zfgn-10q_20190930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2019

or

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

For the transition period from                      to                      .

Commission File Number 001-36510

 

ZAFGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-3857670

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

Zafgen, Inc.

3 Center Plaza, Suite 610

Boston, Massachusetts 02108

(Address of principal executive offices, including zip code)

Registrant’s Telephone Number, Including Area Code: (617) 622-4003

 

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

ZFGN

NASDAQ Global Market

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Emerging growth company

Smaller reporting company

 

 

 

 

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

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

As of October 31, 2019, there were 37,374,118 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

 

 

 


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q Report, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

the accuracy of our estimates regarding expenses, future revenues, cash forecasts and capital requirements;

 

our ability to consummate a strategic alternative transaction, if any, and the timing of any such strategic alternative;

 

regulatory and political developments in the United States and foreign countries;

 

our ability to obtain additional financing when needed;

 

the loss of our executive, financial and strategic alternatives teams;

 

potential de-listing from the NASDAQ Global Market; and

 

other risks and uncertainties, including those listed under Part I, Item 1A. Risk Factors.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. Risk Factors and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

 


Zafgen, Inc.

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Item 1

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

 

 

Item 4.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

30

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors

 

31

 

 

 

 

 

Item 6.

 

Exhibits

 

55

 

 

 

 

 

Signatures

 

56

 

 

2


PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

ZAFGEN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

43,337

 

 

$

49,331

 

Marketable securities

 

 

38,669

 

 

 

68,735

 

Tax incentive receivable

 

 

235

 

 

 

1,536

 

Prepaid expenses and other current assets

 

 

1,202

 

 

 

1,728

 

Total current assets

 

 

83,443

 

 

 

121,330

 

Property and equipment, net

 

 

913

 

 

 

375

 

Operating lease right-of-use assets

 

 

7,172

 

 

 

 

Restricted cash

 

 

1,339

 

 

 

 

Other assets

 

 

20

 

 

 

57

 

Total assets

 

$

92,887

 

 

$

121,762

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,319

 

 

$

3,590

 

Accrued expenses

 

 

1,719

 

 

 

4,261

 

Accrued restructuring costs

 

 

3,619

 

 

 

 

Operating lease liabilities, current

 

 

409

 

 

 

 

Notes payable, current

 

 

7,273

 

 

 

5,455

 

Total current liabilities

 

 

16,339

 

 

 

13,306

 

Notes payable, long-term

 

 

10,166

 

 

 

15,185

 

Operating lease liabilities

 

 

6,502

 

 

 

 

Total liabilities

 

 

33,007

 

 

 

28,491

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock; $0.001 par value per share; 5,000,000 shares authorized as of

   September 30, 2019 and December 31, 2018; no shares issued and outstanding as

   of September 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value per share; 115,000,000 shares authorized as of

  September 30, 2019 and December 31, 2018; 37,370,301 and 37,287,221 shares

  issued and outstanding as of September 30, 2019 and December 31, 2018,

  respectively

 

 

37

 

 

 

37

 

Additional paid-in capital

 

 

448,902

 

 

 

444,212

 

Accumulated deficit

 

 

(389,100

)

 

 

(350,945

)

Accumulated other comprehensive income (loss)

 

 

41

 

 

 

(33

)

Total stockholders' equity

 

 

59,880

 

 

 

93,271

 

Total liabilities and stockholders' equity

 

$

92,887

 

 

$

121,762

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


ZAFGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,260

 

 

 

11,830

 

 

 

23,463

 

 

 

36,472

 

General and administrative

 

 

3,627

 

 

 

3,339

 

 

 

10,891

 

 

 

9,959

 

Restructuring charges

 

 

4,019

 

 

 

 

 

 

4,019

 

 

 

 

Total operating expenses

 

 

12,906

 

 

 

15,169

 

 

 

38,373

 

 

 

46,431

 

Loss from operations

 

 

(12,906

)

 

 

(15,169

)

 

 

(38,373

)

 

 

(46,431

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

451

 

 

 

623

 

 

 

1,654

 

 

 

1,214

 

Interest expense

 

 

(426

)

 

 

(475

)

 

 

(1,404

)

 

 

(1,399

)

Foreign currency transaction losses, net

 

 

(33

)

 

 

(46

)

 

 

(32

)

 

 

(182

)

Total other income (expense), net

 

 

(8

)

 

 

102

 

 

 

218

 

 

 

(367

)

Net loss

 

$

(12,914

)

 

$

(15,067

)

 

$

(38,155

)

 

$

(46,798

)

Net loss per share, basic and diluted

 

$

(0.35

)

 

$

(0.41

)

 

$

(1.02

)

 

$

(1.53

)

Weighted average common shares outstanding, basic and diluted

 

 

37,369,829

 

 

 

36,619,575

 

 

 

37,337,081

 

 

 

30,608,664

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(12,914

)

 

$

(15,067

)

 

$

(38,155

)

 

$

(46,798

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable debt securities

 

 

11

 

 

 

(22

)

 

 

74

 

 

 

30

 

Total other comprehensive income (loss)

 

 

11

 

 

 

(22

)

 

 

74

 

 

 

30

 

Total comprehensive loss

 

$

(12,903

)

 

$

(15,089

)

 

$

(38,081

)

 

$

(46,768

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


4


ZAFGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balances as of December 31, 2017

 

 

27,489,457

 

 

$

27

 

 

$

367,825

 

 

$

(289,577

)

 

$

(58

)

 

$

78,217

 

Issuance of common stock upon exercise of stock

   options and employee stock purchase plan

 

 

63,893

 

 

 

1

 

 

 

260

 

 

 

 

 

 

 

 

 

261

 

Issuance of restricted stock units

 

 

5,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,466

 

 

 

 

 

 

 

 

 

2,466

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(15,956

)

 

 

 

 

 

(15,956

)

Balances as of March 31, 2018

 

 

27,558,883

 

 

$

28

 

 

$

370,551

 

 

$

(305,533

)

 

$

(49

)

 

$

64,997

 

Issuance of common stock upon exercise of stock

   options and employee stock purchase plan

 

 

15,643

 

 

 

 

 

 

86

 

 

 

 

 

 

 

 

 

86

 

Issuance of restricted stock units

 

 

4,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,671

 

 

 

 

 

 

 

 

 

2,671

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43

 

 

 

43

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(15,775

)

 

 

 

 

 

(15,775

)

Balances as of June 30, 2018

 

 

27,578,989

 

 

$

28

 

 

$

373,308

 

 

$

(321,308

)

 

$

(6

)

 

$

52,022

 

Issuance of common stock, net of issuance costs

 

 

9,200,000

 

 

 

9

 

 

 

64,551

 

 

 

 

 

 

 

 

 

64,560

 

Issuance of common stock upon exercise of stock

   options and employee stock purchase plan

 

 

82,365

 

 

 

 

 

 

244

 

 

 

 

 

 

 

 

 

244

 

Issuance of restricted stock units

 

 

4,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,200

 

 

 

 

 

 

 

 

 

2,200

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

(22

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(15,067

)

 

 

 

 

 

(15,067

)

Balances as of September 30, 2018

 

 

36,865,817

 

 

$

37

 

 

$

440,303

 

 

$

(336,375

)

 

$

(28

)

 

$

103,937

 

Balances as of December 31, 2018

 

 

37,287,221

 

 

$

37

 

 

$

444,212

 

 

$

(350,945

)

 

$

(33

)

 

$

93,271

 

Issuance of common stock upon exercise of stock

   options and employee stock purchase plan

 

 

31,391

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

95

 

Issuance of restricted stock units

 

 

4,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,076

 

 

 

 

 

 

 

 

 

2,076

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

34

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,112

)

 

 

 

 

 

(13,112

)

Balances as of March 31, 2019

 

 

37,323,079

 

 

$

37

 

 

$

446,383

 

 

$

(364,057

)

 

$

1

 

 

$

82,364

 

Issuance of restricted stock units

 

 

3,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,875

 

 

 

 

 

 

 

 

 

1,875

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

29

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,129

)

 

 

 

 

 

(12,129

)

Balances as of June 30, 2019

 

 

37,326,895

 

 

$

37

 

 

$

448,258

 

 

$

(376,186

)

 

$

30

 

 

$

72,139

 

Issuance of common stock upon exercise of stock

   options and employee stock purchase plan

 

 

39,589

 

 

 

 

 

 

40

 

 

 

 

 

 

 

 

 

40

 

Issuance of restricted stock units

 

 

3,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

604

 

 

 

 

 

 

 

 

 

604

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

11

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,914

)

 

 

 

 

 

(12,914

)

Balances as of September 30, 2019

 

 

37,370,301

 

 

$

37

 

 

$

448,902

 

 

$

(389,100

)

 

$

41

 

 

$

59,880

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


 

ZAFGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(38,155

)

 

$

(46,798

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

4,555

 

 

 

7,337

 

Depreciation expense

 

 

185

 

 

 

209

 

Impairment of assets

 

 

80

 

 

 

 

Loss on disposal of property and equipment

 

 

6

 

 

 

 

Unrealized foreign currency transaction losses

 

 

13

 

 

 

45

 

Premium on marketable securities, net

 

 

(39

)

 

 

(3

)

Amortization of discount on marketable securities

 

 

(706

)

 

 

(345

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

526

 

 

 

(465

)

Tax incentive receivable

 

 

1,288

 

 

 

(344

)

Accounts payable

 

 

(556

)

 

 

(397

)

Accrued restructuring costs

 

 

3,619

 

 

 

 

Accrued expenses and other

 

 

(1,830

)

 

 

1,108

 

Other assets

 

 

37

 

 

 

 

Net cash used in operating activities

 

 

(30,977

)

 

 

(39,653

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

101,920

 

 

 

84,938

 

Purchases of marketable securities

 

 

(71,035

)

 

 

(105,976

)

Purchases of property and equipment

 

 

(479

)

 

 

(96

)

Proceeds from sales of property and equipment

 

 

3

 

 

 

 

Payments for leasehold improvements on right-of-use assets

 

 

(586

)

 

 

 

Net cash provided by (used in) investing activities

 

 

29,823

 

 

 

(21,134

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offering, net of issuance costs

 

 

 

 

 

64,560

 

Repayments of notes payable

 

 

(3,636

)

 

 

 

Proceeds from exercise of common stock options and employee stock purchase plan

 

 

135

 

 

 

591

 

Net cash (used in) provided by financing activities

 

 

(3,501

)

 

 

65,151

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(4,655

)

 

 

4,364

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

49,331

 

 

 

40,777

 

Cash, cash equivalents and restricted cash at end of period

 

$

44,676

 

 

$

45,141

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment included in accounts payable and accrued expenses

 

$

285

 

 

$

4

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

969

 

 

$

819

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


ZAFGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of the Business and Basis of Presentation

Zafgen, Inc., or the Company, was incorporated on November 22, 2005 under the laws of the State of Delaware. The Company is a biopharmaceutical company that has leveraged its proprietary knowledge of the methionine aminopeptidase 2 (“MetAP2”) pathway to pioneer the study of MetAP2 inhibitors in both common and rare metabolic disorders.

The Company’s prior lead product candidate, ZGN-1061, is a MetAP2 inhibitor that was in Phase 2 clinical development for the treatment of type 2 diabetes and other related metabolic disorders. In November 2018, the Company received a letter from the U.S. Food and Drug Administration (“FDA”) placing a full clinical hold on the investigational new drug application (“IND”) for the first U.S. clinical trial of ZGN-1061. The FDA cited the possibility of cardiovascular (“CV”) safety risk based on the Company’s prior compound. In July 2019, the Company reached agreement with the FDA on an in vivo animal study design and protocol to establish relevant safety margins for ZGN-1061. The study was designed to translate the data from the Company’s newly developed in vitro assays of human endothelial cells and assessment of tissue factor expression with endothelial cells, along with other supportive assays, as it worked toward resolving the full clinical hold. Based on the preliminary results from the in vivo study, on September 5, 2019, the Company announced that it believes there is a low probability of resolving the clinical hold in the near-term. Subsequently, all further development activities of MetAP2 inhibitors were halted and the Company withdrew the IND for ZGN-1061 in September 2019. Therefore, the Company has determined that it is in the best interest of shareholders to evaluate strategic alternatives. Potential strategic alternatives that may be evaluated include, but are not limited to, an acquisition, merger, business combination, in-licensing, or other strategic transaction involving the Company or its assets. There can be no assurance that the exploration of strategic alternatives will result in any transaction being entered into or consummated. In addition to evaluating strategic alternatives, in September 2019, the Company’s Board of Directors approved a restructuring plan to reduce operating costs and better align the Company’s workforce with its needs, which in combination with the July restructuring actions and other attrition in 2019, resulted in a 70% reduction in workforce and closure of its San Diego facility (See Note 10).

The Company was also co-sponsoring a four-year natural history study which was designed to advance understanding of the medical history of and medical events in people with Prader-Willi syndrome in collaboration with the Foundation for Prader-Willi Research (“FPWR”). In October 2019, the Company transferred the study sponsorship and all of the associated rights to the study data to FPWR.

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Future product candidates will require significant additional research and development efforts, including extensive nonclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities.

There can be no assurance that the Company’s future product candidates’ research and development, if any, will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any product candidates developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants.

The Company has incurred losses and negative cash flows from operations since its inception. As of September 30, 2019, the Company had an accumulated deficit of $389.1 million. From its inception through September 30, 2019, the Company received net proceeds of $397.9 million from the sales of redeemable convertible preferred stock, the issuance of convertible promissory notes, the proceeds from its initial public offering (“IPO”) in June 2014 and its follow-on offerings in January 2015 and July 2018. On July 2, 2018, the Company completed a public offering of its common stock, which resulted in the sale of 9,200,000 shares at a price of $7.50 per share, resulting in net proceeds of approximately $64.6 million after deducting underwriting discounts and commissions, as well as offering costs. As disclosed in Note 5 to the condensed consolidated financial statements, the Company has a term loan with an aggregate principal balance of $16.4 million as of September 30, 2019. The loan agreement requires that the Company maintain certain minimum liquidity at all times, which as of September 30, 2019, was approximately $17.2 million. If the minimum liquidity covenant is not met, the Company may be required to repay the loan prior to scheduled maturity dates. The Term Loan also includes events of default, the occurrence and continuation of any of which provides the lenders the right to exercise remedies against the Company and the collateral securing the amounts due under the Term Loan. These events of default include, among other things, failure to pay any amounts due under the Term Loan, insolvency, the occurrence of a material adverse event, the occurrence of any default under certain other indebtedness and a final judgment against the Company in an amount greater than $0.3 million. The Company has estimated that the risk of subjective acceleration under the material adverse events clause is reasonably possible,

7


however not probable and therefore have classified the outstanding principal in current and long-term liabilities based on contractually scheduled principal payments. However, the assessment of such probability of the debt holder calling the debt is subjective and their actions and/or the Company’s related assessment could change in the future, which in turn would impact the classification of the debt balances. Until such time, if ever, as the Company can generate substantial product revenue, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other sources of funding.

On September 17, 2019, the Company received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying it that, for the last 30 consecutive business days, the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global Market, referred to as the minimum bid price rule. In accordance with Nasdaq Listing Rules, the Company has an initial period of 180 calendar days, or until March 16, 2020, to regain compliance with the minimum bid price rule. The Company is actively monitoring its stock price and will consider any and all options available to the Company to maintain compliance. The alternatives to trading on the Nasdaq Capital Market or another national securities exchange are generally considered to be less efficient and less broad-based than the national securities exchanges and the liquidity of the Company’s common stock will likely be reduced if we fail to regain compliance with the minimum bid price rule.

Based on its current operating plans, the Company believes its cash, cash equivalents and marketable securities of $82.0 million as of September 30, 2019 will be sufficient to fund its anticipated level of operations, capital expenditures and satisfy debt repayments for a period of at least 12 months from the issuance date of this Quarterly Report. The Company expects to generate operating losses for the foreseeable future. If the Company is unable to raise additional funds through equity or debt financings, the Company may be required to delay, limit, reduce or terminate future product development or future commercialization efforts or grant rights to develop and market products or product candidates that the Company would otherwise prefer to develop and market itself.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Zafgen Securities Corporation, Zafgen Australia Pty Limited, and Zafgen Animal Health, LLC. All intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2018 was derived from the Company’s audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2018, on file with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position as of September 30, 2019 and condensed consolidated results of operations and cash flows for the three and nine months ended September 30, 2019 and 2018 have been made. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

Marketable securities

Marketable securities consist of investments with original maturities greater than ninety days. The Company has classified its investments with maturities beyond one year as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company classifies its marketable debt securities as available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains

8


and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income (expense), net, based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. Fair value is determined based on quoted market prices.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and unvested restricted common shares, as determined using the treasury stock method. For periods in which the Company has reported net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is antidilutive.

The Company excluded the following common stock equivalents, outstanding as of September 30, 2019 and 2018, from the computation of diluted net loss per share for the three and nine months ended September 30, 2019 and 2018 because they had an anti-dilutive impact due to the net loss incurred for the periods:

 

 

 

As of September 30,

 

 

 

2019

 

 

2018

 

Options to purchase common stock

 

 

5,118,280

 

 

 

5,676,861

 

Unvested restricted common stock

 

 

56,770

 

 

 

4,465

 

 

 

 

5,175,050

 

 

 

5,681,326

 

 

Recently Issued and Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases and in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The new leasing standards generally require lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the consolidated balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.

We adopted the new leasing standards using the modified retrospective transition approach, as of January 1, 2019, with no restatement of prior periods or cumulative adjustment to retained earnings. Upon adoption, we elected the package of transition practical expedients, which allowed us to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. In addition, the Company elected the hindsight practical expedient to determine the lease term for existing leases. The Company elected not to record leases with an initial term of 12 months or less on the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. Upon adoption of the new leasing standards we recognized an operating lease asset of approximately $1.0 million and a corresponding operating lease liability of approximately $1.0 million, which are included in our condensed consolidated balance sheet. The adoption of the new leasing standards did not have an impact on our condensed consolidated statements of income or cash flows.

We determine if an arrangement is a lease at contract inception. Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We use the implicit rate when readily determinable and use our incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the commencement date in determining the present value of the lease payments. Our incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease.

The lease payments used to determine our operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation when determinable and are recognized in our operating lease assets in our condensed consolidated balance sheets.

Our operating leases are reflected in operating lease right-of-use assets, accrued expenses and in long-term operating lease liabilities in our condensed consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

9


For additional information on the adoption of the new leasing standards, please read Note 7, Commitments and Contingencies, to these condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent accounting for employee share-based compensation. This standard was effective for the Company in 2019. The adoption of this guidance had an immaterial impact on the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2019.

3. Fair Value Measurements and Marketable Securities

Fair Value Measurements

The following tables present information about the Company’s financial assets that have been measured at fair value as of September 30, 2019 and December 31, 2018 and indicate the fair value of the hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair value determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices, for similar assets or liabilities, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. During the three and nine months ended September 30, 2019 and the year ended December 31, 2018, there were no transfers between Level 1 and Level 2 financial assets.

The following tables summarize the Company’s cash equivalents and marketable securities as of September 30, 2019 and December 31, 2018:

 

 

 

September 30, 2019

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

 

 

 

 

 

Markets

 

 

Inputs

 

 

Inputs

 

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

33,344

 

 

$

33,344

 

 

$

 

 

$

 

Commercial paper

 

 

700

 

 

 

 

 

 

700

 

 

 

 

Total cash equivalents

 

 

34,044

 

 

 

33,344

 

 

 

700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

13,479

 

 

 

 

 

 

13,479

 

 

 

 

Corporate bonds

 

 

13,169

 

 

 

 

 

 

13,169

 

 

 

 

U.S. Government securities

 

 

12,021

 

 

 

 

 

 

12,021

 

 

 

 

Total marketable securities

 

 

38,669