Business context and reporting period
This is Zafgen, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2020, filed May 7, 2020. The filing describes a proposed merger with Chondrial Therapeutics, Inc.; the combined company was expected to operate as Larimar Therapeutics, Inc. Zafgen had halted development of its MetAP2 inhibitor programs and was pursuing the merger as a strategic transaction.
Key financial metrics
Amounts below are in millions of dollars, except per-share data.
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $(0.094) net credit | $9.631 |
| General and administrative expense | $3.647 | $3.646 |
| Total operating expenses | $3.563 | $13.277 |
| Net loss | $(3.598) | $(13.112) |
| Net loss per share, basic and diluted | $(0.10) | $(0.35) |
| Cash used in operating activities | $(4.616) | $(12.471) |
| Cash, cash equivalents and marketable debt securities | $63.885 | $70.261 at Dec. 31, 2019 |
| Current assets / current liabilities | $64.680 / $9.867 | $71.503 / $12.190 at Dec. 31, 2019 |
| Term-loan principal outstanding | $12.728 | $14.545 at Dec. 31, 2019 |
| Total liabilities | $22.960 | $27.110 at Dec. 31, 2019 |
| Total stockholders’ equity | $50.742 | $53.624 at Dec. 31, 2019 |
The R&D credit in Q1 2020 resulted mainly from reversal of stock-based compensation after the company’s final R&D employee was terminated. No product revenue or gross margin was reported. Cash and securities declined from $70.261 million at year-end; the quarter’s $11.769 million increase in cash, cash equivalents and restricted cash reflected net securities sales and maturities, not operating cash generation. Restricted cash was $1.339 million.
Changes versus the prior comparable period
- Net loss narrowed by $9.514 million and operating cash use fell by $7.855 million year over year, primarily because MetAP2 development had ceased and the workforce had been reduced.
- R&D expense fell by $9.725 million, including $4.990 million less direct MetAP2 program spending and lower personnel, consulting and stock-compensation costs.
- G&A was essentially unchanged at $3.647 million; merger-related, insurance and facility costs offset lower personnel and stock-based compensation.
- The company repaid $1.818 million of notes payable during the quarter. Interest income declined to $0.258 million from $0.642 million.
Outlook, risks and unusual items
- Management estimated that $63.9 million of cash, cash equivalents and marketable securities would fund planned operations, capital expenditures and debt repayments for at least 12 months from the filing date. The company expected continuing operating losses and said future funding could be needed.
- The proposed merger contemplated approximately 60% ownership for former Chondrial securityholders and 40% for existing Zafgen stockholders, subject to adjustments. Closing required, among other conditions, Zafgen net cash of at least $30 million and Zafgen stockholder approval; the companies were targeting a second-quarter 2020 closing. Termination fees of $3.375 million and expense reimbursement up to $350,000 could apply in specified circumstances.
- The filing said merger-related net-cash calculations include specified liabilities, including lease obligations. COVID-19 created uncertainty about subleasing or buying out existing leases and could affect the merger, operations and financing access.
- Nasdaq notified the company on April 21, 2020 that its share price had been below the $1 minimum bid requirement. With temporary Nasdaq relief, the stated compliance deadline was December 28, 2020; a reverse stock split was among potential remedies.
- The $12.728 million term loan was secured by substantially all personal property other than intellectual property, carried a variable rate, and included liquidity requirements and default provisions. Management assessed subjective acceleration under a material-adverse-event clause as reasonably possible but not probable; a change in that assessment could affect debt classification.
- Other unusual items included $0.218 million of other income from raw-material sales and resolution of a vendor dispute, and $0.210 million of foreign-currency losses. The company reported no material legal proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the merger closed, the final exchange ratio and ownership split, and the combined company’s actual net cash at closing.
- Current unrestricted liquidity, cash burn and the effect of lease obligations and debt covenants on funds available to the business.
- Nasdaq listing compliance status and whether a reverse stock split or other measure was required.
- Post-merger strategy, development programs, financing needs and any changes to the stated 12-month runway estimate.
- That this filing is under Zafgen, Inc.; the Larimar name was presented as the planned name of the combined company, not the registrant’s name at the filing date.