zfgn-10q_20200331.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 March 31, 2020

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 April 30, 2020, there were 37,469,596 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 plans and expectations regarding the merger with Chondrial Therapeutics, Inc., including the expected completion of the merger;

 

our strategies, goals, prospects, plans, expectations, forecasts or objectives of with Chondrial Therapeutics, Inc. or the combined company;

 

the impacts of the current COVID-19 pandemic on our continuing business and operations, the completion of the proposed merger with Chondrial Therapeutics, Inc., and the business and operations of the combined company;

 

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 March 31, 2020 and December 31, 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders Equity for the Three Months Ended March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

16

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

 

Item 4.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

25

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

26

 

 

 

 

 

Item 1A.

 

Risk Factors

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

56

 

 

 

 

 

Signatures

 

57

 

 

2


PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

ZAFGEN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,980

 

 

$

27,211

 

Marketable debt securities

 

 

24,905

 

 

 

43,050

 

Tax incentive receivable

 

 

214

 

 

 

243

 

Prepaid expenses and other current assets

 

 

581

 

 

 

999

 

Total current assets

 

 

64,680

 

 

 

71,503

 

Property and equipment, net

 

 

743

 

 

 

821

 

Operating lease right-of-use assets

 

 

6,928

 

 

 

7,051

 

Restricted cash

 

 

1,339

 

 

 

1,339

 

Other assets

 

 

12

 

 

 

20

 

Total assets

 

$

73,702

 

 

$

80,734

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

322

 

 

$

632

 

Accrued expenses

 

 

881

 

 

 

1,190

 

Accrued restructuring costs

 

 

981

 

 

 

2,709

 

Operating lease liabilities, current

 

 

410

 

 

 

386

 

Notes payable, current

 

 

7,273

 

 

 

7,273

 

Total current liabilities

 

 

9,867

 

 

 

12,190

 

Notes payable, long-term

 

 

6,747

 

 

 

8,464

 

Operating lease liabilities

 

 

6,346

 

 

 

6,456

 

Total liabilities

 

 

22,960

 

 

 

27,110

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   March 31, 2020 and December 31, 2019; no shares issued and outstanding as

   of March 31, 2020 and December 31, 2019

 

 

 

 

 

 

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

   March 31, 2020 and December 31, 2019; 37,469,596 and 37,446,498 shares

   issued and outstanding as of March 31, 2020 and December 31, 2019,

   respectively

 

 

37

 

 

 

37

 

Additional paid-in capital

 

 

450,623

 

 

 

449,903

 

Accumulated deficit

 

 

(399,949

)

 

 

(396,351

)

Accumulated other comprehensive income

 

 

31

 

 

 

35

 

Total stockholders' equity

 

 

50,742

 

 

 

53,624

 

Total liabilities and stockholders' equity

 

$

73,702

 

 

$

80,734

 

 

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 March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

(94

)

 

 

9,631

 

General and administrative

 

 

3,647

 

 

 

3,646

 

Restructuring charges

 

 

10

 

 

 

 

Total operating expenses

 

 

3,563

 

 

 

13,277

 

Loss from operations

 

 

(3,563

)

 

 

(13,277

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

258

 

 

 

642

 

Interest expense

 

 

(301

)

 

 

(500

)

Other income

 

 

218

 

 

 

 

Foreign currency transaction (losses) gains, net

 

 

(210

)

 

 

23

 

Total other (expense) income, net

 

 

(35

)

 

 

165

 

Net loss

 

$

(3,598

)

 

$

(13,112

)

Net loss per share, basic and diluted

 

$

(0.10

)

 

$

(0.35

)

Weighted average common shares outstanding, basic and diluted

 

 

37,467,411

 

 

 

37,313,947

 

Comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,598

)

 

$

(13,112

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Unrealized (loss) gain on marketable debt securities

 

 

(4

)

 

 

34

 

Total other comprehensive (loss) income

 

 

(4

)

 

 

34

 

Total comprehensive loss

 

$

(3,602

)

 

$

(13,078

)

 

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, 2019

 

 

 

 

37,446,498

 

 

$

37

 

 

$

449,903

 

 

$

(396,351

)

 

$

35

 

 

$

53,624

 

Issuance of common stock upon exercise of stock

   options and employee stock purchase plan

 

 

 

 

10,911

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Issuance of restricted stock units

 

 

 

 

12,187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

710

 

 

 

 

 

 

 

 

 

710

 

Unrealized loss on marketable debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(4

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,598

)

 

 

 

 

 

(3,598

)

Balances as of March 31, 2020

 

 

 

 

37,469,596

 

 

$

37

 

 

$

450,623

 

 

$

(399,949

)

 

$

31

 

 

$

50,742

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 debt 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

 

 

 

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

 

 

5


ZAFGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,598

)

 

$

(13,112

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

710

 

 

 

2,076

 

Depreciation expense

 

 

76

 

 

 

51

 

Loss on disposal of fixed assets

 

 

2

 

 

 

 

Unrealized foreign currency transaction losses (gains)

 

 

29

 

 

 

(14

)

Amortization of discount on marketable debt securities

 

 

(52

)

 

 

(283

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

418

 

 

 

469

 

Tax incentive receivable

 

 

 

 

 

(94

)

Accounts payable

 

 

(310

)

 

 

(445

)

Accrued restructuring costs

 

 

(1,728

)

 

 

 

Accrued expenses

 

 

(163

)

 

 

(1,119

)

Net cash used in operating activities

 

 

(4,616

)

 

 

(12,471

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of marketable debt securities

 

 

20,532

 

 

 

34,275

 

Purchases of marketable debt securities

 

 

(2,339

)

 

 

(33,466

)

Purchases of property and equipment

 

 

 

 

 

(2

)

Net cash provided by investing activities

 

 

18,193

 

 

 

807

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(1,818

)

 

 

 

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

 

 

10

 

 

 

95

 

Net cash (used in) provided by financing activities

 

 

(1,808

)

 

 

95

 

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

 

 

11,769

 

 

 

(11,569

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

28,550

 

 

 

49,331

 

Cash, cash equivalents and restricted cash at end of period

 

$

40,319

 

 

$

37,762

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment included in accounts payable

 

$

 

 

$

11

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

212

 

 

$

339

 

 

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.

Following an extensive process of evaluating strategic alternatives for the Company and identifying and reviewing potential candidates for a strategic acquisition or other transaction, on December 17, 2019, the Company entered into an Agreement and Plan of Merger, or the Merger Agreement, with Chondrial Therapeutics, Inc., or Chondrial, pursuant to which a wholly owned subsidiary of the Company will merge with and into Chondrial, with Chondrial continuing as the surviving corporation of the merger and a wholly owned subsidiary of the Company, or the merger. Under the exchange ratio formula in the Merger Agreement, as of immediately after the merger, the former Chondrial securityholders are expected to own approximately 60% of the outstanding shares of the Company’s common stock on a fully-diluted basis and the Company’s stockholders as of immediately prior to the merger are expected to own approximately 40% of the outstanding shares of the Company’s common stock on a fully-diluted basis. The relative percentage ownership of the combined company was derived using a stipulated value of Chondrial of approximately $67.5 million and of the Company of approximately $45.0 million. The Company’s valuation was determined based on a projected net cash, cash equivalents and marketable securities balance minus outstanding liabilities, as defined in the Merger Agreement, of $40.0 million as of a determination date prior to the closing of the merger, but subject to adjustment as described below, plus an additional $5.0 million of enterprise value. If the Company’s actual net cash is between $39.5 million and $40.5 million, no adjustment will be made to the ownership percentages based on the Company’s net cash. The Company’s target net cash, lower target net cash and upper target net cash amounts will be reduced by $21,311 per day beginning on March 31, 2020 through the closing date of the merger, and the Chondrial valuation will be increased by $111,656 per day beginning on March 31, 2020 through the closing date of the merger, resulting in a corresponding adjustment to the exchange ratio and an increase to the ownership percentage of Chondrial’s stockholder in the combined company.

The Merger Agreement provides the Company and Chondrial with specified termination rights, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of $3,375,000. In addition, in connection with certain terminations of the Merger Agreement, either party may be required to pay the other party’s third party expenses up to $350,000. In connection with the merger, the Company will seek to amend its certificate of incorporation to: (i) effect a reverse split of the Company’s common stock at a ratio to be determined by the Company and Chondrial, which is intended to ensure that the listing requirements of the Nasdaq Global Market are satisfied and (ii) change the name of Zafgen, Inc. to “Larimar Therapeutics, Inc.”

The Company’s and Chondrial’s obligations to consummate the merger are subject to the satisfaction or waiver of customary closing conditions, including, among others, obtaining the requisite approvals of the Company’s stockholders and satisfaction of minimum net cash thresholds of $30,000,000 by the Company and not less than zero by Chondrial. The sole stockholder of Chondrial has approved the Merger Agreement. In connection with the execution of the Merger Agreement, the Company entered into stockholder support agreements with its current directors and certain officers and the Company’s largest stockholder, which collectively beneficially own or control an aggregate of approximately 9.7% of its outstanding shares of common stock. Each of the stockholders party to such stockholder support agreements has agreed to vote or cause to be voted, all of the shares of the Company’s common stock beneficially owned by such stockholder in favor of the stockholder proposals submitted at the Company’s stockholders meeting to be held in connection with the merger.

The Company expects to devote significant time and resources to the completion of the merger with Chondrial. However, there can be no assurance that such activities will result in the completion of the merger. Further, the completion of the merger ultimately may not deliver the anticipated benefits or enhance shareholder value.

The Company has incurred losses and negative cash flows from operations since its inception. As of March 31, 2020, the Company had an accumulated deficit of $399.9 million. From its inception through March 31, 2020, 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 $12.7 million as of March 31, 2020 The loan agreement requires that the Company maintain certain minimum liquidity at all times, which as of March 31, 2020 was approximately $13.4 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

7


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. During the quarter ended March 31, 2020 the Company was in compliance with all covenants under the term loan. The Company has estimated that the risk of subjective acceleration under the Term Loan’s material adverse events clause is reasonably possible, however not probable and therefore has classified the outstanding principal balance 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.

Based on its current operating plans, the Company believes its cash, cash equivalents and marketable debt securities of $63.9 million as of March 31, 2020, 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 date of this Quarterly Report. 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. 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 ourselves.

On April 21, 2020, 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. On April 16, 2020, Nasdaq announced it was providing temporary relief from continued listing bid price requirements through June 30, 2020. Under the relief the Company will have additional time to regain compliance with the listing bid price requirements with the compliance period beginning July 1, 2020. As such, the compliance period for the Company will expire on December 28, 2020. 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.

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

Unaudited Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2019 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 March 31, 2020 and for the three months ended March 31, 2020 and 2019, 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, 2019, included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2019, 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 March 31, 2020 and condensed consolidated results of operations and cash flows for the three months ended March 31, 2020 and 2019 have been made. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.

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.

8


Marketable debt securities

Marketable debt securities consist of debt investments with original maturities greater than ninety days. The Company has classified its debt investments with maturities beyond one year as short term, based on their highly liquid nature and because such marketable debt 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. When the fair value is below the amortized cost the amount of the expected credit loss is estimated. The credit-related impairment amount is recognized in net income; the remaining impairment amount and unrealized gains are reported as a component of accumulated other comprehensive income in stockholders’ equity. Credit losses are recognized through the use of an allowance for credit losses account and subsequent improvements in expected credit losses are recognized as a reversal of the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, the allowance for credit loss is written off and the excess of the amortized cost basis of the asset over its fair value is recorded in net income.

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 March 31, 2020 and 2019, from the computation of diluted net loss per share for the three months ended March 31, 2020 and 2019 because they had an anti-dilutive impact due to the net loss incurred for the periods:

 

 

 

As of March 31,

 

 

 

2020

 

 

2019

 

Options to purchase common stock

 

 

3,945,647

 

 

 

6,663,162

 

Unvested restricted common stock

 

 

40,766

 

 

 

351,371

 

 

 

 

3,986,413

 

 

 

7,014,533

 

 

Risks and Uncertainties

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic is in its incipient stages and information is rapidly evolving. Capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic disruption could have a material adverse effect on the Company’s business. Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain.

The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, all of which are uncertain and cannot be predicted. The Company is required to have a net cash balance of at least $30,000,000 at the closing of the merger as a condition to Chondrial’s obligation to consummate the merger. For purposes of the merger agreement, net cash is subject to certain reductions, including, without limitation, accounts payable, accrued expenses (except those related to the merger), current liabilities payable in cash, unpaid expenses related to the merger and certain other unpaid obligations, including outstanding lease obligations. The liability with regards to the Company’s outstanding lease obligations is a large component of the Company’s net cash and COVID-19 has created uncertainties surrounding our ability to take the steps necessary to sublease or negotiate a buy-out of our existing leases. In the event that the Company’s net cash falls below this threshold, a condition to the Chondrial’s obligation to consummate the merger will fail to be satisfied and Chondrial will have the right to terminate the merger agreement at an outside date of September 17, 2020 (subject to extension as provided in the merger agreement) if the Company’s net cash continues to be lower than the $30,000,000 threshold. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.

Recently Issued and Adopted Accounting Pronouncements

In June 2016 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2020. This standard requires

9


entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. This standard limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases.

This standard became effective for the Company on January 1, 2020, and based on the composition of the Company’s marketable debt securities, current economic conditions and historical credit loss activity, the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

In August 2018 the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. This standard became effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s disclosures.

3. Fair Value Measurements and Marketable Debt Securities

Fair Value Measurements

The following tables present information about the Company’s financial assets that have been measured at fair value as of March 31, 2020 and December 31, 2019 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.

The following tables summarize the Company’s cash equivalents and marketable debt securities as of March 31, 2020 and December 31, 2019:

 

 

 

March 31, 2020

 

 

 

 

 

 

 

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

 

$

35,865

 

 

$

35,865

 

 

$

 

 

$

 

Total cash equivalents

 

 

35,865

 

 

 

35,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

 

10,629

 

 

 

 

 

 

10,629

 

 

 

 

Corporate bonds

 

 

8,589

 

 

 

 

 

 

8,589

 

 

 

 

Commercial paper

 

 

5,687

 

 

 

 

 

 

5,687

 

 

 

 

Total marketable debt securities

 

 

24,905

 

 

 

 

 

 

24,905

 

 

 

 

Total cash equivalents and marketable debt securities

 

$

60,770

 

 

$

35,865

 

 

$

24,905

 

 

$

 

10


 

 

 

December 31, 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

 

$

18,289

 

 

$

18,289

 

 

$

 

 

$

 

U.S. Government securities

 

 

3,098

 

 

 

 

 

 

3,098

 

 

 

 

Commercial paper

 

 

1,047

 

 

 

 

 

 

1,047

 

 

 

 

Total cash equivalents

 

 

22,434

 

 

 

18,289

 

 

 

4,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government securities

 

 

14,996

 

 

 

 

 

 

14,996

 

 

 

 

Corporate bonds

 

 

14,648

 

 

 

 

 

 

14,648

 

 

 

 

Commercial paper

 

 

13,406

 

 

 

 

 

 

13,406

 

 

 

 

Total marketable debt securities

 

 

43,050

 

 

 

 

 

 

43,050

 

 

 

 

Total cash equivalents and marketable debt securities

 

$

65,484

 

 

$

18,289

 

 

$

47,195

 

 

$

 

 

The carrying amounts reflected in the condensed consolidated balance sheets for tax incentive receivable, accounts payable, and accrued expenses approximate fair value due to their short-term maturities. The carrying value of the Company’s outstanding notes payable approximates fair value (a Level 2 fair value measurement), reflecting interest rates currently available to the Company.

Marketable Debt Securities

The following tables summarize the Company’s marketable debt securities as of March 31, 2020 and December 31, 2019:

 

 

 

March 31, 2020

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities (due within 1 year)

 

$

10,596

 

 

$

33

 

 

$

 

 

$

10,629

 

Corporate bonds (due within 1 year)

 

 

8,590

 

 

 

3

 

 

 

(4

)

 

 

8,589

 

Commercial paper (due within 1 year)

 

 

5,687

 

 

 

 

 

 

 

 

 

5,687

 

 

 

$

24,873

 

 

$

36

 

 

$

(4

)

 

$

24,905

 

 

As of March 31, 2020, the Company did not have an allowance for credit losses.

 

 

 

December 31, 2019

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government securities (due within 1 year)

 

$

14,981

 

 

$

15

 

 

$

 

 

$

14,996

 

Corporate bonds (due within 1 year)

 

 

14,628

 

 

 

20

 

 

 

 

 

 

14,648

 

Commercial paper (due within 1 year)

 

 

13,406

 

 

 

 

 

 

 

 

 

13,406

 

 

 

$

43,015

 

 

$

35

 

 

$

 

 

$

43,050

 

 

11


4. Accrued Expenses

Accrued expenses consisted of the following as of March 31, 2020 and December 31, 2019:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Accrued payroll and related expenses

 

$

193

 

 

$

37

 

Accrued professional fees

 

 

452

 

 

 

864

 

Accrued other

 

 

236

 

 

 

289

 

 

 

$

881

 

 

$

1,190

 

 

5. Notes Payable

On December 29, 2017, the Company entered into a loan and security agreement with Silicon Valley Bank (the “Term Loan”). The Term Loan provided for borrowings of $20.0 million. On December 29, 2017, the Company received proceeds of $20.0 million from the issuance of a promissory note. The promissory note issued under the Term Loan is collateralized by substantially all of the Company’s personal property, other than its intellectual property.

Upon entering into the Term Loan, the Company became obligated to make monthly, interest-only payments until March 29, 2019 and, thereafter, to pay 33 consecutive, equal monthly installments of principal and interest from April 1, 2019 through December 1, 2021. The outstanding Term Loan bears a variable interest at an annual rate of 1.25% above the prime rate, which at March 31, 2020 was 3.25%. In addition, a final payment equal to 8.0% of the Term Loan is due upon the earlier of the maturity date, acceleration of the Term Loan or prepayment of all or part of the Term Loan. The Company accrues the final payment amount of $1.6 million, to outstanding debt by charges to interest expense using the effective-interest method from the date of issuance through the maturity date.

Additionally, the Company, as borrower, is required to maintain a minimum cash, cash equivalents and marketable debt securities balance at Silicon Valley Bank of no less than 105% of the total outstanding principal balance of the Term Loan, which was $13.4 million as of March 31, 2020 and $15.3 million as of December 31, 2019.

Further, since 45 days after the Term Loan was entered in, the Company has met its obligation to maintain a balance of unrestricted cash, cash equivalents and marketable debt securities at Silicon Valley Bank in an amount not less than the greater of (i) $55.0 million and (ii) sixty-five percent (65%) of all the Company’s cash, cash equivalents and marketable Debt securities. If the Company does not meet this requirement it will not be considered an event of default provided it immediately secures 87.5% of the principal balance in a restricted cash account.

There are negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions; encumbering or granting a security interest in its intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; limiting the aggregate value of cash maintained by its Australian subsidiary not to exceed $4.0 million and certain other business transactions.

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, including cash in the amount of the outstanding balance. 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.

As of March 31, 2020 and December 31, 2019, notes payable consist of the following:

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Notes payable

 

$

12,728

 

 

$

14,545

 

Less: current portion

 

 

(7,273

)

 

 

(7,273

)

Notes payable, net of current portion

 

 

5,455

 

 

 

7,272

 

Accretion related to final payment

 

 

1,292

 

 

 

1,192

 

Notes payable, long term

 

$

6,747

 

 

$

8,464

 

During the three months ended March 31, 2020 and 2019, the Company recognized $0.3 million and $0.5 million of interest expense, respectively, related to the Term Loan. The effective annual interest rate as of March 31, 2020 on the outstanding debt under the Term Loan was approximately 7.7%.

12


6. Stock-Based Awards

The Company’s 2014 Stock Option and Incentive Plan, as amended (the “2014 Plan”) provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, performance-share awards, cash-based awards and dividend equivalent rights to employees, members of the board of directors and consultants of the Company. The Company has outstanding stock-based awards under its Amended and Restated 2006 Stock Option Plan but is no longer granting awards under this plan. The Company also issues common stock under its 2014 Employee Stock Purchase Plan (the “ESPP”). As of March 31, 2020, 6,795,572 shares are available for grant under the 2014 Plan, including 1,497,859 shares automatically added to the 2014 Plan on January 1, 2020, and 58,611 shares are available for issuance to participating employees under the ESPP.

The Company recorded stock-based compensation expense related to stock options, restricted common stock and the ESPP in the following expense categories within its condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Research and development

 

$

(144

)

 

$

960

 

General and administrative

 

 

854

 

 

 

1,116