Business context and reporting period
This is Zafgen, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed March 5, 2020—not a filing issued under the Larimar Therapeutics name. Zafgen traded as ZFGN and expected to rename itself Larimar upon completing its proposed merger with Chondrial Therapeutics.
After FDA concerns about cardiovascular safety led to a full clinical hold on ZGN-1061, Zafgen halted development of its MetAP2 inhibitors and withdrew the investigational new drug application in September 2019. It restructured and shifted its focus to the proposed Chondrial merger. The filing also presents unaudited quarterly results for 2019.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $23.9 million | $47.9 million |
| General and administrative expense | $16.2 million | $13.2 million |
| Restructuring charges | $5.6 million | None |
| Net loss | $45.4 million | $61.4 million |
| Net loss per share, basic and diluted | $1.22 | $1.90 |
| Cash used in operating activities | $40.8 million | $51.5 million |
At December 31, 2019, cash, cash equivalents and marketable securities totaled $70.3 million, down from $118.1 million a year earlier. Working capital was $59.3 million, versus $108.0 million. Total assets were $80.7 million; total liabilities were $27.1 million; stockholders’ equity was $53.6 million. The company reported an accumulated deficit of $396.4 million. Operating margins are not meaningful because the company had no revenue.
Term-loan principal outstanding was $14.5 million, with scheduled principal payments through December 2021. The loan is secured by substantially all personal property other than intellectual property, bears variable interest, and includes minimum-liquidity requirements and restrictive covenants. The company reported compliance with covenants in 2019. Operating lease commitments totaled $11.1 million. The filing states cash and marketable securities should fund operations and debt repayments for at least 12 months from the report’s issuance date.
Material changes versus the prior comparable period
- Net loss narrowed by $16.0 million, while operating expenses fell $15.5 million. Research and development expense declined $24.0 million, primarily because development was halted and there were no clinical trials in 2019; 2018 included a Phase 2 ZGN-1061 trial.
- General and administrative expense increased $3.0 million, mainly from strategic-transaction legal and banking fees, retention bonuses and other costs.
- 2019 included $5.6 million in restructuring charges, including workforce-related and contract-termination costs. Cash operating outflow decreased by $10.7 million.
- Cash and marketable securities declined $47.8 million. Financing activities used $5.3 million in 2019, compared with $66.9 million provided in 2018, which included net proceeds from a public stock offering.
Outlook, risks and unusual items
- The proposed merger, signed December 17, 2019, was targeted for the second quarter of 2020, subject to stockholder and other approvals and closing conditions. Chondrial securityholders were expected to own about 60% and existing Zafgen stockholders about 40% of the combined company, subject to adjustments.
- A key merger condition was Zafgen having at least $30 million of net cash at closing. The agreement also provides for a possible $3.375 million termination fee and up to $350,000 of expense reimbursement in specified circumstances. The filing cautions that the merger might not close or deliver anticipated benefits.
- Management expected continued operating losses and stated that further capital would be needed for future product development and commercialization. The stated 12-month runway is based on current plans and assumptions; the filing warns that resources could be used sooner than expected.
- Debt acceleration risk under a material-adverse-event provision was assessed as reasonably possible, but not probable; management noted that the assessment could change. Failure to meet liquidity requirements could require early repayment or other lender remedies.
- The filing reports no material pending legal claims and no off-balance-sheet arrangements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor issued an unqualified opinion on the financial statements and did not audit internal controls.
Important facts for investors to verify
- Whether the merger closed, its final terms and ownership split, and the combined company’s subsequent strategy and financial position.
- Net cash available for the merger’s $30 million closing condition after liabilities, transaction costs and ongoing cash use.
- Current cash runway, debt balance, covenant compliance and any change in lenders’ rights or repayment expectations.
- The status and value of any tax-loss carryforwards, including potential limitations from ownership changes; the filing says the merger was expected to limit use of certain carryforwards.
- How restructuring, termination of legacy licenses and continuing lease obligations affect cash needs and liabilities.