1,516,194 — $ — 490,760 $49 $ — $(4,359,128) $(4,359,079) Issuance of SeriesB redeemableconvertiblepreferred stock,net of stockissuance costsof $3,089 — — 250,000 347,411 — — — — — — — Accretion ofredeemableconvertiblepreferred stockto redemptionvalue — 25,443 — 62,511 — — — — (87,954) — (87,954) Issuance of Series1 convertiblepreferred stock,net of offeringcosts of$289,878 — — — — 6,244,051 12,925,034 — — — — — Issuance ofcommon stock(prerecapitalization) — — — — — — 74,923 7 125,360 — 125,367 Forfeiture ofcommon stock(prerecapitalization) — — — — — — (359,042) (36) 36 — — Recapitalizationtransactions(Note 8) (720,002) (1,671,622) (1,248,109) (1,926,116) 720,002 3,597,777 591,230 778 791,183 — 791,961 Issuance ofcommon stock(postrecapitalization) — — — — — — 693,661 694 1,146,913 — 1,147,607 Forfeiture ofcommon stock(postrecapitalization) — — — — — — (41,667) (42) 42 — — Issuance ofrestricted stock — — — — — — 579,882 580 (580) — — Net loss — — — — — — — — — (5,669,577) (5,669,577) Balance atDecember 31,2014 — $ — — $ — 6,964,053 $16,522,811 2,029,747 $2,030 $1,975,000 $(10,028,705) $(8,051,675) Conversion ofSeries 1convertiblepreferred stock — — — — (6,964,053) (16,522,811) 3,704,215 3,704 16,519,107 — 16,522,811 Issuance ofcommon stock,net of issuancecosts — — — — — — 3,450,000 3,450 42,118,554 — 42,122,004 Exercise of stockoptions — — — — — — 15,957 16 63,493 — 63,509 Stock-basedcompensationexpense — — — — — — — — 1,600,625 — 1,600,625 Net loss — — — — — — — — — (12,551,350) (12,551,350) Balance atDecember 31,2015 — — — — — — 9,199,919 9,200 62,276,779 (22,580,055) 39,705,924 Issuance ofcommon stock,net of issuancecosts — — — — — — 794,906 795 9,999,730 — 10,000,525 Stock-basedcompensationexpense — — — — — — — — 3,269,366 — 3,269,366 Net loss — — — — — — — — — (23,388,507) (23,388,507) Balance atDecember 31,2016 — $ — — $ — — $ — 9,994,825 $9,995 $75,545,875 $(45,968,562) $29,587,308 See accompanying notes to consolidated financial statements. 88 Table of Contents ZYNERBA PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2016 2015 2014 Cash flows from operating activities: Net loss $(23,388,507) $(12,551,350) $(5,669,577) Adjustments to reconcile net loss to net cash used in operatingactivities: Depreciation 75,301 26,027 27,063 Forgiveness of accounts payable — — (180,782) Common stock issued for services — — 2,063,565 Stock-based compensation 3,269,366 1,600,625 — Loss on disposal of equipment 99,147 — 22,550 Changes in operating assets and liabilities: Incentive and tax receivables (3,257,225) (356,718) — Grant receivables — — 34,514 Prepaid expenses and other assets (285,041) (359,968) 437,691 Deferred grant revenue (7,250) (278,900) (641,321) Accounts payable 1,044,127 536,354 140,105 Accrued expenses 2,011,916 1,597,131 225,537 Net cash used in operating activities (20,438,166) (9,786,799) (3,540,655) Cash flows from investing activities: Purchases of property and equipment (109,628) (216,335) (19,717) Net cash used in investing activities (109,628) (216,335) (19,717) Cash flows from financing activities: Proceeds from issuance of Series B redeemable convertible preferredstock, net — — 309,911 Proceeds from issuance of Series 1 convertible preferred stock, net — — 12,925,034 Proceeds from the issuance of common stock, net of offering costs 10,000,525 42,122,004 1,409 Proceeds from the exercise of stock options — 63,509 — Repayment of borrowings — — (499,996) Net cash provided by financing activities 10,000,525 42,185,513 12,736,358 Net (decrease) increase in cash and cash equivalents (10,547,269) 32,182,379 9,175,986 Cash and cash equivalents at beginning of period 41,513,060 9,330,681 154,695 Cash and cash equivalents at end of period $30,965,791 $41,513,060 $9,330,681 Supplemental disclosures of cash flow information: Accrued dividends on redeemable convertible preferred stock $ — $ — $48,078 Accretion of redeemable convertible preferred stock — — 39,876 Deferred offering costs included in accounts payable — — 1,080,199 Change in property and equipment acquired but not paid (19,444) 17,696 1,748 Cash paid for interest — — 1,920 See accompanying notes to unaudited consolidated financial statements 89 Table of Contents ZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1)Nature of Business and Liquidity Zynerba Pharmaceuticals, Inc., together with its subsidiary, Zynerba Pharmaceuticals Pty Ltd (the “Company”, “we”), is aclinical stage specialty pharmaceutical company dedicated to developing and commercializing innovative transdermalcannabinoid treatments for patients with high unmet needs. The Company was incorporated on January 31, 2007 under thelaws of the State of Delaware as AllTranz, Inc. and changed its name to Zynerba Pharmaceuticals, Inc. in August 2014. TheCompany operated in Lexington, Kentucky until October 2014 when it moved its operations to Pennsylvania. The Company has incurred losses and negative cash flows from operations since inception and has an accumulated deficit of$46.0 million as of December 31, 2016. The Company anticipates incurring additional losses until such time, if ever, that itcan generate significant revenue from its product candidates currently in development. The Company's primary source ofliquidity has been the issuance of equity securities and convertible promissory notes. In August 2015, the Company completed its Initial Public Offering (IPO) of common stock selling 3,450,000 shares at anoffering price of $ 14.00 per share, resulting in gross proceeds of $48.3 million. Net proceeds received after underwriting feesand offering expenses were $42.1 million. In connection with the IPO, all outstanding shares of Series 1 convertible preferredstock converted into 3,704,215 shares of common stock. During the year ended December 31, 2016, the Company entered into an Open Market Sales Agreement (the “SalesAgreement”) with Jefferies LLC (“Jefferies”) pursuant to which the Company sold and issued 794,906 shares of commonstock in the open market at a weighted average selling price of $13.39 per share, for gross proceeds of $10.6 million. Netproceeds received after deducting commissions and offering expenses were $10.0 million. In the first quarter of 2017, the Company completed a follow-on public offering, selling 3,220,000 shares at an offering priceof $18.00 per share resulting in gross proceeds of $58.0 million. Net proceeds received after deducting underwriting andcommissions and offering expenses were $54.3 million. Management believes that current cash and cash equivalents, including proceeds from the Company’s follow-on publicoffering in the first quarter of 2017, are sufficient to develop five Phase 3 ready programs and, assuming feedback from theFDA supports a decision to move forward, initiate at least one Phase 3 program and fund operations and capital requirementsinto 2019. Substantial additional financings will be needed by the Company to fund its operations, to complete clinicaldevelopment of and to commercially develop its product candidates. There is no assurance that such financing will beavailable when needed or on acceptable terms. The Company is subject to those risks associated with any clinical stage pharmaceutical company that has substantialexpenditures for research and development. There can be no assurance that the Company's research and development projectswill be successful, that products developed will obtain necessary regulatory approval, or that any approved product will becommercially viable. In addition, the Company operates in an environment of rapid technological change and is largelydependent on the services of its employees and consultants. (2) Summary of Significant Accounting Policies a.Basis of Presentation The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. generallyaccepted accounting principles (GAAP) and with the instructions to Form 10-K and Article 10 of Regulation S-X. 90 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED b. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of thefinancial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differfrom such estimates. c. Fair Value of Financial Instruments The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts payable and accruedexpenses approximate fair value given their short‑term nature. d. Cash and Cash Equivalents The Company considers all highly liquid investments that have maturities of three months or less when acquired to be cashequivalents. As of December 31, 2016 and 2015, the Company invested a portion of its cash balances in money market funds,which has been included as cash equivalents on the consolidated balance sheets. e. Incentive and Tax Receivable The Company’s subsidiary, Zynerba Pharmaceuticals Pty Ltd (the “Subsidiary”), is incorporated in Australia. The Subsidiaryis eligible to participate in an Australian research and development tax incentive program. As part of this program, theSubsidiary is eligible to receive a cash refund from the Australian Taxation Office for a percentage of the research anddevelopment costs expended by the Subsidiary in Australia. During the year ended December 31, 2016, the Companyreceived $0.4 million from the Australian Taxation Office related to 2015 eligible spending under this incentive program. Asof December 31, 2016, the Company estimates it will collect $3.3 million during the year ended December 31, 2017, relatedto 2016 eligible spending as part of this incentive program. The Company’s estimate of the amount of cash refund it expectsto receive in 2017 related to the Australian research and development tax incentive program is included in “Incentive andtax receivables” on the accompanying consolidated balance sheets. In addition, the Subsidiary incurs Goods and Services Tax (“GST”) on services provided by Australian vendors. As anAustralian entity, the Subsidiary is entitled to a refund of the GST paid. During the year ended December 31, 2016, theCompany received a refund of $0.5 million for GST paid to Australian vendors through September 30, 2016, and theCompany estimates it will collect an additional $0.3 million in 2017 for GST on expenses related to Australian vendorsincurred during the remainder of 2016. The Company’s estimate of the amount of cash refund it expects to receive related toGST paid is included in “Incentive and tax receivables” on the accompanying consolidated balance sheets. f. Prepaid Expenses and Other Assets Prepaid expenses primarily consist of prepaid preclinical study and clinical trial expenses of $1.5 million and $1.2 million asof December 31, 2016 and 2015, respectively. g. Property and Equipment Property and equipment are recorded at cost and are depreciated on a straight‑line basis over their estimated useful lives. TheCompany estimates a life of three years for computer equipment and five years for furniture and fixtures and lab equipment,unless circumstances dictate otherwise. When property and equipment are sold or otherwise disposed of, the cost and relatedaccumulated depreciation are removed from the accounts and the resulting gain or loss is included in other expenses. Repairsand maintenance costs are expensed as incurred. During the year ended December 31, 2016, the Company recognized a losson the disposal of equipment of $99,147, which is reflected in “Loss on disposal of equipment” on the accompanyingconsolidated statement of operations.91 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED h. Impairment of Long‑Lived Assets The Company assesses the recoverability of its long‑lived assets, which include property and equipment, wheneversignificant events or changes in circumstances indicate impairment may have occurred. If indicators of impairment exist,projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whetherthe asset’s value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related assetin excess of fair value and a charge to operating results. For the years ended December 31, 2016, 2015 and 2014, theCompany determined that there was no impairment of its long‑lived assets. i. Research and Development Research and development costs are expensed as incurred and are primarily comprised of external research and developmentexpenses incurred under arrangements with third parties, such as contract research organizations (“CROs”), consultants andemployee related expenses including salaries and benefits. At the end of each reporting period, the Company compares thepayments made to each service provider to the estimated progress towards completion of the related project. Factors that theCompany considers in preparing these estimates include the number of patients enrolled in studies, milestones achieved andother criteria related to the efforts of its vendors. These estimates will be subject to change as additional information becomesavailable. Depending on the timing of payments to vendors and estimated services provided, the Company will record netprepaid or accrued expenses related to these costs. Beginning in the fourth quarter of 2015, research and development costsare reduced by the Australian research and development incentive and GST recorded in the respective period. j. Stock‑Based Compensation The Company measures employee and nonemployee stock‑based awards at grant‑date fair value and records compensationexpense on a straight‑line basis over the vesting period of the award. Stock‑based awards issued to non‑employees, if any, arerevalued until the award vests. The Company estimates the fair value of restricted stock based on the closing price of the Company’s common stock on thedate of grant. The Company uses the Black‑Scholes option pricing model to value its stock option awards. Estimating the fairvalue of stock option awards requires management to apply judgment and make estimates, including the volatility of theCompany’s common stock, the expected term of the Company’s stock options, the expected dividend yield and the fair valueof the Company’s common stock on the date of grant. As a result, if factors change and management uses differentassumptions, stock‑based compensation expense could be materially different for future awards. The expected life of stock options was estimated using the “simplified method,” as the Company has no historicalinformation to develop reasonable expectations about future exercise patterns and post vesting employment terminationbehavior for its stock option grants. The simplified method is based on the average of the vesting tranches and thecontractual life of each grant. For stock price volatility, the Company uses comparable public companies as a basis for itsexpected volatility to calculate the fair value of option grants. The risk-free interest rate is based on U.S. Treasury notes witha term approximating the expected life of the option. k. Revenue Recognition Revenue related to research grants and research services for third party product development are recognized when persuasiveevidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable,and collectability is reasonably assured. Grant revenue received is deferred until the related expenditures are incurred.Revenue in 2016 and 2015 was entirely related to work performed in connection with grants92 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED received prior to 2015. Research services revenue of $0.1 million in 2014 represents fees for research and developmentactivities. l. Income Taxes The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basisand the tax basis of the Company’s assets and liabilities and the expected benefits of net operating loss carryforwards. Theimpact of changes in tax rates and laws on deferred taxes, if any, applied during the years in which temporary differences areexpected to be settled, is reflected in the financial statements in the period of enactment. The measurement of deferred taxassets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferredtax assets will not be realized. As of December 31, 2016 and 2015, the Company has concluded that a full valuationallowance is necessary for their net deferred tax assets. The Company had no material amounts recorded for uncertain taxpositions, interest or penalties in the accompanying financial statements. m. Net Loss Per Share Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number ofshares of common stock outstanding during each period. Diluted loss per share includes the effect, if any, from the potentialexercise or conversion of securities, such as redeemable convertible preferred stock, convertible preferred stock, restrictedstock, and stock options, which would result in the issuance of incremental shares of common stock. In computing the basicand diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the samefor both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as theimpact is anti‑dilutive. The following potentially dilutive securities outstanding as of December 31, 2016, 2015 and 2014 have been excluded fromthe computation of diluted weighted average shares outstanding, as they would be anti‑dilutive: Year ended December 31, 2016 2015 2014 Convertible preferred stock — — 3,704,126 Stock options 1,808,493 1,637,399 542,550 Unvested restricted stock 253,702 398,671 579,882 2,062,195 2,036,070 4,826,558 Amounts in the table reflect the common stock equivalents of the noted instruments. n. Foreign Currency The Company has determined the functional currency of its Australian subsidiary to be the U.S. dollar. The Companytranslates assets and liabilities of its foreign operations at exchange rates in effect at the balance sheet date. The Companyrecords remeasurement gains and losses on monetary assets and liabilities, such as incentive and tax receivables and accountspayables, which are not in the functional currency of the operation. These remeasurement gains and losses are recorded in thestatement of operations as they occur. o. Segment Information Operating segments are defined as components of an enterprise about which separate discrete information is available forevaluation by the chief operating decision maker, or decision‑making group, in deciding how to allocate resources and inassessing performance. The Company views its operations and manages its business in one segment. 93 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED p. Recent Accounting Pronouncements In August 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about anEntity’s Ability to Continue as a Going Concern, which defines management’s responsibility to assess an entity’s ability tocontinue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability tocontinue as a going concern. The pronouncement was effective for annual reporting periods ending after December 15, 2016with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s consolidatedfinancial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires that lease arrangements longer than 12 monthsresult in an entity recognizing an asset and liability. The pronouncement is effective for interim and annual periodsbeginning after December 15, 2018 with early adoption permitted. The adoption of this guidance is not expected to have amaterial impact on the Company’s consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which isintended to simplify the accounting and reporting for employee share-based payment transactions. The pronouncement iseffective for interim and annual periods beginning after December 31, 2016 with early adoption permitted. The adoption ofthis guidance is not expected to have a material impact on the Company’s consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, whichprovides specific guidance related to eight cash flow classification issues. The pronouncement is effective for interim andannual periods beginning after December 15, 2017 with early adoption permitted. The adoption of this guidance is notexpected to have a material impact on the Company’s consolidated financial statements. In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which requires changes in restricted cash andrestricted cash equivalents to be explained on the statement of cash flows by including restricted cash and restricted cashequivalents in the beginning-of-period and end-of-period total cash and cash equivalents shown on the statement of cashflows. The pronouncement is effective for interim and annual periods beginning after December 15, 2017 with early adoptionpermitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financialstatements. (3) Fair Value Measurements The Company utilizes a valuation hierarchy that prioritizes fair value measurements based on the types of inputs used for thevarious valuation techniques related to its financial assets and financial liabilities. The three levels of inputs used to measurefair value are described as follows: Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 — Observable inputs and quoted prices in active markets for similar assets and liabilities. Level 3 — Unobservable inputs and models that are supported by little or no market activity. 94 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED In accordance with the fair value hierarchy described above, the following table sets forth the Company's financial assetsmeasured at fair value on a recurring basis: Fair Value Measurement Carrying value as of December 31, 2016 as of December 31,2016 Level 1 Level 2 Level 3 Cash equivalents (money marketaccounts) $30,485,212 $30,485,212 $ — $ — Certificate of deposit (included inprepaid expenses and other currentassets) 20,000 20,000 — — $30,505,212 $30,505,212 $ — $ — Fair Value Measurement Carrying value as of December 31, 2015 as of December 31,2015 Level 1 Level 2 Level 3 Cash equivalents (money marketaccounts) $41,032,351 $41,032,351 $ — $ — Certificate of deposit (included inprepaid expenses and other currentassets) 20,000 20,000 — — $41,052,351 $41,052,351 $ — $ — (4) Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following as of December 31, 2016 and 2015: December 31, December 31, 2016 2015 Prepaid development expenses $1,473,402 $1,211,668 Prepaid insurance 321,463 282,440 Other 36,093 51,809 Total prepaid expenses and other current assets $1,830,958 $1,545,917 (5) Property and Equipment Property and equipment consisted of the following as of December 31, 2016 and 2015: Estimated useful life December 31, December 31, (in years) 2016 2015 Equipment 2-5 $85,417 $139,526 Computer equipment 3-5 27,111 23,632 Furniture and fixtures 5 99,731 94,118 Total cost 212,259 257,276 Less accumulated depreciation (68,877) (29,630) Property and equipment, net $143,382 $227,646 Depreciation expense was $75,301, $26,027 and $27,063 for the years ended December 31, 2016, 2015 and 2014respectively. 95 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED (6) Accrued Expenses Accrued expenses consisted of the following as of December 31, 2016 and 2015: December 31, December 31, 2016 2015 Accrued compensation $1,349,108 $1,047,530 Accrued research and development 2,628,681 943,295 Other 307,118 282,166 Total accrued expenses $4,284,907 $2,272,991 (7) Debt In April 2007, the Company was awarded a grant by the Kentucky Economic Development Finance Authority (KEDFA) onbehalf of the Commonwealth of Kentucky Department of Commercialization and Innovation in the form of a non interestbearing forgivable loan in the amount of up to $500,000 to be used for the purchase of equipment. In January 2014, theCompany granted KEDFA liens on certain of its patents as security for the forgivable loan. In September 2014, the Companyrepaid the forgivable loan balance of $499,996 as management determined they would not meet the performance criteriaassociated with the grant and KEDFA released its security interest. (8) Redeemable Convertible Preferred Stock, Common Stock and Stockholders’ Equity (Deficit) Series A and Series B Redeemable Convertible Preferred Stock In connection with the Company’s recapitalization in 2014, all $0.0001 par value Series A Participating Preferred Stock(Series A) and $0.0001 par value Series B Participating Preferred Stock (Series B) were converted to Series 1 convertiblepreferred stock (see below). The Series B ranked senior to the Series A and the common stock in liquidation. The Series A and B were convertible intocommon stock at the option of the holder, automatically converted into common stock upon a public offering of stock with apublic offering price of not less than $25,000,000, or the consent of a majority of the holders and had a liquidation value of$1.75 per share plus unpaid dividends. Dividends were cumulative, accrued beginning in June 2008 and October 2013 forthe Series A and Series B, respectively, at a rate of 6% per year and became payable upon declaration by the board ofdirectors of the Company, redemption or liquidation. At the earlier of a Company Default (as defined) or August 30, 2017, the Series A and B Preferred Stock were redeemable atthe option of a majority of the holders at the greater of a price per share of $1.75 plus unpaid dividends, if any, or the then fairmarket value. Total accretion of the Series A unamortized issuance cost towards redemption value was $1,309 for the yearended December 31, 2014. Total accretion of the Series A dividends towards the redemption value was $24,134 for the yearended December 31, 2014. Total accretion of the Series B unamortized issuance cost and beneficial conversion feature towards the redemption valuewas $38,568 for the year ended December 31, 2014. Total accretion of the Series B dividends towards the redemption valuewas $23,943 for the year ended December 31, 2014. In January 2014, the Company issued 200,002 shares of Series B and warrants to purchase 49,998 shares of Series B for totalproceeds of $350,000 less stock issuance costs of $3,089 for net proceeds to the Company of $346,911. In April 2014, thewarrants to purchase 49,998 shares of Series B were exercised for total proceeds to the Company of $500. Since the Series Bunderlying the warrants could have been redeemed for cash upon an event that was not within the Company’s control, thesewarrants were classified as a derivative liability with changes to fair value, if any, recorded through earnings at each reportingperiod through the exercise date.96 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED Recapitalization Transactions In May 2014, a series of transactions, referred to as the Recapitalization Transactions, were executed resulting in the issuanceof 720,002 shares of Series 1 convertible preferred stock (Series 1) and 797,871 shares of new common stock, as follows: ·A shareholder who was an original founder of the Company elected to forfeit 359,042 shares of the originalcommon stock. The forfeited shares were canceled and retired by the Company. ·All outstanding options that were previously issued were cancelled. ·The Company issued 74,923 shares of common stock to certain existing investors and employees for totalproceeds of $1,409. As a result of the issuance, the Company recognized $123,958 of noncash general andadministrative expense during the year ended December 31, 2014. ·Prior to the recapitalization, all outstanding shares of the Series A and the Series B were converted into shares ofcommon stock. The Company converted 720,002 shares of Series A and 1,248,109 shares of Series B into1,046,847 shares of common stock. ·On May 6, 2014, the Company recapitalized. In connection with the recapitalization, each share of commonstock was exchanged into shares of Series 1 by multiplying each share of common stock issued and outstandingimmediately prior to the recapitalization by 0.57434. As a result, 720,002 shares of Series 1 were issuedpursuant to such exchange. ·In connection with the recapitalization, 478,723 shares of new common stock were issued to a new investor(New Investor). The Company recognized $792,000 of noncash general and administrative expense during theyear ended December 31, 2014 as a result of the issuance. In addition, the Company issued 319,148 shares ofnew common stock to the same shareholder that forfeited 359,042 shares of common stock prior to therecapitalization. Series 1 Convertible Preferred Stock From May 2014 through October 2014, the Company issued an aggregate of 6,244,051 shares of Series 1 for total proceeds of$13,214,912 less stock issuance costs of $289,878 for net proceeds of $12,925,034. The Series 1 converted into 3,704,215shares of common stock in connection with the IPO. Voting Holder of the Series 1, voting as a class, were entitled to elect four members of the board of directors. Holders of the commonstock, voting as a single class, were entitled to elect one member of the board of directors. Dividends Holders of Series 1 were entitled to receive a dividend on each outstanding share of Series 1, if and when declared by theboard of directors, issuable upon the conversion of a share of Series 1 on the record date in the case of a dividend on commonstock or any class or series convertible into common stock. 97 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED Liquidation In the event of a liquidation, dissolution, or winding‑up, or in the event the Company was merged with, or was acquired byanother entity, the holders of each share of Series 1 were entitled to receive an amount equal to the greater of the $3.98 pershare plus any dividends declared but unpaid thereon or such amount per share as would have been payable had all shares ofSeries 1 been converted to common stock immediately prior to such liquidation. With respect to the liquidation preference,after payment has been made to the holders of Series 1, the remaining assets available for distribution would have beendistributed to the holders of common stock. Redemption The Series 1 was subject to redemption under certain “deemed liquidation events” and as such, the Series 1 was consideredcontingently redeemable for financial accounting purposes. The Company concluded that none of these events wereprobable at December 31, 2014. Common Stock Transactions In September 2014, the Company issued 579,614 shares of common stock to the New Investor for providing certain advisoryservice, including management services. The Company recognized $958,914 of noncash general and administrative expensefor these issuances during the year ended December 31, 2014. An additional 114,047 shares of common stock were issued tothird parties for providing consulting services. As a result of the issuances, the Company recognized $188,693 of noncashgeneral and administrative expense during the year ended December 31, 2014. In October 2014, the New Investor forfeited 41,667 shares of common stock. In August 2015, the Company completed its IPO, selling 3,450,000 shares at an offering price of $14.00 per share, resultingin gross proceeds of $48.3 million. Net proceeds received after underwriting fees and offering expenses were approximately$42.1 million. During the year ended December 31, 2016, the Company entered into the Sales Agreement with Jefferies pursuant to whichthe Company sold and issued 794,906 shares of common stock in the open market at a weighted average selling price of$13.39 per share, for gross proceeds of $10.6 million. Net proceeds received after deducting commissions and offeringexpenses were $10.0 million. In the first quarter of 2017, the Company completed an additional follow-on public offering, selling 3,220,000 shares at anoffering price of $18.00 per share resulting in gross proceeds of $58.0 million. Net proceeds received after deductingunderwriting and commissions and offering expenses were $54.3 million. (9) Stock-Based Compensation During May 2014, all outstanding stock options under the 2007 stock option plan were cancelled in connection with therecapitalization (Note 8). The Company maintains the Amended and Restated 2014 Omnibus Incentive Compensation Plan, as amended (the “2014Plan”), which allows for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, stockawards, stock units, performance units and other stock‑based awards to purchase an aggregate of 2,450,000 shares of theCompany’s common stock to employees, officers, directors, consultants, and advisors, subject to automatic annual increasesin the number of shares authorized for issuance under the 2014 Plan on the first trading day of January each year, equal to thelesser of 1.5 million shares and 10% of the number of shares of common stock outstanding on the last trading day ofDecember of the preceding year. In addition, the 2014 Plan provides selected executive employees98 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED with the opportunity to receive bonus awards that are considered qualified performance‑based compensation. As ofDecember 31, 2016, 195,668 shares are available for issuance under the 2014 Plan. Options issued under the 2014 Plan have a contractual life of 10 years and may be exercisable in cash or as otherwisedetermined by the board of directors. The Company has granted options to employees and non‑employee directors. In October and December 2014, the Company entered into employment contracts and agreements in connection with thehiring of its key executives and certain consultants and issued stock options to purchase 542,550 shares of common stockwith an exercise price of $3.98 per share and 579,882 shares of restricted common stock that have certain performance‑basedand time‑based vesting criteria. The stock options and restricted stock awards vested 25% upon the closing of the Company’sIPO and then quarterly over three years following the closing of the Company’s IPO. Accordingly, prior to the Company’sIPO in August 2015, no expense had been recorded for the stock option grants and restricted stock awards. During the year ended December 31, 2015, the Company granted 1,110,806 stock options, which included 1,001,977 stockoptions that were granted to employees and the Company’s Board of Directors at the time of the Company’s IPO. The stockoptions granted to the Company’s employees at the time of the IPO, primarily vest in sixteen equal quarterly increments fromthe IPO date. The stock options granted to the Company’s Board of Directors at the time of the IPO vest in equal one-thirdincrements on the anniversary of the of the Company’s IPO for three consecutive years. All other stock options grantedduring 2015 vest 25% upon the first anniversary of the relative grant date and quarterly over three years thereafter. During the year ended December 31, 2016, the Company granted 285,000 stock options to employees and the Company’sBoard of Directors, of which 150,000 stock options were granted as an inducement grant pursuant to NASDAQ Listing Rule5635(c)(4) and are outside of the 2014 Plan. The stock options granted to the Company’s Board of Directors vest on theearlier of the one-year anniversary of the grant date, or the date of the Company’s 2017 annual stockholders’ meeting. Thestock options granted to the Company’s employees vest 25% upon the first anniversary date of grant and quarterly over threeyears thereafter. During the years ended December 31, 2016 and 2015, the Company recorded stock-based compensation expense related toits stock option grants and restricted stock awards, as follows: Year Ended December 31, 2016 Year Ended December 31, 2015 Research andDevelopment General andAdministrative Total Research andDevelopment General andAdministrative Total Stock option grants $1,137,639 $1,891,887 $3,029,526 $403,395 $860,281 $1,263,676 Restricted stock awards 143,469 96,371 239,840 142,506 194,443 336,949 $1,281,108 $1,988,258 $3,269,366 $545,901 $1,054,724 $1,600,625 99 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED The following table summarizes the Company’s stock option activity. Weighted Average Weighted GrantDate Average Options Fair Value ExercisePrice Outstanding as of December 31, 2014 542,550 $0.84 $3.98 Granted under the 2014 Plan 1,110,806 $9.13 $13.58 Exercised (15,957) $0.84 $3.98 Outstanding as of December 31, 2015 1,637,399 $6.47 $10.49 Granted under the 2014 Plan 135,000 $5.96 $8.99 Granted as an inducement grant 150,000 $6.95 $10.23 Forfeited (113,906) $8.12 $12.67 Outstanding as of December 31, 2016 1,808,493 $6.36 $10.22 As of December 31, 2016, there was $7.3 million of unrecognized stock-based compensation expense related to stockoptions, which is expected to be recognized over a weighted-average period of 2.56 years. As of December 31, 2016,641,375 stock options with a weighted average grant date fair value of $5.18 per share were exercisable. The Companyexpects 1,154,618 unvested stock options to vest. As of December 31, 2016, the Company’s outstanding stock options had aweighted average contractual life of 8.5 years and an intrinsic value of $9.7 million. The weighted average grant date fair value of stock options granted during the year ended December 31, 2016 was estimatedusing the Black-Scholes option pricing model with the following ranges of assumptions: expected volatility of 77%, risk freeinterest rate of 1.4% - 2.2%, expected term of 5.5 years to 6.25 years and 0% expected dividend yield. The weighted averagegrant date fair value of stock options granted during the year ended December 31, 2015 was estimated using the Black-Scholes option pricing model with the following ranges of assumptions: expected volatility of 76% - 77%, risk free interestrate of 1.7% - 2.0%, expected term of 5.75 years to 6.25 years and 0% expected dividend yield. Due to the stage of theCompany and its recent IPO in August 2015, the Company currently computes volatility using a basket of peer companiesrather than its own historical experience. The following table summarizes the restricted stock award activity under the 2014 Plan. Weighted Average GrantDate Shares Fair Value Unvested as of December 31, 2014 579,882 $1.65 Vested (181,211) $1.65 Unvested as of December 31, 2015 398,671 $1.65 Vested (144,969) $1.65 Unvested as of December 31, 2016 253,702 $1.65 As of December 31, 2016, there was $0.4 million of unrecognized stock-based compensation expense related to unvestedrestricted stock awards as of December 31, 2016, which is expected to be recognized over a weighted-average period of 1.59years, and the Company expects all 253,702 unvested restricted stock awards to vest. 100 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED (10) Income Taxes The Company’s U.S. and foreign loss before income taxes are set forth below: Year ended December 31, 2016 2015 2014 United States $(18,803,227) $(12,145,964) $(5,669,577) Foreign (4,612,823) (377,843) — Total $(23,416,050) $(12,523,807) $(5,669,577) The Company had $36.5 million and $17.7 million of federal net operating loss carryforwards and $1.3 million and $0.4million of research tax credit carryforwards as of December 31, 2016 and 2015, respectively. The U.S. federal net operatingloss carryforwards and research tax credit carryforwards begin to expire in 2028 and 2027, respectively. The Company has$34.4 million and $21.6 million of state net operating loss carryforwards as of December 31, 2016 and 2015, respectively.The state net operating loss carryforwards begin to expire in 2028 and 2027, respectively. The Company had $1.2 million ofAustralia net operating loss carryforwards as of December 31, 2016, which have an indefinite life. The Tax Reform Act of 1986 (the Act) provides for limitation on the use of net operating loss and research and developmenttax credit carryforwards following certain ownership changes (as defined by the Act) that could limit the Company’s abilityto utilize these carryforwards. The Company may have experienced various ownership changes, as defined by the Act, as aresult of past financings. Accordingly, the Company’s ability to utilize the aforementioned carryforwards may be limited.Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, theCompany may not be able to take full advantage of these carryforwards for federal income tax purposes. The components of the net deferred income tax asset as of December 31, 2016 and 2015 are as follows: December 31,2016 December 31,2015 Deferred tax assets: Net operating loss carry‑forwards $14,877,358 $6,531,375 Startup costs — 817,052 Research and development credit carry‑forwards 1,337,748 425,282 Deferred revenue — 304,264 Stock-based compensation 1,576,280 227,093 Other 43,004 — Gross deferred tax assets 17,834,390 8,305,066 Deferred tax liabilities: Accumulated depreciation (21,632) (18,519) Gross deferred tax liabilities (21,632) (18,519) Less valuation allowance (17,812,758) (8,286,547) Net deferred tax asset $ — $ — In assessing the realizability of deferred tax assets, the Company considers whether it is more‑likely‑than‑not that someportion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent uponthe generation of future taxable income during the periods in which the temporary differences representing net futuredeductible amounts become deductible. After consideration of all the evidence, both positive and negative, the Companyhas recorded a full valuation allowance against its net deferred tax assets as of December 31, 2016 and 2015, respectively,because the Company has determined that is it more likely than not that these assets will not be fully realized due to historicnet operating losses incurred. The valuation allowance increased by $9.5 million and $4.7 million101 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED during the years ended December 31, 2016 and 2015, respectively, due primarily to the generation of net operating losscarryforwards during those years. The Company does not have unrecognized tax benefits as of December 31, 2016 and 2015, respectively. The Companyrecognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. A reconciliation of income tax expense (benefit) at the statutory federal income tax rate and income taxes as reflected in thefinancial statements is as follows: Year ended December 31, 2016 2015 2014 Federal income tax benefit at statutory rate 34.0% 34.0% 34.0%State income tax, net of federal benefit 7.8% 2.9% (0.3)%Foreign tax rate differential (0.2)%(0.1)% —%Nondeductible research and development expenses (4.7)%(1.1)% —%Other permanent differences —% (0.1)% (0.7)%Research and development credit benefit 3.9% 2.0% 1.6%Change in valuation allowance (40.7)% (37.8)% (34.6)%Effective income tax rate 0.1% (0.2)% —% The Company and its subsidiaries are subject to income taxes in the U.S. federal jurisdiction, various state jurisdictions andAustralia. The Company’s 2011 to 2016 tax years remain open and subject to examination. (11) Commitments and Contingencies a.Federal Grants There was no grant revenue received during the years ended December 31, 2016 and 2015. One U.S. Federal agency provided85% of grant revenue during the year ended December 31, 2014. When received, grant revenue is deferred until the relatedexpenditures are incurred. As of December 31, 2016 and 2015, there was $0.8 million and $0.8 million, respectively, included in deferred revenue and$0.8 million and $0.8 million, respectively, included in prepaid expenses and other assets for prepaid research anddevelopment contracts related to the federal grant “ARRA — Transdermal Cannabinoid Prodrug Treatment for CannabisWithdrawal and Dependence.” b.Research and Development Agreement In August 2014, the Company entered into a patent assignment consideration agreement with Albany College of Pharmacy(ACP) pursuant to which the Company paid $500,000 in exchange for the termination of a royalty agreement that wasexecuted in December 2004. This payment was expensed and included in general and administrative expenses for the yearended December 31, 2014. c.Employee Retirement Plan The Company has established a retirement plan authorized by section 401(k) of the Internal Revenue Code. In accordancewith the plan, all full-time employees age 21 or older are eligible to participate in the plan. Each employee can contribute apercentage of compensation up to a maximum of the statutory limits per year. The Company has the option to makediscretionary matching contributions and profit sharing contributions. The Company made no contributions during 2016,2015 or 2014. 102 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED d.Leases The Company has entered into lease agreements for office space in Pennsylvania and Kentucky. In February 2015, theCompany entered into the current lease for its Pennsylvania headquarters, which commenced in June 2015. In December2016, the Company entered into a lease amendment that provided for the expansion of its Pennsylvania headquarters, whichcommenced in February 2017. The lease, as amended, expires in 2020 and provides for minimum lease commitments of$156,478, $200,082, $203,755 and $85,535 for the years ended December 31, 2017, 2018, 2019 and 2020, respectively. TheCompany is party to a month-to-month lease for office space in Kentucky for which it pays a nominal monthly rent. TheCompany is also party to a lease for office equipment that expires in June 2017 for which it pays a nominal monthly rent. Total lease expense during the years ended December 31, 2016, 2015 and 2014 was $101,609, $77,192 and $63,880,respectively. e.Employment Agreements The Company has entered into employment contracts with its officers and certain employees that provide for severance andcontinuation of benefits in the event of termination of employment either by the Company without cause or by the employeefor good reason, both as defined in the agreements. In addition, in the event of termination of employment following achange in control, as defined in the employment contracts, either by the Company without cause or by the employee forgood reason, any unvested portion of the employee’s stock options become immediately vested. f.Litigation Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recordedwhen it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company believesthere are no matters pending or threatened that will have a material impact to the Company’s financial position or results ofoperations. (12) Related Party Transactions The Company paid affiliates of the New Investor $250,000 for the reimbursement of stock issuance costs during the yearended December 31, 2014. Additionally, the Company paid $250,000 for various services, including management services,rendered in 2014. Furthermore, the Company paid legal expenses on the behalf of the New Investor totaling $200,000, ofwhich, $37,366 related to stock issuance costs. In January 2015, the Company entered into a termination agreement with theNew Investor pursuant to which certain agreements will be terminated upon payment of $500,000. The Company paid theNew Investor $500,000 prior to the closing of the Company’s August 2015 IPO. 103 Table of ContentsZYNERBA PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–CONTINUED (13) Quarterly Financial Data (unaudited) The following information has been derived from unaudited consolidated financial statements that, in the opinion ofmanagement, include all recurring adjustments necessary for a fair statement of such information. 2016 First Quarter Second Quarter Third Quarter Fourth Quarter Revenue $7,250 $ — $ — $ — Operating expenses: Research and development 2,568,989 4,807,177 4,504,097 4,904,363 General and administrative 1,680,130 1,476,357 1,493,461 1,780,304 Total operating expenses 4,249,119 6,283,534 5,997,558 6,684,667 Loss from operations (4,241,869) (6,283,534) (5,997,558) (6,684,667) Other income (expense): Interest income (expense), net 12,377 18,118 22,747 26,980 Foreign exchange loss (23,148) (20,250) (6,270) (139,829) Loss on disposal of equipment — — — (99,147) Total other income (expense) (10,771) (2,132) 16,477 (211,996) Loss before income taxes (4,252,640) (6,285,666) (5,981,081) (6,896,663) Income tax expense (benefit) 28,734 (56,277) — — Net loss $(4,281,374) $(6,229,389) $(5,981,081) $(6,896,663) Net loss per share basic and diluted $(0.49) $(0.70) $(0.67) $(0.71) Basic and diluted weighted average sharesoutstanding 8,823,951 8,860,592 8,912,508 9,678,924 2015 First Quarter (1) Second Quarter (1) Third Quarter Fourth Quarter Revenue $14,828 $15,390 $199,407 $49,275 Operating expenses: Research and development 853,704 1,010,989 2,271,968 3,309,008 General and administrative 653,773 631,474 1,922,755 2,156,388 Total operating expenses 1,507,477 1,642,463 4,194,723 5,465,396 Loss from operations (1,492,649) (1,627,073) (3,995,316) (5,416,121) Other income (expense): Interest income (expense), net 680 697 1,572 4,403 Loss before income taxes (1,491,969) (1,626,376) (3,993,744) (5,411,718) Income tax expense — — — 27,543 Net loss $(1,491,969) $(1,626,376) $(3,993,744) $(5,439,261) Net loss per share basic and diluted $(1.03) $(1.12) $(0.66) $(0.62) Basic and diluted weighted average sharesoutstanding 1,449,865 1,449,865 6,045,211 8,787,855 The sum of the quarterly per share amounts may not equal per share amounts reported for the year due to rounding. The Company has corrected the amounts above to exclude contingently redeemable shares from the net loss per sharebasic and diluted and basic and diluted weighted average shares outstanding calculations for the first and second quarter.The Company had previously disclosed $0.74 net loss per share basic and diluted for the three months ended March 31, 2015in the Company's Form S-1 and $0.80 net loss per share basic and diluted for the three months ended June 30, 2015 in thesecond quarter Form 10-Q. 104 (1)Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures as of December 31, 2016. The term “disclosure controls andprocedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of acompany that are designed to ensure that information required to be disclosed by a company in the reports that it files orsubmits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the company’s management, including its principal executive and principal financialofficers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controlsand procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving theirobjectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controlsand procedures. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls andprocedures as of December 31, 2016, 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. Management’s annual report on internal control over financial reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internalcontrol over financial reporting is a process designed to provide reasonable assurance of the reliability of financial reportingand of the preparation of financial statements for external reporting purposes, in accordance with U.S. generally acceptedaccounting principles. Internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that,in reasonable detail, accurately and fairly reflect transactions and disposition of assets; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generallyaccepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorizationof its management and directors; and (3) provide reasonable assurance regarding the prevention or timely detection ofunauthorized acquisition, use, or disposition of our assets that could have a material effect on its financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies and procedures included insuch controls may deteriorate. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. Inmaking this assessment, management used the criteria established by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control – Integrated Framework (2013). These criteria are in the areas of controlenvironment, risk assessment, control activities, information and communication, and monitoring. Management’s assessmentincluded extensive documentation, evaluating and testing the design and operating effectiveness of its internal controls overfinancial reporting. Based on the Management’s processes and assessment, as described above, management has concluded that, as of December31, 2016, our internal control over financial reporting was effective. 105 Table of ContentsChanges in Internal Control Over Financial Reporting There has been no change in our internal control over financial reporting during the last fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance The information called for by this item is incorporated herein by reference to the material under the captions “Board ofDirectors, Executive Officers and Corporate Governance,” and “Security Ownership of Certain Beneficial Owners andManagement – Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement for the 2017 annualmeeting of stockholders to be filed no later than 120 days after the end of our fiscal year ended December 31, 2016 (the“2017 Proxy Statement”). Item 11. Executive Compensation The information called for by this item is incorporated herein by reference to the material under the captions “Board ofDirectors, Executive Officers and Corporate Governance,” “Director Compensation” and “Executive Compensation” in our2017 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table contains information about our equity compensation plans as of December 31, 2016. Equity Compensation Plan Information Number ofsecurities Number of Weighted- remainingavailable securities to average for future issuance be issuedupon exercise under equity exercise of price of compensationplans outstanding outstanding (excludingsecurities Plan Category options options reflected incolumn (a)) Equity compensation plans approved by security holders 1,658,493 10.22 195,668 Equity compensation plans not approved by security holders 150,000(1)10.23 —(2) Total 1,808,493 10.22 195,668 (1)Reflects option grants that were “inducement grants” as defined in NASDAQ Listing Rule 5635(c)(4).(2)Our board of directors has not established any specific number of shares that could be issued without shareholderapproval. Inducement grants to new key employees are determined on a case-by-case basis. Other than possibleinducement grants, we expect that all equity awards will be made under stockholder-approved plan. Please see note (9) to our audited financial statements for a description of our Amended and Restated 2014 OmnibusIncentive Compensation Plan. The other information called for by this item is incorporated herein by reference to the material under the caption “SecurityOwnership of Certain Beneficial Owners and Management” in our 2017 Proxy Statement. 106 Table of Contents Item 13. Certain Relationships and Related Transactions, and Director Independence The information called for by this item is incorporated herein by reference to the material under the captions “CertainRelationships and Related Party Transactions” and “Board of Directors, Executive Officers and Corporate Governance –Policies and Procedures for Related Party Transactions” in our 2017 Proxy Statement. Item 14. Principal Accounting Fees and Services The information called for by this item is incorporated herein by reference to the material under the captions “IndependentAuditors and Related Fees” in our 2017 Proxy Statement. PART IV Item 15. Exhibits, Financial Statement Schedules (a)(1) Financial Statements. The Consolidated Financial Statements and related Notes thereto as set forth under Item 8 of this Report areincorporated herein by reference. (a)(2) Financial Statement Schedules. No financial statement schedules are provided because the information called for is not required or is shown either inthe financial statements or the notes thereto. (a)(3) Exhibits: A list of exhibits to this Annual Report on Form 10-K is set forth on the Exhibit Index immediately preceding suchexhibits and is incorporated herein by reference. (b) Exhibits See Exhibit Index. (c) Not applicable Item 16. Form 10-K Summary None. 107 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 2017 ZYNERBA PHARMACEUTICALS, INC. By: /s/ Armando Anido Armando Anido Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Armando Anido Armando AnidoChairman and Chief Executive Officer(Principal Executive Officer)March 27, 2017/s/ James E. Fickenscher James E. FickenscherChief Financial Officer(Principal Financial Officer)March 27, 2017/s/ Warren D. Cooper, MB, BS, BSc, MFPM Warren D. Cooper, MB, BS, BSc, MFPMDirectorMarch 27, 2017/s/ William J. Federici William J. FedericiDirectorMarch 27, 2017/s/ Thomas L. Harrison, LH.D Thomas L. Harrison, LH.DDirectorMarch 27, 2017/s/ Daniel L. Kisner, MD Daniel L. Kisner, MDDirectorMarch 27, 2017 /s/ Kenneth I. Moch Kenneth I. MochDirectorMarch 27, 2017/s/ Cynthia A. Rask, MD Cynthia A. Rask, MDDirectorMarch 27, 2017 108 Table of Contents EXHIBIT INDEX ExhibitNo.Exhibit Description3.1Sixth Amended and Restated Certificate of Incorporation of Zynerba Pharmaceuticals, Inc., effective August 10,2015. Incorporated herein by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K (File No.001-37526) filed on August 10, 2015.3.2Amended and Restated By-laws of Zynerba Pharmaceuticals, Inc., effective August 10, 2015. Incorporatedherein by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K (File No. 001-37526) filed onAugust 10, 2015.4.1Form of Common Stock Certificate. Incorporated herein by reference to Exhibit 4.1 to the registrant’sRegistration Statement on Form S-1/A (File No. 333-205355) filed on July 31, 2015.4.2Third Amended and Restated Stockholders Agreement, dated May 6, 2014, by and among the registrant andcertain stockholders. Incorporated herein by reference to Exhibit 4.2 to the registrant’s Registration Statementon Form S-1 (File No. 333-205355) filed on June 30, 2015.10.1(A)+Employment Agreement, dated September 4, 2014, by and between the registrant and Armando Anido.Incorporated herein by reference to Exhibit 10.2(A) to the registrant’s Registration Statement on Form S-1 (FileNo. 333-205355) filed on June 30, 2015.10.1(B)+Amendment to the Employment Agreement, dated October 2, 2014, by and between the registrant and ArmandoAnido. Incorporated herein by reference to Exhibit 10.2(B) to the registrant’s Registration Statement on Form S-1 (File No. 333-205355) filed on June 30, 2015.10.2+Employment Agreement, dated October 2, 2014, by and between the registrant and Terri B. Sebree. Incorporatedherein by reference to Exhibit 10.3 to the registrant’s Registration Statement on Form S-1 (File No. 333-205355)filed on June 30, 2015.10.3+Employment Agreement, dated October 2, 2014, by and between the registrant and Suzanne M. Hanlon.Incorporated herein by reference to Exhibit 10.4 to the registrant’s Registration Statement on Form S-1 (File No.333-205355) filed on June 30, 2015.10.4+Employment Agreement, dated January 2, 2015, by and between the registrant and Richard A. Baron.Incorporated herein by reference to Exhibit 10.5 to the registrant’s Registration Statement on Form S-1 (File No.333-205355) filed on June 30, 2015.10.5+Separation Agreement, dated August 10, 2016, between and among the registrant and Richard A. Baron.Incorporated herein by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for thequarter ended September 30, 2016 (File No. 001-37526) filed on November 14, 2016.10.6+Employment Agreement, dated August 11, 2016, by and between the registrant and James E. Fickenscher.Incorporated herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for thequarter ended September 30, 2016 (File No. 001-37526) filed on November 14, 2016.10.7+Employment Agreement, dated January 18, 2017, by and between the registrant and Brian Rosenberger (filedherewith).10.8Severance Agreement and Release of Claims, dated September 26, 2014, by and between the registrant andAudra Stinchcomb. Incorporated herein by reference to Exhibit 10.6 to the registrant’s Registration Statementon Form S-1 filed on June 30, 2015.10.9Patent Assignment, dated October 2, 2014, by and between the registrant and Audra Stinchcomb. Incorporatedherein by reference to Exhibit 10.7 to the registrant’s Registration Statement on Form S-1 (File No. 333-205355)filed on June 30, 2015.10.10Agreement and Plan of Merger, dated May 6, 2014, by and among BCM X1 Holdings, LLC, BCM Partners IV,Corp., the registrant, Audra Stinchcomb and Steven Gailar. Incorporated herein by reference to Exhibit 10.10 tothe registrant’s Registration Statement on Form S-1 (File No. 333-205355) filed on June 30, 2015.10.11Stock Transfer Agreement, dated September 26, 2014, by and between Michael Rapoport, Audra Stinchcomband the registrant. Incorporated herein by reference to Exhibit 10.12 to the registrant’s Registration Statementon Form S-1 (File No. 333-205355) filed on June 30, 2015.109 Table of Contents10.12Grant no. 5RC2DA028984-02 dated September 17, 2010, from the National Institutes of Health to the registrant.Incorporated herein by reference to Exhibit 10.13 to the registrant’s Registration Statement on Form S-1 (FileNo. 333-205355) filed on June 30, 2015.10.13Grant no. 1R43DA032161-01 dated July 14, 2011, from the National Institutes of Health to the registrant.Incorporated herein by reference to Exhibit 10.14 to the registrant’s Registration Statement on Form S-1 (FileNo. 333-205355) filed on June 30, 2015.10.14Grant no. 1RC2DA028984-01 dated September 30, 2009, from the National Institutes of Health to the registrant.Incorporated herein by reference to Exhibit 10.15 to the registrant’s Registration Statement on Form S-1 (FileNo. 333-205355) filed on June 30, 2015.10.15Grant no. 1RC2DA028984-01, revised award letter dated June 9, 2011, from the National Institutes of Health tothe registrant. Incorporated herein by reference to Exhibit 10.16 to the registrant’s Registration Statement onForm S-1 (File No. 333-205355) filed on June 30, 2015.10.16(A)+Amended and Restated 2014 Omnibus Incentive Compensation Plan. Incorporated herein by reference toExhibit 10.19(A) to the registrant’s Registration Statement on Form S-1 (File No. 333-205355) filed on June 30,2015.10.16(B)+Form of Amendment to Amended and Restated 2014 Omnibus Incentive Compensation Plan. Incorporatedherein by reference to Exhibit 10.19(B) to the registrant’s Registration Statement on Form S-1/A (File No. 333-205355) filed on July 23, 2015.10.16(C)+Form of Incentive Stock Option Grant under Amended and Restated 2014 Omnibus Incentive CompensationPlan. Incorporated herein by reference to Exhibit 10.19(C) to the registrant’s Registration Statement on Form S-1 (File No. 333-205355) filed on June 30, 2015.10.16(D)+Form of Nonqualified Stock Option Grant under Amended and Restated 2014 Omnibus IncentiveCompensation Plan. Incorporated herein by reference to Exhibit 10.19(D) to the registrant’s RegistrationStatement on Form S-1 (File No. 333-205355) filed on June 30, 2015.10.16(E)+Form of Restricted Stock Grant Agreement under Amended and Restated 2014 Omnibus IncentiveCompensation Plan. Incorporated herein by reference to Exhibit 10.19(E) to the registrant’s RegistrationStatement on Form S-1 (File No. 333-205355) filed on June 30, 2015.10.17+Form of Award Agreement for Inducement Awards (filed herewith).10.18+Zynerba Pharmaceuticals, Inc. Non-Employee Director Compensation Policy (filed herewith).10.19+Form of Indemnification Agreement for directors and officers. Incorporated herein by reference to Exhibit 10.20to the registrant’s Registration Statement on Form S-1/A (File No. 333-205355) filed on July 23, 2015.10.20Grant Agreement No. KSTC-184-512-12-140 dated October 1, 2012 by and between Kentucky Science andTechnology Corporation and the registrant. Incorporated herein by reference to Exhibit 10.21 to the registrant’sRegistration Statement on Form S-1 (File No. 333-205355) filed on June 30, 2015.10.21Grant Agreement No. KSTC-184-512-11-114 dated September 29, 2011 by and between Kentucky Science andTechnology Corporation and the registrant. Incorporated herein by reference to Exhibit 10.22 to the registrant’sRegistration Statement on Form S-1 (File No. 333-205355) filed on June 30, 2015.10.22Grant Agreement No. KSTC-184-184-512-07-029 dated November 21, 2007 by and between Kentucky Scienceand Technology Corporation and the registrant. Incorporated herein by reference to Exhibit 10.23 to theregistrant’s Registration Statement on Form S-1 (File No. 333-205355) filed on June 30, 2015.10.23Grant no. 5RC2DA028984-02, revised award letter dated May 9, 2012, from the National Institutes of Health tothe registrant. Incorporated herein by reference to Exhibit 10.24 to the registrant’s Registration Statement onForm S-1 (File No. 333-205355) filed on June 30, 2015.10.24Termination of Letter Agreements, dated January 7, 2015, by and between Broadband Capital ManagementLLC and the registrant. Incorporated herein by reference to Exhibit 10.25 to the registrant’s RegistrationStatement on Form S-1 (File No. 333-205355) filed on June 30, 2015.110 Table of Contents10.25Lease Agreement dated February 12, 2015 by and between Provco Devon, L.L.C. and the registrant.Incorporated herein by reference to Exhibit 10.26 to the registrant’s Registration Statement on Form S-1 (FileNo. 333-205355) filed on June 30, 2015.10.26Lease Amendment dated December 1, 2016, by and between Provco Devon, L.L.C. and the registrant (filedherewith).10.27Open Market Sale Agreement, dated September 1, 2016, by and between Jefferies LLC and the registrant.Incorporated herein by reference to Exhibit 1.2 to the registrant’s Registration Statement on Form S-3 (File No.333-213430) filed on September 1, 2016.21.1List of subsidiaries of the registrant (filed herewith).23.1Consent of independent registered public accounting firm (filed herewith).31.1Certifying Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed herewith).31.2Certifying Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed herewith).32.1Certifying Statement of the Chief Executive Officer pursuant to Section 1350 of Title 18 of the United StatesCode (furnished herewith).32.2Certifying Statement of the Chief Financial Officer pursuant to Section 1350 of Title 18 of the United StatesCode (furnished herewith).101 INSXBRL Instance Document (filed herewith).101 SCHXBRL Taxonomy Extension Schema Document (filed herewith).101 CALXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).101 DEFXBRL Taxonomy Extension Definition Linkbase Document (filed herewith). 101 LABXBRL Taxonomy Extension Label Linkbase Document (filed herewith).101 PREXBRL Taxonomy Extension Presentation Linkbase Document (filed herewith). +Indicates management contract or compensatory plan. 111Exhibit 10.17Inducement Form of GrantZYNERBA PHARMACEUTICALS, INC. NONQUALIFIED STOCK OPTION GRANTThis NONQUALIFIED STOCK OPTION GRANT AGREEMENT (this “Agreement”),dated as of , 201 (the “Date of Grant”), is delivered by Zynerba Pharmaceuticals, Inc. (the“Company”) to (the “Grantee”).RECITALSA.The Company maintains the Amended and Restated Zynerba Pharmaceuticals, Inc.2014 Omnibus Incentive Compensation Plan (the “Plan”), which provides the general terms andrestrictions for certain equity awards to the Company’s employees, consultants and directors. ThisOption is not awarded pursuant to the Plan, but rather is intended to constitute a non-plan based“inducement grant,” as described in Nasdaq Listing Rule 5635(c)(4). Nonetheless, the terms andprovisions of the Plan are hereby incorporated into this Agreement by this reference, as though fully setforth herein, as if this award was granted pursuant to the Plan.B.NOW, THEREFORE, the parties to this Agreement, intending to be legally boundhereby, agree as follows:1.Grant of Option. Subject to the terms and conditions of this Agreement and the Plan, theCompany hereby grants to the Grantee a nonqualified stock option (the “Option”) to purchase shares of common stock of the Company (“Shares”) at an exercise price of $ per Share. TheOption shall become exercisable according to Paragraph 2 below. 2.Vesting and Exercisability of Option. The Option shall become vested and exercisable on thefollowing dates, if the Grantee is employed by, or providing service to, the Employer (as defined in thePlan) on the applicable vesting date (each, a “Vesting Date”):Twenty five percent (25%) on with the balance vesting intwelve equal quarterly installments thereafter, so that each option is100% vested on the fourth anniversary of the Date of Grant.The vesting and exercisability of the Option is cumulative, but shall not exceed 100% of the Sharessubject to the Option. If the foregoing schedule would produce fractional Shares, the number of Sharesfor which the Option becomes vested and exercisable shall be rounded down to the nearest wholeShare.3.Term of Option.(a)The Option shall have a term of ten years from the Date of Grant and shall terminate atthe expiration of that period, unless it is terminated at an earlier date pursuant to the provisions of thisAgreement or the Plan. (b)The Option shall automatically terminate upon the happening of the first of thefollowing events:(i)The expiration of the 90-day period after the Grantee ceases to beemployed by, or provide service to, the Employer, if the termination is for any reason other thanDisability, death or Cause (as defined in the Plan).(ii)The expiration of the one-year period after the Grantee ceases to beemployed by, or provide service to, the Employer on account of the Grantee’s Disability.(iii)The expiration of the one-year period after the Grantee ceases to beemployed by, or provide service to, the Employer, if the Grantee dies while employed by, or providingservice to, the Employer or within 90 days after the Grantee ceases to be so employed or provide suchservices on account of a termination described in subparagraph (i) above.(iv)The date on which the Grantee ceases to be employed by, or provideservice to, the Employer for Cause. In addition, notwithstanding the prior provisions of this Paragraph3, if the Grantee engages in conduct that constitutes Cause after the Grantee’s employment or serviceterminates, the Option shall immediately terminate, and the Grantee shall automatically forfeit allShares underlying any exercised portion of the Option for which the Company has not yet deliveredthe Share certificates, upon refund by the Company of the exercise price paid by the Grantee for suchShares.Notwithstanding the foregoing, in no event may the Option be exercised after the date that isimmediately before the tenth anniversary of the Date of Grant. Any portion of the Option that is notexercisable at the time the Grantee ceases to be employed by, or provide service to, the Employer shallimmediately terminate.4.Exercise Procedures.(a)Subject to the provisions of Paragraphs 2 and 3 above, the Grantee may exercise part orall of the exercisable Option by giving the Company written notice of intent to exercise in the mannerprovided in this Agreement, specifying the number of Shares as to which the Option is to be exercisedand the method of payment. Payment of the exercise price shall be made in accordance withprocedures established by the Board of Directors of the Company (the “Board”) from time to timebased on type of payment being made but, in any event, prior to issuance of the Shares. The Granteeshall pay the exercise price (i) in cash, (ii) unless the Board determines otherwise, by delivering Sharesowned by the Grantee and having a Fair Market Value (as defined in the Plan) on the date of exerciseat least equal to the exercise price or by attestation (on a form prescribed by the Board) to ownership ofShares having a Fair Market Value on the date of exercise at least equal to the exercise price, (iii) bypayment through a broker in accordance with procedures permitted by Regulation T of the FederalReserve Board, (iv) by surrender of all or any part of the vested Shares for the Option is exercisable tothe Company for an appreciation distribution payable in shares of common stock with a Fair MarketValue at the time of the Option surrender equal to the dollar amount by which the then Fair MarketValue of the shares of common stock subject to the surrendered portion exceeds the aggregate exerciseprice payable for those shares, or (v) by2 such other method as the Board may approve. The Board may impose from time to time suchlimitations as it deems appropriate on the use of Shares of the Company to exercise the Option.(b)The obligation of the Company to deliver Shares upon exercise of the Option shall besubject to all applicable laws, rules, and regulations and such approvals by governmental agencies asmay be deemed appropriate by the Board, including such actions as Company counsel shall deemnecessary or appropriate to comply with relevant securities laws and regulations.(c)All obligations of the Company under this Agreement shall be subject to the rights ofthe Company as set forth in the Plan to withhold amounts required to be withheld for any taxes, ifapplicable. Subject to Board approval, the Grantee may elect to satisfy any tax withholding obligationof the Employer with respect to the Option by having Shares withheld up to an amount that does notexceed the minimum applicable withholding tax rate for federal (including FICA), state and local taxliabilities.5.Change of Control. The provisions of the Plan applicable to a Change of Control (as definedin the Plan) shall apply to the Option, and, in the event of a Change of Control, the Board may takesuch actions as it deems appropriate pursuant to the Plan.6.Restrictions on Exercise. Except as the Board may otherwise permit pursuant to the Plan,only the Grantee may exercise the Option during the Grantee’s lifetime and, after the Grantee’s death,the Option shall be exercisable (subject to the limitations specified in the Plan) solely by the legalrepresentatives of the Grantee, or by the person who acquires the right to exercise the Option by will orby the laws of descent and distribution, to the extent that the Option is exercisable pursuant to thisAgreement.7.Grant Subject to Plan Provisions. This grant not is made pursuant to the Plan; however, theterms of the Plan are incorporated herein by reference, and in all respects shall be interpreted inaccordance with the Plan. The grant and exercise of the Option are subject to interpretations,regulations and determinations concerning the Plan established from time to time by the Board inaccordance with the provisions of the Plan, including, but not limited to, provisions pertaining to(a) rights and obligations with respect to withholding taxes, (b) the registration, qualification or listingof the Shares, (c) changes in capitalization of the Company and (d) other requirements of applicablelaw. The Board shall have the authority to interpret and construe the Option pursuant to the terms ofthe Plan, and its decisions shall be conclusive as to any questions arising hereunder.8.No Employment or Other Rights. The grant of the Option shall not confer upon the Granteeany right to be retained by or in the employ or service of the Employer and shall not interfere in anyway with the right of the Employer to terminate the Grantee’s employment or service at any time. Theright of the Employer to terminate the Grantee’s employment or service at any time for any reason isspecifically reserved.9.No Stockholder Rights. Neither the Grantee, nor any person entitled to exercise theGrantee’s rights in the event of the Grantee’s death, shall have any of the rights and privileges of astockholder with respect to the Shares subject to the Option, until certificates for Shares have beenissued upon the exercise of the Option.3 10.Assignment and Transfers. Except as the Board may otherwise permit pursuant to the Plan,the rights and interests of the Grantee under this Agreement may not be sold, assigned, encumbered orotherwise transferred except, in the event of the death of the Grantee, by will or by the laws of descentand distribution. In the event of any attempt by the Grantee to alienate, assign, pledge, hypothecate, orotherwise dispose of the Option or any right hereunder, except as provided for in this Agreement, or inthe event of the levy or any attachment, execution or similar process upon the rights or interests herebyconferred, the Company may terminate the Option by notice to the Grantee, and the Option and allrights hereunder shall thereupon become null and void. The rights and protections of the Companyhereunder shall extend to any successors or assigns of the Company and to the Company’s parents,subsidiaries, and affiliates. This Agreement may be assigned by the Company without the Grantee’sconsent.11.Applicable Law. The validity, construction, interpretation and effect of this instrument shallbe governed by and construed in accordance with the laws of the State of Delaware, without givingeffect to the conflicts of laws provisions thereof.12.Notice. Any notice to the Company provided for in this instrument shall be addressed to theCompany in care of the General Counsel at , and any notice to the Grantee shall beaddressed to such Grantee at the current address shown on the payroll of the Employer, or to suchother address as the Grantee may designate to the Employer in writing. Any notice shall be deliveredby hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above,registered and deposited, postage prepaid, in a post office regularly maintained by the United StatesPostal Service.[SIGNATURE PAGE FOLLOWS] 4 IN WITNESS WHEREOF, the Company has caused its duly authorized officers to executeand attest this Agreement, and the Grantee has executed this Agreement, effective as of the Date ofGrant. ZYNERBA PHARMACEUTICALS, INC. By: Name: Title: I hereby accept the Option described in this Agreement, and I agree to be bound by the terms of thisAgreement and the Plan. I hereby further agree that all the decisions and determinations of the Boardshall be final and binding. Grantee: 5 CONFIDENTIAL Exhibit 10.18Board of Directors Compensation Policy This policy sets forth the compensation for non-employee members of the Board of Directors of ZynerbaPharmaceuticals, Inc. (“Company”) from and after January 25, 2017. The Board of Directors may change this policyat any time.Compensation ElementAmountPaid orGrantedBoard of Directors:·Director Retainer·Lead Independent Director·Annual Option Grant·New Director Option Grant $35,000 per year$20,000 per year15,000 options35,000 option QuarterlyQuarterlyAnnuallyAt sign-on Audit Committee:·Chair Retainer·Member Retainer $15,000 per year$ 7,500 per year QuarterlyQuarterlyCompensation Committee:·Chair Retainer·Member Retainer$10,000 per year$5,000 per year QuarterlyQuarterly Nominating and Corporate GovernanceCommittee:·Chair Retainer·Member Retainer $ 5,000 per year$ 3,500 per year QuarterlyQuarterlyExpenses:·ReimbursedWith receiptsas submitted ______________________________ All options granted to non-employee directors shall have an exercise price equal to the closing price per share on thedate of grant and a term of 10 years. Upon a termination of service, unvested options expire and vested optionsremain exercisable for one year.Quarterly cash payments are disbursed at the beginning of each calendar quarter for service during the quarter. and aresubject to adjustment by the Board of Directors from time to time. For calendar year 2017, directors may submit anelection by January 31, 2017 to receive stock options in lieu of quarterly cash payments for Q2 through Q4 in anamount based on the Black-Scholes valuation. For calendar year 2018 and thereafter, prior to the beginning of eachsuch calendar year, directors may submit an election to receive stock options in lieu of quarterly cash paymentsduring that year. Options in lieu of cash compensation are fully vested on the date of grant.Option amounts are subject to adjustment by the Board of Directors from time to time.Annual Option Grants are made on the date of the Annual Meeting of Stockholders to all non-employee directors inoffice after the Annual Meeting; Annual Option Grants vest in full on the earlier of the day before the following year’sAnnual Meeting, and the one-year anniversary of the grant date, but vest in full earlier upon a change of control ofthe Company or the death or total disability of the director. 13322452222221234CONFIDENTIAL New Director Option Grants are made on the date that a new non-employee director joins the Board. New DirectorOption Grants vest one-third per year beginning on the one-year anniversary of the grant date, but vest in full earlierupon a change of control of Company or the death or total disability of the director. 5Exhibit 10.26LEASE AMENDMENT THIS LEASE AMENDMENT (“Amendment”) is entered into as of the 1st day of December, 2016, by and betweenPROVCO DEVON, L.L.C., a Pennsylvania limited liability company (hereinafter called the "Landlord"), and ZYNERBAPHARMACEUTICALS, INC. a Pennsylvania corporation (hereinafter referred to as "Tenant"). The following statements are amaterial part of the Amendment: WITNESSETH: WHEREAS, Landlord and Tenant entered into a written Lease Agreement (the “Lease”) dated February 12, 2015 for thatcertain premises in known as Suite 300, The World Activity Building, 80 West Lancaster Avenue, Devon, PA 19333 (the “OriginalPremises”); WHEREAS, Landlord and Tenant desire to amend Lease as hereinafter provided. NOW, THEREFORE, in consideration of the mutual agreements, covenants and representations herein contained and thosecontained in the Lease and in reliance thereon, the parties intending to be legally bound hereby mutually agree as follows: 1.Tenant hereby agrees to lease 3,485 additional rentable square feet (hereinafter the “Expansion Space”) asdepicted in Exhibit “A”. 2. This Expansion Space shall increase the total leased premises from 3,860 rentable square feet (3,271 usablesquare feet) (the “Original Premises”) to 7,345 rentable square feet (6,387 usable square feet). 3. The first sentence of Paragraph #1 of the Lease shall be deleted and in its place inserted: Premises. The Landlord does hereby lease to the Tenant and the Tenant does hereby lease from the Landlord, thefollowing described premises (collectively, the “Premises”): that portion of the third floor of the building known as, Suite300, The World Activity Building at 80 West Lancaster Avenue, Devon, Chester County, PA (the “Building”), as depictedon the plan prepared by 3GHC Architects, attached hereto as Exhibit “A” and incorporated herein (the “Space Plan”),consisting of approximately 7,345 rentable square feet (including the floor load factor of 15%) and approximately 6,387usable square feet (excluding the floor load factor of 15%), together with the right of free and uninterrupted access incommon with other tenants in the Building and their employees and invitees within the Building and the grounds adjacentthereto (collectively, the “Property”). An exhibit to this Amendment is attached hereto, made a part hereof, and marked asExhibit “A”, 4.A paragraph 2(a) shall be inserted after Paragraph 2 as follows: 2 (a) Expansion Space Term. This term of the Expansion Space shall commence on the date Landlord tenderspossession of the Expansion Space to Tenant following the completion of Landlord’s Expansion Work (as hereinafterdefined) (the “Expansion Space Commencement Date”), and shall end at the end of the Term defined in Paragraph 2 of theLease. Tenant shall have the right of access to the Expansion Space in a manner coordinated by Landlord to the greatestextent reasonably possible prior to the Expansion Space Commencement Date, such access to be limited to access whichdoes not interfere with Landlord’s Expansion Work for Tenant’s construction, wiring and installation of furniture, fixtures,furnishings and equipment, provided, that all terms of the Lease shall apply to Tenant’s access, except for the payment ofthe Expansion Space Rent (as defined below) or additional rent,. A supplement to this Amendment is attached hereto, madea part hereof, and marked as Exhibit “B”, containing blanks for the Expansion Space Commencement Date. The partieshereto agree that after the Expansion Space Commencement Date becomes certain, as provided herein, they will completeand execute said supplement to reflect the date. 5.A Paragraph 4(b) shall be inserted after Paragraph 4 as follows: 4 (b). Expansion Space Rent. In addition to the rent to be paid in Paragraph 4 above, the Tenant agrees to pay renton the Expansion Space beginning on the Expansion Space Commencement Date, in the amount of $7,986.46 per month(equal to $27.50 per rentable square foot) in advance, and thereafter due on the 1st day of each month, provided the Expansion Space Rent for any initial partial month period shall be apportioned on a per diem basis and shallbe due five (5) days after the Expansion Space Commencement Date. On the following dates, the Expansion Space Rentshall be increased as follows: Lease YearBase Rent PerRentable Square FootAnnual Base RentMonthly Payment June 1, 2017-May 31, 2018June 1, 2018-May 31, 2019June 1, 2019-May 31, 2020$28.00$28.50$29.00 $97,580.00$99,322.50$101,065.00 $8,131.67$8,276.88$8,422.08 6.The Rent for the Original Premises shall remain as set forth in the Lease. 7.Landlord shall complete the alterations and improvements (the “Landlord’s Expansion Work”) as described in theWork Letter attached hereto as Exhibit “C” and incorporated herein and shall use its best efforts to Substantially Complete (asdefined below) Landlord’s Expansion Work by February 1, 2017 (the “Target Date”). The Landlord shall tender the ExpansionSpace to Tenant following the Substantial Completion of Landlord’s Expansion Work and the receipt of a Certificate of Occupancyfor the Expansion Space. Landlord’s Expansion Work shall be considered substantially complete when all improvementsdescribed on Exhibit "C" have been completed except for (i) minor items of finishing and construction that do not materiallyinterfere with Tenant's use of the Expansion Space and (ii) items not then completed because of delays by Tenant or because ofrequests by Tenant for changes or additions to the plans and specifications attached hereto as Exhibit "C," (“SubstantiallyComplete”). 8.. Any additional costs or change orders in order to complete Landlord’s Work shall be paid solely by Tenant. 9.Paragraph 44 of the Lease shall be deleted in its entirety. 10.Exhibit “C” to the Lease, Paragraph 4 shall be changed to the following” 4. “Tenant’s Proportionate Share” shall equal the total rentable square feet in the Premises (which is 7,345)divided by the total rentable square feet in the World Activity Building (which is 54,405) at the present time. 11.Except as modified herein, the parties hereto agree that all the terms and conditions of the Lease, andAmendment shall remain in full force and effect and are hereby ratified and confirmed including that the Landlord May ConfessJudgment as follows: CONFESSION OF JUDGMENT. THE FOLLOWING PARAGRAPHS SET FORTH WARRANTS OF AUTHORITY FOR AN ATTORNEY TO CONFESSJUDGMENT AGAINST TENANT, IN GRANTING THIS RIGHT TO CONFESS JUDGMENT AGAINST TENANT, TENANTHEREBY KNOWINGLY, INTENTIONALLY, VOLUNTARILY AND IRREVOCABLY AND, ON THE ADVICE OF THESEPARATE COUNSEL OF TENANT, UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS TENANT HAD OR MAYHAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS ANDLAWS OF THE UNITED STATES AND THE COMMONWEALTH OF PENNSYLVANIA.(i) CONFESSIONS OF JUDGMENT/EJECTMENT. TENANT HEREBY KNOWINGLY,INTENTIONALLY, VOLUNTARILY AND IRREVOCABLY AGREES THAT, IN THE EVENT THAT, AND WHEN THISLEASE SHALL BE DETERMINED BY TERM, COVENANT, LIMITATION OR CONDITION BROKEN, AS AFORESAID,DURING THE TERM, AND ALSO WHEN AND AS SOON AS THE TERM, AS SAME MAY HAVE BEEN EXTENDED FROMTIME TO TIME, HEREBY CREATED SHALL HAVE EXPIRED OR BE TERMINATED, IT SHALL BE LAWFUL FORANY ATTORNEY, AS ATTORNEY FOR TENANT TO CONFESS JUDGMENT IN EJECTMENT IN ANY COMPETENTCOURT AGAINST TENANT AND ALL PERSONS CLAIMING UNDER TENANT FOR THE RECOVERY BY LANDLORDOF POSSESSION OF THE LEASED PREMISES, WITHOUT- 2 - ANY LIABILITY ON THE PART OF THE SAID ATTORNEY, FOR WHICH THIS LEASE SHALL BE A SUFFICIENTWARRANT; WHEREUPON, IF LANDLORD SO DESIRES, A WRIT OF POSSESSION WITH CLAUSES FOR COSTS MAYISSUE FORTHWITH WITH OR WITHOUT ANY PRIOR WRIT OR PROCEEDING WHATSOEVER. IF FOR ANYREASON AFTER SUCH ACTION HAS BEEN COMMENCED, THE SAME SHALL BE DETERMINED AND THEPOSSESSION OF THE LEASED PREMISES REMAINS IN OR IS RESTORED TO TENANT, THE LANDLORD SHALLHAVE THE RIGHT IN THE EVENT OF ANY SUBSEQUENT DEFAULT OR DEFAULTS TO CONFESS JUDGMENT INEJECTMENT AGAINST TENANT IN THE MANNER AND FORM HEREINBEFORE SET FORTH, TO RECOVERPOSSESSION OF THE LEASED PREMISES FOR SUCH SUBSEQUENT DEFAULT, NO SUCH DETERMINATION OF THISLEASE NOR RECOVERING POSSESSION OF THE LEASED PREMISES SHALL DEPRIVE LANDLORD OF ANYREMEDIES OR ACTION AGAINST TENANT FOR RENT OR FOR DAMAGES DUE OR TO BECOME DUE FOR THEBREACH OF ANY CONDITION OR COVENANT; NOR THE RESORT TO ANY WAIVER OF THE RIGHT TO INSISTUPON THE FORFEITURE, AND TO OBTAIN POSSESSION IN THE MANNER PROVIDED HEREIN.(ii) AFFIDAVIT OF DEFAULT. In any action to confess judgment in ejectment, Landlord shall first cause tobe filed in such action an affidavit made by Landlord or someone acting for Landlord setting forth the facts necessary toauthorize the entry of judgment, of which facts such affidavit shall be conclusive evidence and if a true copy of the Lease (and ofthe truth of the copy such affidavit shall be sufficient evidence) be filed in such action, it shall not be necessary to file theoriginal as a warrant of attorney, any rule of Court, custom or practice to the contrary notwithstanding.(iii) TENANT WAIVER. TENANT SPECIFICALLY ACKNOWLEDGES THAT TENANT HASKNOWINGLY, INTENTIONALLY, VOLUNTARILY AND IRREVOCABLY WAIVED CERTAIN DUE PROCESS RIGHTSTO A PREJUDGMENT HEARING RELATING SOLELY TO THE POSSESSION OF THE LEASED PREMSIES BYAGREEING TO THE TERMS OF THIS PARAGRAPH REGARDING CONFESSION OF JUDGMENT, TENANT FURTHERSPECIFICALLY AGREES THAT IN THE EVENT OF DEFAULT, LANDLORD MAY PURSUE MULTIPLE REMEDIESINCLUDING OBTAINING POSSESSION OF THE LEASED PREMISES PURSUANT TO A JUDGMENT BY CONFESSIONAND ALSO OBTAINING A MONEY JUDGMENT FOR PAST DUE AND ACCELERATED AMOUNTS AND EXECUTINGUPON SUCH JUDGMENT. FURTHERMORE, TENANT SPECIFICALLY WAIVES ANY CLAIM AGAINST LANDLORDAND LANDLORD'S COUNSEL FOR VIOLATION OF TENANT'S CONSTITUTIONAL RIGHTS IN THE EVENT THATJUDGMENT IS CONFESSED PURSUANT TO THIS PARAGRAPH. (iv) In view of the commercial nature of the relationship between the parties hereto and the fact that theparties hereto may have adverse interests, the parties agree that there is no expectation that Landlord shall have any dutyunder any provision of Chapter 56 of the Pennsylvania Decedents, Estates and Fiduciaries Code (20 Pa. C.S.A. § 5601, et seq.)(including, without limitation, 20 Pa. C.S.A. § 5601.3(a)(1)) to act in the best interest of Tenant hereunder, and it is agreed thatLandlord shall have no such duty. Further, Landlord and Tenant hereby agree that all duties owed by an agent as specifiedunder 20 Pa.C.S.A. § 5601.3(b) (as the term “agent” is used therein) are irrevocably waived. 12.This Amendment shall be governed by and construed in accordance with the laws of the Commonwealth ofPennsylvania. 13.This Amendment can be executed in any number of counterparts, each of which shall be deemed an original. 14.To the extent there are any conflicts or inconsistencies between the Lease and this Amendment, this Amendmentand the rights and obligations herein shall govern. All other terms and provisions of the previous agreements between the partiesshall remain unaffected by this Amendment. - 3 - IN WITNESS WHEREOF, the Landlord and Tenant hereto have executed this Amendment as of the date first written above. LANDLORD: WITNESS PROVCO DEVON, L.L.C. /s/ Joy Caldwell By: /s/ Gerald N. Holtz Its: Vice President TENANT: WITNESS Zynerba Pharmaceuticals, Inc. /s/ Suzanne M. Hanlon By: /s/ Armando Anido Its: Chief Executive Officer COMMONWEALTH OF PENNSYLVANIACOUNTY OF DELAWARE On this the 1st day of December, 2016, before me, a Notary Public in and for the Commonwealth of Pennsylvania, theundersigned officer, personally appeared Armando Anido who acknowledged himself to be the CEO of Zynerba Pharmacueticals,Inc., and who, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing theirnames thereto. IN WITNESS WHEREOF, I hereunto set my hand and official seal. [ SEAL ]/s/ Willys K. Silvers, Jr. Notary Public COMMONWEALTH OF PENNSYLVANIACOUNTY OF DELAWARE On this the _____ day of December, 2016, before me, a Notary Public in and for the Commonwealth of Pennsylvania, theundersigned officer, personally appeared Gerald N. Holtz who acknowledged himself to be the Vice President of Provco Devon,L.L.C. and who, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing theirnames thereto. IN WITNESS WHEREOF, I hereunto set my hand and official seal. [ SEAL ]/s/ Willys K. Silvers, Jr. Notary Public - 4 - EXHIBIT “A” Expansion Space - 5 - EXHIBIT “B” EXPANSION SPACE COMMENCEMENT AGREEMENT This Commencement Agreement is entered into this _____ day of _________, 2017 between Provco Devon, L.L.C. (“Landlord”)and Zynerba Pharmaceuticals, Inc. (“Tenant”) WHEREAS, Landlord and Tenant entered into a Lease dated February 12, 2015 for the Leased Premises (the “Lease”); WHEREAS, Landlord and Tenant amended that Lease on December ___, 2016 (the “Amendment”); WHEREAS, pursuant to the provisions of Paragraph 4 of the Amendment, Landlord and Tenant desire to confirm the ExpansionSpace Commencement date as defined in the Amendment; NOW THEREFORE, Landlord and Tenant agree and acknowledge that the information set forth below is true and accurate.1.The Expansion Space Commencement Date shall be the _____ day of __________, 2017.2.The Rent for the Expansion Space shall commence on ______________, 2017.IN WITNESS WHEREOF, the parties have hereunto duly executed this Commencement Agreement on the date first set forthabove. LANDLORD: ATTEST:PROVCO DEVON, L.L.C. ______________________By: __________________________ Its: Vice President TENANT: ZYNERBA PHARMACEUTICALS, INC. By: _________________________ Its:  EXHIBIT “C” Landlord’s Work in Expansion Space 1. Remove all wallpaper and prepare walls for new paint.2. Remove existing wall sconces, white boards, hooks and signage and patch walls.3. New paint throughout space to match color of Tenant’s existing space.4. Tenant to indicate what walls are to receive accent color similar to Tenant’s existing space.5. Provide similar LED ceiling light fixtures throughout to match lighting in Tenant’s existing space.6. Provide similar, operable window blinds throughout to match Tenant’s existing space; repair or replace existing damaged blinds.7. Install two (2) quad electrical outlets along open wall to accommodate future work stations.8. Relocate or replace wall switch (motion sensor) in western most glass lined office and current kitchen.9. Install shelf and coat rod in existing small closet in large conference room.10. Provide new door lock and key(s) to designated large conference room used for files (currently Monroe Room).11. Demise expansion space to deck at eastern side.12. Open wall at appropriate span to connect Tenant’s existing space to expansion space.13. Install new carpet tiles to match Tenant’s existing space14. Reinforce conference room wall to accommodate bracket for wall mounted TV – if necessary.15. Clean windows and repair or replace peeling window film. Clean and repair (where necessary) window trim. CONFIDENTIALEXECUTION VERSION Exhibit 10.7EMPLOYMENT AGREEMENTTHIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as ofJanuary 18, 2017 (the “Effective Date”) by and between Zynerba Pharmaceuticals, Inc., a Delawarecorporation (the “Employer”) and Brian Rosenberger (the “Employee”).RecitalsWHEREAS, the Employer desires to employ the Employee and the Employee desires to beemployed by the Employer upon the terms and conditions hereinafter set forth.NOW, THEREFORE, in consideration of the premises and covenants set forth herein, andintending to be legally bound hereby, the parties to this Agreement hereby agree as follows:1. Duties. The Employer agrees that the Employee shall serve as Vice PresidentCommercial of the Employer. The Employee shall report to the Chief Executive Officer of theEmployer. The Employee agrees to be so employed by the Employer and to devote his best efforts andsubstantially all of his business time to advance the interests of the Employer and to perform suchexecutive, managerial, administrative and financial functions as are required to develop the Employer’sbusiness and to perform such other duties that are consistent with the Employee’s position. Nothing setforth herein shall prohibit the Employee from engaging in personal investing activities, provided suchactivities do not conflict with the business of the Employer and are consistent with the Employer’sinternal trading policies. The Employee shall be permitted to serve on the boards of directors of otherentities whose businesses are not competitive with the Employer in accordance with Employer policy.2. Term. This Agreement is effective as of the Effective Date, and, from and after theEffective Date, will govern the Employee’s employment by the Employer until that employment ceasesin accordance with the terms of this Agreement.3. Compensation.(a) Salary. The Employee shall be paid a base salary at the annual rate of$270,000 (the “Base Salary”) in accordance with the Employer’s regular payroll practices. The Boardof Directors of the Company (“Board”) or the Compensation Committee of the Board (the“Compensation Committee”) shall review the Base Salary at least annually at the end of each calendaryear pursuant to the normal performance review policies for senior level executives. (b) Incentive Compensation. (i)The Employee shall participate in all short-term and long-term incentiveprograms, including equity compensation programs, established by theEmployer for its senior level executives generally, at levels determinedby the Board or the Compensation Committee. The Employee’sincentive compensation shall be subject to the terms of the applicableplans and shall be determined based on the Employee’s individualperformance and Employer1 CONFIDENTIALEXECUTION VERSION performance as determined by the Board or the CompensationCommittee and shall be awarded, if at all, at the discretion of theEmployer. Any annual incentive compensation earned by the Employeeshall be paid on or after January 1, but not later than March 15 of thefiscal year following the fiscal year for which the annual incentivecompensation is earned.(ii)Employee’s target annual discretionary bonus shall be thirty-five percent(35%) of Employee’s Base Salary, subject to the achievement of goals tobe mutually agreed upon by the Employee and the Board orCompensation Committee.(iii)Upon the Effective Date of this Agreement, Employee shall receive non-qualified stock options to purchase an aggregate of 37,500 shares ofEmployer common stock in accordance with the terms of theNonqualified Stock Option Grant Agreement attached hereto as ExhibitA (the “Option”). The Option shall have a per share exercise price equalto the closing price of Employer common stock on the date of the Grant(which shall be the Effective Date) and shall vest twenty-five percent(25%) on the first anniversary of the date of the Grant with the remaindervesting over twelve equal quarterly installments thereafter, so that theOption is one hundred percent (100%) vested on the fourth anniversaryof the date of Grant. Notwithstanding any term contained herein or inany Grant Instrument to the contrary, if the Employee (A) dies whileemployed by or providing service to the Employer; or (B) ceases to beemployed by, or to provide service to, the Employer on account of theEmployee's Total Disability all vested and exercisable Grants held byEmployee on such date shall remain exercisable (by Employee or byEmployee’s representative) for a period of twelve (12) months followingdeath or Total Disability (or until the expiration date of the applicableGrant, if earlier). (c) Retirement and Welfare Benefits. The Employee shall participate inemployee retirement and welfare benefit plans made available to the Employer’s senior levelexecutives as a group or to its employees generally, as such retirement and welfare plans may be ineffect from time to time and subject to the eligibility requirements of the plans. Nothing in thisAgreement shall prevent the Employer from amending or terminating any retirement, welfare or otheremployee benefit plans or programs from time to time as the Employer deems appropriate. (d) Reimbursement of Expenses; Vacation. The Employee shall be reimbursedfor all normal items of travel, entertainment and miscellaneous business expenses reasonably incurredby the Employee on behalf of the Employer, provided that such expenses are documented andsubmitted in accordance with the reimbursement policies of the Employer as in2 CONFIDENTIALEXECUTION VERSION effect from time to time (subject to Section 9 of this Agreement). The Employee shall be entitled tovacation and sick leave in accordance with the Employer’s applicable leave policies.4. Termination.(a) Death. This Agreement shall automatically terminate effective as of the date ofthe Employee’s death, in which event the Employer shall have no further obligation or liability underthis Agreement except that the Employer shall pay to the Employee’s estate: (i) any portion of theEmployee’s Base Salary for the period up to the Employee’s date of death that has been earned butremains unpaid; and (ii) any benefits that have been earned, accrued and are due to the Employeeunder the terms of the employee benefit plans of the Employer, which benefits shall be paid inaccordance with the terms of those plans. Any equity that is unvested at the time of Employee’s deathshall be treated in accordance with the applicable equity plan.(b) Total Disability. In the event of the Employee’s Total Disability (as definedbelow), the Employer may terminate the employment of the Employee, to the extent permitted by law,immediately upon written notice to the Employee, in which event, the Employer shall have no furtherobligation or liability under this Agreement except that the Employer shall pay to the Employee: (i)any portion of the Employee’s Base Salary for the period up to the date of termination that has beenearned but remains unpaid; and (ii) any benefits that have been earned, accrued and are due to theEmployee under the terms of the employee benefit plans of the Employer, which benefits shall be paidin accordance with the terms of those plans. Any equity that is unvested at the time of Employee’sTotal Disability shall be treated in accordance with the applicable equity plan.(c) Termination by the Employer for Cause. Subject to any applicable right tocure under Section 4(g)(i), the Employer may terminate the Employee’s employment at any time,effective immediately, for Cause upon written notice to the Employee. In the event that the Employerterminates the Employee pursuant to this Section 4(c), the Employer shall have no further obligation orliability under this Agreement, except that the Employer shall pay to the Employee: (i) any portion ofthe Employee’s Base Salary for the period up to the Termination Date that has been earned but remainsunpaid; and (ii) any benefits that have been earned, accrued and are due to the Employee under theterms of the employee benefit plans of the Employer, which benefits shall be paid in accordance withthe terms of those plans.(d) Termination by the Employer Without Cause; Termination by theEmployee for Good Reason. The Employer may terminate the employment of the Employee for anyreason other than those specified in Section 4(b) or 4(c) upon thirty (30) days written notice (or thepayment of Base Salary and benefit continuation in lieu of such thirty (30) day notice) to theEmployee. In addition, the Employee may terminate his employment at any time, including, withoutlimitation, upon written notice to the Employer for Good Reason in accordance with the requirementsof Section 4(g)(vi). If the Employee terminates his employment for Good Reason (as such term is defined herein), or theEmployer terminates the Employee for any reason other than those specified in Section 4(b) or 4(c)hereof, then the Employer shall pay to the Employee:3 CONFIDENTIALEXECUTION VERSION (i) any portion of the Employee’s Base Salary for the period up to theTermination Date that has been earned but remains unpaid;(ii) any benefits that have been earned, accrued and are due to the Employeeunder the terms of any employee benefit plans of the Employer, which benefits shall be paid inaccordance with the terms of those plans; and(iii) subject to the execution and nonrevocation by the Employee of a releasesatisfactory to the Employer (the “Release) and the Employee’s compliance with all terms andprovisions of this Agreement that survive the termination of the Employee’s employment by theEmployer, the Employer shall provide the Employee with the payments and benefits set forth below in(A), (B) and (C). Notwithstanding any provision of this Agreement to the contrary, in no event shallthe timing of the Employee’s execution of the Release, directly or indirectly result in the Employeedesignating the calendar year of payment and to the extent payment could be made in more than onetaxable year, payment shall be made in the later taxable year. Moreover, such release must be executed,if at all, no later than sixty (60) days following the date of Employee’s separation from service fromEmployer. The payments and benefits for such termination are limited to:(A) Severance in an amount equal to salary continuation of Employee’sBase Salary at the rate in effect at the time of the Employee’s termination for a period of nine (9)months following the effective date of the Release; and(B) Continued medical and dental coverage at the same level in effect atthe time of the Termination Date (or generally comparable coverage) for a period of nine (9) monthsfollowing the Termination Date for himself and, where applicable, his spouse and dependents, at thesame premium rates as may be charged from time to time for employees generally, as if the Employeehad continued in employment during such nine (9) month period. If applicable, the health carecontinuation period shall run concurrently with the foregoing nine (9) month period; and(C)Pro rata vesting of all outstanding unvested stock options and otherequity-based awards held by the Employee that would have vested had the Employee remainedemployed for twelve months following the Termination Date.(D)The Exercise of all vested equity awards by Employee at thetermination of employment (except on account of death or disability as indicated in Sections 4(a) and(b)) shall be governed by the terms of the applicable equity plan adopted by Employer.(e) Effect of a Change of Control. Notwithstanding any provision of Section 4(d)to the contrary, if Employee’s employment is terminated pursuant to Section 4(d) within the ninety(90) day period preceding a Change of Control or on or within twelve (12) months following a Changeof Control upon such termination or resignation, Employee shall be entitled to the same payments andbenefits described in Section 4(d) above, subject to execution and nonrevocation of the Release and theEmployee’s compliance with all terms and provisions of this Agreement that survive the termination ofthe Employee’s employment by the Employer, provided that in addition to the severance and otherbenefits set forth in Section 4(d) (iii) (A)-4 CONFIDENTIALEXECUTION VERSION (C), (i) one hundred percent (100%) of all outstanding unvested stock options and other equity-basedawards held by the Employee as of the Termination Date shall become fully vested and exercisable (tothe extent applicable) as of the Termination Date; (ii) all outstanding stock options and other equity-based awards held by the Employee as of the Termination Date that become vested pursuant to (i)above or that are vested as of the Termination Date shall remain exercisable (to the extent applicable)until the earlier of (x) the three (3) year anniversary of the Termination Date and (y) the expiration dateof the relevant stock option or other equity-based award; and (iii) Employee shall be entitled to onehundred percent (100%) of Employee’s targeted annual bonus for the year in which the TerminationDate occurs, without regard to whether the relevant Employee and Employer goals have beenachieved.Notwithstanding anything set forth in this Agreement to the contrary, if any payment or benefit,including severance benefits, that the Employee would receive from the Employer in connection with aChange of Control or otherwise (“Payment”) would (i) constitute a “parachute payment” within themeaning of section 280G of the Code and (ii) but for this sentence, be subject to the excise tax imposedby section 4999 of the Code (the “Excise Tax”), then such Payment shall be reduced to the ReducedAmount. The “Reduced Amount” shall be either (A) the largest portion of the Payment that wouldresult in no portion of the Payment being subject to the Excise Tax or (B) the largest portion, up to andincluding the total, of the Payment, whichever amount, after taking into account all applicable federal,state and local employment taxes, income taxes, and the Excise Tax (all computed at the highestapplicable marginal rate), results in the Employee’s receipt, on an after-tax basis, of the greater amountof the Payment notwithstanding that all or some portion of the Payment may be subject to the ExciseTax. If a reduction in payments or benefits (or a cancellation of the acceleration of vesting of stockoptions or other equity-based awards) constituting “parachute payments” is necessary so that thePayment equals the Reduced Amount, such reduction and/or cancellation of acceleration shall occur inthe order that provides the maximum economic benefit to the Employee. In the event that accelerationof vesting of a stock option or other equity-based award is to be reduced, such acceleration of vestingalso shall be canceled in the order that provides the maximum economic benefit to the Employee. The Employer shall appoint a nationally recognized accounting firm with appropriate subjectmatter expertise to make the determinations required under this Section 4(e).The Employer shall bear all expenses with respect to the making of the determinations by suchaccounting firm required to be made under this Section 4(e), up to a maximum of $25,000. Theaccounting firm engaged to make the determinations under this Section 4(e) shall provide itscalculations, together with detailed supporting documentation, to the Employer and the Employee assoon as practicable after the date on which the Employee’s right to a Payment is triggered (if requestedat that time by the Employer or the Employee) or such other time as requested by the Employer or theEmployee. If the accounting firm determines that no Excise Tax is payable with respect to a Payment,either before or after the application of the Reduced Amount, it shall furnish the Employer with anopinion reasonably acceptable to the Employee that no Excise Tax will be imposed with respect tosuch Payment. Any good faith determinations of the accounting firm made under this Section 4(e)shall be final, binding, and conclusive upon the Employer and the Employee.5 CONFIDENTIALEXECUTION VERSION (f) Elective Termination by Employee. Employee may voluntarily terminate hisemployment with the Employer without Good Reason at any time upon thirty (30) days prior writtennotice, which termination shall become effective upon the thirtieth (30) day after the receipt of suchnotice. In the event that the Employee terminates his(g) employment pursuant to this Section 4(f), the Employer shall have no furtherobligation or liability for compensation or benefits, except that the Employer shall pay to theEmployee:(A) any portion of the Employee's Base Salary for the period up to the Termination Datethat has been earned but remains unpaid; and (B) any benefits that have been earned, accrued and aredue to the Employee under the terms of the employee benefit plans of the Employer, which benefit sshall be paid in accordance with the terms of those plans.(h) Definitions. (i)“Cause” shall be deemed to exist with respect to any termination ofemployment by the Employer for any of the following reasons:(1)the Employee’s engagement in conduct constituting breach offiduciary duty, gross negligence or willful misconduct relating tothe Employer or the performance of the Employee’s duties;(2)the Employee’s continued failure to perform the Employee’smaterial duties in a satisfactory manner after written noticespecifying the areas in which performance is unsatisfactory and,if subject to cure, the Employee’s failure to perform within thirty(30) days after such notice;(3)the Employee’s commission of any act of fraud with respect tothe Employer;(4)the Employee’s violation of any covenants or agreements infavor of the Employer regarding confidentiality, non-competitionand/or non-solicitation; or(5)the Employee’s conviction of a felony or a crime involving moralturpitude under the laws of the United States or any state orpolitical subdivision thereof.Any notice required to be provided to the Employee under clause (2) ofthis definition of “Cause” shall state that failure to cure within theapplicable period will result in termination for Cause. (ii)“Change of Control” shall mean:(1)any person or entity becomes the beneficial owner, directly orindirectly, of securities of the Employer representing6 CONFIDENTIALEXECUTION VERSION greater than 50% (>50%) percent of the total voting power of allits then outstanding voting shares;(2)a merger or consolidation of the Employer in which its votingsecurities immediately prior to the merger or consolidation do notrepresent, or are not converted into securities that represent, amajority of the voting power of all voting securities of thesurviving entity immediately after the merger or consolidation;(3)a sale of substantially all of the assets of the Employer or aliquidation or dissolution of the Employer.(4)But in no event shall “Change of Control” mean an initial publicoffering (“IPO”) of the Employer’s stock or any investment byany individual or entity that does not result in the right of suchindividual or entity to appoint a majority of the Employer’sBoard.(iii)“Code” shall mean the Internal Revenue Code of 1986, as amended, andthe regulations promulgated thereunder.(iv)“Fair Market Value” means, for so long as the common stock of Employer is not publicly traded or, if publicly traded, is notsubject to reported transactions requirements, the Fair MarketValue per share shall be as determined reasonably and in good faith by the Board or the Compensation Committee through any reasonablevaluation method authorized under section 409A of the Code.(v)"Fully Diluted" means, the number of outstanding shares of commonstock as of any date, equal to the sum of (i) the common sharesoutstanding on such date plus (ii) the maximum number of commonshares issuable upon the conversion of the preferred shares outstandingon such date plus (iii) the maximum number of common shares issuableupon the exercise, conversion or exchange of all outstanding options,warrants and other securities exercisable or exchangeable for, orconvertible into, common shares.(vi)“Good Reason” shall be deemed to exist with respect to any terminationof employment by the Employee for any of the following reasons:(1)a material reduction in the Employee’s duties and responsibilities,which for purposes of this Agreement means the assignment toEmployee of any duties or responsibilities which are materiallyinconsistent with or7 CONFIDENTIALEXECUTION VERSION adverse to the Employee’s then current duties, responsibilities,positions and/or titles with the Employer;(2)a material reduction of the Employee’s then-current base salaryor target bonus opportunity;(3)the requirement that the Employee regularly report to work at alocation that is more than fifty (50) miles from the location of theEmployee’s employment as of the Effective Date;(4)a material breach of this Agreement by the Employer; or(5)in the event of the assignment of this Agreement to a third party,the failure of the assignee or successor entity to agree to bebound to the terms of this Agreement;(6)the consummation of a Change of Control of the Employer, assuch term is defined herein.provided, however, that except with respect to Section 4(g)(vi)(6)above, for any of the foregoing to constitute Good Reason, theEmployee must provide written notification of his intention to resignwithin ninety (90) days after the Employee first knows or first has reasonto know of the occurrence of any such event or condition, and, theEmployer must have thirty (30) business days from the date of receipt ofsuch notice to effect a cure of the event or condition constituting GoodReason. If the Employer fails to effect a cure of the event or conditionconstituting Good Reason, the Employee must actually resign fromemployment within thirty (30) days following the expiration of theforegoing cure period. In the event of a cure of such event or conditionconstituting Good Reason by the Employer, such event or conditionshall no longer constitute Good Reason.(vii)“Grant” shall mean a stock option, stock appreciation right, stock award,stock unit or other stock based award granted to Employee.(viii)“Grant Instrument shall mean the written agreement that sets forth theterms and conditions of a Grant, including any amendments thereto.(ix)“Termination Date” shall mean the date on which the Employee’semployment with the Employer terminates in accordance with theapplicable provisions of this Agreement.8 CONFIDENTIALEXECUTION VERSION (x)“Total Disability,” shall mean an illness, incapacity or a mental orphysical condition that renders the Employee unable, despite theprovision, if requested, of a reasonable accommodation as that term isdefined in the Americans with Disabilities Act, to perform the essentialfunctions of his employment position for a continuous period of six (6)months or more.(i) No Mitigation. The Employee shall not be required to mitigate the amount ofany payment provided for in this Section 4 by seeking other employment or otherwise, nor shall theamount of any payment or benefit provided for in this Section 4 be reduced by any compensationearned by the Employee as the result of employment by another employer or self-employment, byretirement benefits, by offset against any amounts (other than loans or advances to the Employee by theEmployer) claimed to be owed by the Employee to the Employer, or otherwise, provided, however,that if Employee becomes eligible for a group health insurance plan during the Severance period, thenEmployee shall notify Employer of same and Employer shall be relieved of the obligation to make anypremium contributions to the continuation of Employee’s health insurance coverage.5. Non-Disclosure; Non-Competition and Prior Agreements.(a) Non-Disclosure. The Employee acknowledges that in the course ofperforming services for the Employer, the Employee will obtain knowledge of the Employer’s businessplans, products, processes, software, know-how, trade secrets, formulas, methods, models, prototypes,discoveries, inventions, improvements, disclosures, names and positions of employees and/or otherproprietary and/or confidential information (collectively the “Confidential Information”). TheEmployee agrees to keep the Confidential Information secret and confidential and not to publish,disclose or divulge to any other party, and the Employee agrees not to use any of the ConfidentialInformation for the Employee’s own benefit or to the detriment of the Employer without the priorwritten consent of the Employer, whether or not such Confidential Information was discovered ordeveloped by the Employee. The Employee also agrees not to divulge, publish or use any proprietaryand/or confidential information of others that the Employer is obligated to maintain in confidence.(b) Non-Competition. The Employee agrees that, during his employment by theEmployer hereunder and for an additional period of nine (9) months after the termination of theEmployee’s employment hereunder for any reason, neither the Employee nor any corporation or otherentity in which the Employee may be interested as a partner, trustee, director, officer, employee, agent,shareholder, lender of money or guarantor, or for which he performs services in any capacity(including as a consultant or independent contractor) shall at any time during such period be engaged,directly or indirectly, in any Competitive Business (as that term is hereinafter defined). The Employeeshall not solicit or, if the Employee owns or has the right to acquire more than five percent (5%) of thefully-diluted equity of the employing entity or its affiliates, hire, directly or indirectly, any person thatwas employed by Employer during the nine (9) month period immediately preceding the Employee’stermination of employment with the Employer. For purposes of this Section 5(b) the term“Competitive Business” shall mean any job, role, or specific responsibilities within a firm, company, orbusiness organization that competes directly with the Employer’s business as in effect at the time of theEmployee’s termination of9 CONFIDENTIALEXECUTION VERSION employment with the Employer or in a business area planned in writing by the Employer before theTermination Date for entry within nine (9) months of the Termination Date at the time of theEmployee’s termination of employment with the Employer. The foregoing prohibition shall notprevent any employment or engagement of the Employee, after termination of employment with theEmployer, by any firm, company, or business organization engaged in a Competitive Business as longas the activities of any such employment or engagement, in any capacity, do not involve work onmatters related to any business, product or service being developed, manufactured, marketed,distributed or planned in writing by the Employer at the time of the Employee’s termination ofemployment with the Employer. The Employee’s ownership of no more than one percent (1%) of theoutstanding voting stock of a publicly traded company shall not constitute a violation of this Section5(b). The Employee is entering into this covenant not to compete in consideration of the agreements ofthe Employer in this Agreement, including but not limited to, the agreement of the Employer to providethe severance and other benefits to the Employee upon a termination of employment pursuant toSection 4(d) hereof and the agreement of the Employer to provide the severance and other benefitsupon a Change of Control in accordance with the terms of Section 4(e).(c) Prior Agreements. The Employee represents and warrants to the Employerthat there are no restrictions, agreements or understandings whatsoever to which the Employee is aparty that would prevent or make unlawful the Employee’s execution of this Agreement or theEmployee’s employment hereunder, is or would be inconsistent or in conflict with this Agreement orthe Employee’s employment hereunder, or would prevent, limit or impair in any way the performanceby the Employee of the obligations hereunder.6. Inventions and Discoveries.(a) Disclosure. The Employee shall promptly and fully disclose to the Employer,with all necessary detail, all developments, know-how, discoveries, inventions, improvements,concepts, ideas, formulae, processes and methods (whether copyrightable, patentable or otherwise)made, received, conceived, acquired or written by the Employee (whether or not at the request or uponthe suggestion of the Employer, solely or jointly with others), during the period of his employmentwith the Employer that (i) result from, arise out of, or relate to any work, assignment or task performedby the Employee on behalf of the Employer, whether undertaken voluntarily or assigned to theEmployee within the scope of his responsibilities to the Employer, or (ii) were developed using theEmployer’s facilities or other resources or in Employer time, or (iii) result from the Employee’s use orknowledge of the Employer’s Confidential Information, or (iv) relate to the Employer’s business or anyof the products or services being developed, manufactured or sold by the Employer or that may beused in relation therewith (collectively referred to as “Inventions”). The Employee herebyacknowledges that all original works of authorship that are made by the Employee (solely or jointlywith others) within the above terms and that are protectable by copyright are “works made for hire,” asthat term is defined in the United States Copyright Act. The Employee understands and hereby agreesthat the decision whether or not to commercialize or market any Invention developed by the Employeesolely or jointly with others is within the Employer’s sole discretion and for the Employer’s sole benefitand that no royalty shall be due to the Employee as a result of the Employer’s efforts to commercializeor market any such Invention.10 CONFIDENTIALEXECUTION VERSION (b) Assignment and Transfer. The Employee agrees to assign and transfer to theEmployer all of the Employee’s right, title and interest in and to the Inventions, and the Employeefurther agrees to deliver to the Employer any and all drawings, notes, specifications and data relating tothe Inventions, and to sign, acknowledge and deliver all such further papers, including applications forand assignments of copyrights and patents, and all renewals thereof, as may be necessary to obtaincopyrights and patents for any Inventions in any and all countries and to vest title thereto in theEmployer and its successors and assigns and to otherwise protect the Employer’s interests therein. TheEmployee shall not charge the Employer for time spent in complying with these obligations. If theEmployer is unable because of the Employee’s mental or physical incapacity or for any other reason tosecure the Employee’s signature to apply for or to pursue any application for any United States orforeign patents or copyright registrations covering Inventions or original works of authorship assignedto the Employer as above, then the Employee hereby irrevocably designates and appoints theEmployer and its duly authorized officers and agents as the Employee’s agent and attorney in fact, toact for and in the Employee’s behalf and stead to execute and file any such applications and to do allother lawfully permitted acts to further the prosecution and issuance of letters patent or copyrightregistrations thereon with the same legal force and effect as if executed by the Employee.(c) Records. The Employee agrees that in connection with any research,development or other services performed for the Employer, the Employee will maintain careful,adequate and contemporaneous written records of all Inventions, which records shall be the property ofthe Employer.7. Employer Documentation. The Employee shall hold in a fiduciary capacity for thebenefit of the Employer all documentation, disks, programs, data, records, drawings, manuals, reports,sketches, blueprints, letters, notes, notebooks and all other writings, electronic data, graphics andtangible information and materials of a secret, confidential or proprietary information nature relating tothe Employer or the Employer’s business that are in the possession or under the control of theEmployee.8. Injunctive Relief. The Employee acknowledges that his compliance with theagreements in Sections 5, 6, and 7 hereof is necessary to protect the good will and other proprietaryinterests of the Employer and that he is one of the principal executives of the Employer and conversantwith its affairs, its trade secrets and other proprietary information. The Employee acknowledges that abreach of any of his agreements in Sections 5, 6 and 7 hereof will result in irreparable and continuingdamage to the Employer for which there will be no adequate remedy at law; and the Employee agreesthat in the event of any breach of the aforesaid agreements, the Employer and its successors andassigns shall be entitled to injunctive relief and to such other and further relief as may be proper.9. Application of Section 409A of the Internal Revenue Code. (a) Compliance. This Agreement shall be interpreted to avoid any penaltysanctions under section 409A of the Code. If any payment or benefit cannot be provided or made atthe time specified herein without incurring sanctions under section 409A of the Code, then such benefitor payment shall be provided in full at the earliest time thereafter when such sanctions will not beimposed. For purposes of section 409A of the Code, all payments to be11 CONFIDENTIALEXECUTION VERSION made upon a termination of employment under this Agreement may only be made upon a “separationfrom service” under section 409A of the Code, each payment made under this Agreement shall betreated as a separate payment, and the right to a series of installment payments under this Agreement isto be treated as a right to a series of separate payments. In no event shall the Employee, directly orindirectly, designate the calendar year of payment. All reimbursements provided under this Agreementshall be made or provided in accordance with the requirements of section 409A of the Code, including,where applicable, the requirement that (i) any reimbursement is for expenses incurred during theEmployee’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount ofexpenses eligible for reimbursement during a calendar year may not affect the expenses eligible forreimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be madeon or before the last day of the calendar year following the year in which the expense is incurred, and(iv) the right to reimbursement is not subject to liquidation or exchange for another benefit.(b) Payment Delay. Notwithstanding any provision in this Agreement to thecontrary, if at the time of the Employee’s termination of employment with the Employer, the Employerhas securities which are publicly-traded on an established securities market and the Employee is a“specified employee” (as defined in section 409A of the Code) and it is necessary to postpone thecommencement of any severance payments otherwise payable pursuant to this Agreement as a result ofsuch termination of employment in order to prevent any accelerated or additional tax under section409A of the Code, then the Employer shall postpone the commencement of the payment of any suchpayments or benefits hereunder (without any reduction in such payments or benefits ultimately paid orprovided to the Employee) that are not otherwise paid within the short-term deferral exception undersection 409A of the Code and are in excess of the lesser of two (2) times (i) the Employee’s then-annual compensation or (ii) the limit on compensation then set forth in section 401(a)(17) of the Code,until the first payroll date that occurs after the date that is six (6) months following the Employee’s“separation from service” with the Employer (as defined under section 409A of the Code). If anypayments are postponed due to such requirements, such postponed amounts shall be paid in a lumpsum to the Employee, and any installment payments due to the Employee shall recommence, on thefirst payroll date that occurs after the date that is six (6) months following the Employee’s “separationfrom service” with the Employer. If the Employee dies during the postponement period prior to thepayment of the postponed amount, the amounts withheld on account of section 409A of the Code shallbe paid to the personal representative of the Employee’s estate within sixty (60) days after the date ofthe Employee’s death.10. Supersedes Other Agreements. This Agreement supersedes and is in lieu of any andall other employment arrangements between the Employee and the Employer.11. Amendments. Any amendment to this Agreement shall be made in writing and signedby the parties hereto.12. Enforceability. If any provision of this Agreement shall be invalid or unenforceable,in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and inthe manner necessary to render the same valid and enforceable, or shall be deemed excised from thisAgreement, as the case may require, and this Agreement shall be construed and enforced to themaximum extent permitted by law as if such provision had been12 CONFIDENTIALEXECUTION VERSION originally incorporated herein as so modified or restricted or as if such provision had not beenoriginally incorporated herein, as the case may be.13. Governing Law. This Agreement shall be governed in all respects by the laws of theCommonwealth of Pennsylvania without regard to the conflicts of laws principles of anyjurisdiction. Any legal proceeding arising out of or relating to this Agreement shall be instituted in thePennsylvania state or Federal courts. Employee hereby consents to the personal and exclusivejurisdiction of such court and hereby waives any objection that the Employee may have to the laying ofvenue of any such proceeding and any claim or defense of inconvenient forum.14. Jury Waiver. The Employer and Employee hereby waive trial by jury for all actionsarising from or relating to any breaches or claimed breaches of this Agreement, or any circumstance ormatter arising from or relating to Employee’s employment by Employer.15. Assignment.(a) By the Employer. The rights and obligations of the Employer under thisAgreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of theEmployer. This Agreement may be assigned by the Employer without the consent of theEmployee. The Employer shall require any successor (whether direct or indirect, by purchase, merger,consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer toexpressly assume and agree to perform this Agreement in the same manner and to the same extent thatthe Employer would be required to perform it if no such succession had taken place. Unless expresslyprovided otherwise, “Employer” as used herein shall mean the Employer as defined in this Agreementand any successor to its business and/or assets as aforesaid.(b) By the Employee. This Agreement and the obligations created hereunder maynot be assigned by the Employee, but all rights of the Employee hereunder shall inure to the benefit ofand be enforceable by his heirs, devisees, legatees, executors, administrators and personalrepresentatives.16. Notices. All notices required or permitted to be given hereunder shall be in writing andshall be deemed to have been given when mailed by certified mail, return receipt requested, ordelivered by a national overnight delivery service addressed to the intended recipient as follows:If to the Employer:Zynerba Pharmaceuticals, Inc.80 W. Lancaster Avenue, Suite 300Devon, PA 19333Attention: General Counsel If to the Employee:Brian K. Rosenberger1041 Haverhill Road13 CONFIDENTIALEXECUTION VERSION Chester Springs, PA 19425 Any party may from time to time change its address for the purpose of notices to that party by a similarnotice specifying a new address, but no such change shall be deemed to have been given until it isactually received by the party sought to be charged with its contents.17. Waivers. No claim or right arising out of a breach or default under this Agreementshall be discharged in whole or in part by a waiver of that claim or right unless the waiver is supportedby consideration and is in writing and executed by the aggrieved party hereto or his or its dulyauthorized agent. A waiver by any party hereto of a breach or default by the other party hereto of anyprovision of this Agreement shall not be deemed a waiver of future compliance therewith, and suchprovisions shall remain in full force and effect.18. Indemnification. Employer agrees to indemnify, defend and hold harmless, Employee to the maximum extent permitted by law and underthe by-laws and articles of incorporation of the Employer,as well as to cover Employee under any indemnification agreements or arrangements maintained by the Employer for its directors and officers from time totime, subject to the terms and conditions thereof. Employer specifically acknowledges and agrees the obligations set forth herein include but are not limitedto any and all claims, demands, investigations, suits or actions for any and all liabilities, losses, damages, penalties, costs or expenses of every kindwhatsoever (including but not limited to court costs, legal fees, awards or settlements) arising out of, in connection with or related to any negligent orintentional act, error or omission of Employer, any predecessor entity of Employer, or any of their respective current or former directors, officers,employees, representatives or agents prior to the Effective Date of this Agreement.19. Survival of Covenants. The provisions of Sections 5 through 18 hereof shall survivethe termination of this Agreement. Furthermore, any other provision of this Agreement that, by itsterms, is intended to continue beyond the termination of the Employee’s employment shall continue ineffect thereafter. [signature page follows]14 CONFIDENTIALEXECUTION VERSION IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the date first abovewritten. ZYNERBA PHARMACEUTICALS, INC. By:/s/ Armando Anido Armando Anido Chief Executive Officer EMPLOYEE /s/ Brian Rosenberger Brian Rosenberger15 CONFIDENTIALEXECUTION VERSION EXHIBIT ANON-QUALIFIED STOCK OPTION AGREEMENT 16Exhibit 21.1 Subsidiaries of Zynerba Pharmaceuticals, Inc. SubsidiaryJurisdiction of IncorporationZynerba Pharmaceuticals Pty LtdAustralia Exhibit 23.1Consent Of Independent Registered Public Accounting Firm The Board of DirectorsZynerba Pharmaceuticals, Inc.:We consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-207973) and Form S-3 (No.333-213430) of Zynerba Pharmaceuticals, Inc. of our report dated March 27, 2017, with respect to the consolidated balancesheets of Zynerba Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and the related consolidated statements ofoperations, redeemable convertible preferred stock, convertible preferred stock and stockholders’ equity (deficit), and cashflows for each of the years in the three-year period ended December 31, 2016, which report appears in the December 31, 2016annual report on Form 10-K of Zynerba Pharmaceuticals, Inc. /s/ KPMG LLPPhiladelphia, PAMarch 27, 2017  Exhibit 31.1CERTIFICATIONI, Armando Anido, certify that:1. I have reviewed this annual report on Form 10-K of Zynerba Pharmaceuticals, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present inall material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of theperiod covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting.By: /s/ Armando AnidoName: Armando AnidoTitle: Chairman and Chief Executive OfficerDated: March 27, 2017 Exhibit 31.2CERTIFICATIONI, James E. Fickenscher, certify that:1. I have reviewed this annual report on Form 10-K of Zynerba Pharmaceuticals, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleadingwith respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present inall material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periodspresented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of theperiod covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control overfinancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting.By: /s/ James E. FickenscherName: James E. FickenscherTitle: Chief Financial Officer and TreasurerDated: March 27, 2017 Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the annual report of Zynerba Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the fiscal yearended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,Armando Anido, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Actof 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company./s/ Armando AnidoArmando AnidoChairman and Chief Executive OfficerDated: March 27, 2017 Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the annual report of Zynerba Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the fiscal yearended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, JamesE. Fickenscher, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Actof 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial conditionand results of operations of the Company./s/ James E. FickenscherJames E. FickenscherChief Financial OfficerDated: March 27, 2017 

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