zfgn-10q_20180930.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, 2018

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.

175 Portland Street, 4th Floor

Boston, Massachusetts 02114

(Address of principal executive offices, including zip code)

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

 

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, 2018, there were 36,870,780 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 successfully file and have our investigational new drug application, or IND, for ZGN-1258 and/or ZGN-1061 go into effect;

 

our ability to successfully advance ZGN-1258 and/or ZGN-1061 into and through all clinical trials to enable submission of a new drug application, or NDA;

 

our ability to gain regulatory approval and to successfully commercialize ZGN-1258;

 

our ability to develop supportive clinical and nonclinical data for partnering and to successfully partner ZGN-1061 before commencing Phase 3 clinical development;

 

our ability to advance through nonclinical studies and the IND enabling process an oral methionine aminopeptidase 2, or MetAP2, inhibitor;

 

our ability to advance an oral MetAP2 inhibitor into Phase 1 trials;

 

our ability to dissociate effects of MetAP2 inhibitors from pro-thrombotic effects or other adverse events observed in clinical development of our first-generation compound, beloranib;

 

our ability to distinguish ZGN-1061, ZGN-1258 and other novel MetAP2 inhibitors relative to our first-generation compound;

 

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

 

the performance of our third-party contract manufacturers and clinical research organizations;

 

our ability to obtain and maintain intellectual property protection for our proprietary assets;

 

the size of the potential markets for our product candidates and our ability to serve those markets;

 

the rate and degree of market acceptance of our product candidates for any indication once approved;

 

our ability to obtain additional financing when needed;

 

the success of competing products that are or become available for the indications that we are pursuing;

 

the loss of our executive, medical and development teams; 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, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

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

 

14

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

 

Item 4.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

27

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

28

 

 

 

 

 

Item 1A.

 

Risk Factors

 

28

 

 

 

 

 

Item 6.

 

Exhibits

 

52

 

 

 

 

 

Signatures

 

53

 

 

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,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,141

 

 

$

40,777

 

Marketable securities

 

 

82,691

 

 

 

61,275

 

Tax incentive receivable

 

 

1,245

 

 

 

946

 

Prepaid expenses and other current assets

 

 

2,392

 

 

 

1,927

 

Total current assets

 

 

131,469

 

 

 

104,925

 

Property and equipment, net

 

 

419

 

 

 

528

 

Other assets

 

 

57

 

 

 

57

 

Total assets

 

$

131,945

 

 

$

105,510

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,627

 

 

$

3,020

 

Accrued expenses

 

 

4,901

 

 

 

4,273

 

Notes payable, current

 

 

3,636

 

 

 

 

Total current liabilities

 

 

11,164

 

 

 

7,293

 

Notes payable, long-term

 

 

16,844

 

 

 

20,000

 

Total liabilities

 

 

28,008

 

 

 

27,293

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   September 30, 2018 and December 31, 2017; no shares issued and outstanding as

   of September 30, 2018 and December 31, 2017

 

 

 

 

 

 

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

   September 30, 2018 and December 31, 2017; 36,865,817 and 27,489,457 shares

   issued and outstanding as of September 30, 2018 and December 31, 2017,

   respectively

 

 

37

 

 

 

27

 

Additional paid-in capital

 

 

440,303

 

 

 

367,825

 

Accumulated deficit

 

 

(336,375

)

 

 

(289,577

)

Accumulated other comprehensive loss

 

 

(28

)

 

 

(58

)

Total stockholders' equity

 

 

103,937

 

 

 

78,217

 

Total liabilities and stockholders' equity

 

$

131,945

 

 

$

105,510

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,830

 

 

 

9,723

 

 

 

36,472

 

 

 

29,928

 

General and administrative

 

 

3,339

 

 

 

3,117

 

 

 

9,959

 

 

 

9,713

 

Total operating expenses

 

 

15,169

 

 

 

12,840

 

 

 

46,431

 

 

 

39,641

 

Loss from operations

 

 

(15,169

)

 

 

(12,840

)

 

 

(46,431

)

 

 

(39,641

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

623

 

 

 

266

 

 

 

1,214

 

 

 

740

 

Interest expense

 

 

(475

)

 

 

(31

)

 

 

(1,399

)

 

 

(157

)

Foreign currency transaction (losses) gains, net

 

 

(46

)

 

 

20

 

 

 

(182

)

 

 

115

 

Total other income (expense), net

 

 

102

 

 

 

255

 

 

 

(367

)

 

 

698

 

Net loss

 

$

(15,067

)

 

$

(12,585

)

 

$

(46,798

)

 

$

(38,943

)

Net loss per share, basic and diluted

 

$

(0.41

)

 

$

(0.46

)

 

$

(1.53

)

 

$

(1.42

)

Weighted average common shares outstanding, basic and diluted

 

 

36,619,575

 

 

 

27,483,550

 

 

 

30,608,664

 

 

 

27,414,314

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(15,067

)

 

$

(12,585

)

 

$

(46,798

)

 

$

(38,943

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on marketable securities

 

 

(22

)

 

 

13

 

 

 

30

 

 

 

52

 

Total other comprehensive (loss) income

 

 

(22

)

 

 

13

 

 

 

30

 

 

 

52

 

Total comprehensive loss

 

$

(15,089

)

 

$

(12,572

)

 

$

(46,768

)

 

$

(38,891

)

 

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

 

4


ZAFGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(46,798

)

 

$

(38,943

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

7,337

 

 

 

6,199

 

Non-cash interest expense

 

 

 

 

 

13

 

Depreciation expense

 

 

209

 

 

 

138

 

Unrealized foreign currency transaction losses (gains)

 

 

45

 

 

 

(31

)

Premium on marketable securities, net

 

 

(3

)

 

 

(297

)

Amortization of (discount) premium on marketable securities

 

 

(345

)

 

 

219

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(465

)

 

 

(649

)

Tax incentive receivable

 

 

(344

)

 

 

(91

)

Accounts payable

 

 

(397

)

 

 

104

 

Accrued expenses

 

 

1,108

 

 

 

(610

)

Net cash used in operating activities

 

 

(39,653

)

 

 

(33,948

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

84,938

 

 

 

112,164

 

Purchases of marketable securities

 

 

(105,976

)

 

 

(89,179

)

Purchases of property and equipment

 

 

(96

)

 

 

(28

)

Net cash (used in) provided by investing activities

 

 

(21,134

)

 

 

22,957

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offering, net of issuance costs

 

 

64,560

 

 

 

 

Repayments of notes payable

 

 

 

 

 

(2,363

)

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

 

 

591

 

 

 

195

 

Net cash provided by (used in) financing activities

 

 

65,151

 

 

 

(2,168

)

Net increase (decrease) in cash and cash equivalents

 

 

4,364

 

 

 

(13,159

)

Cash and cash equivalents at beginning of period

 

 

40,777

 

 

 

32,352

 

Cash and cash equivalents at end of period

 

$

45,141

 

 

$

19,193

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment included in accounts payable

 

$

4

 

 

$

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

819

 

 

$

130

 

 

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

 

5


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 clinical-stage biopharmaceutical company leveraging its proprietary methionine aminopeptidase 2 (“MetAP2”) biology platform to develop novel therapies for patients affected by complex metabolic diseases. Zafgen has pioneered the study of MetAP2 inhibitors in both common and rare metabolic disorders, and is currently advancing programs for type 2 diabetes, Prader-Willi syndrome (“PWS”) and liver diseases. The Company’s lead product candidate, ZGN-1061, a MetAP2 inhibitor with unique properties that maximize impact on metabolic parameters relevant to the treatment of type 2 diabetes and other related metabolic disorders, is in Phase 2 clinical development. In the second quarter of 2018 the initial part of the ZGN-1061 Phase 2 clinical trial met all of its primary endpoints at the 0.9 mg dose and 12-week data demonstrated a favorable safety and tolerability profile, with no treatment-related serious adverse events and no cardiovascular safety signals observed. The Company has opted to explore the higher end of the therapeutic range of ZGN-1061 by adding a 1.8 mg dose arm to the trial, which began in the second quarter of 2018. In January 2018, the Company announced advancement of its highly optimized MetAP2 development candidate ZGN-1258, and in the first quarter of 2018, initiated investigational new drug (“IND”) application enabling nonclinical efforts for evaluation of ZGN-1258 in the treatment of people affected by PWS. 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. Product candidates currently under development 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.

The Company’s product candidates are all in the research and development stage. There can be no assurance that the Company’s research and development 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, 2018, the Company had an accumulated deficit of $336.4 million. From its inception through September 30, 2018, 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 $20.0 million as of September 30, 2018 (the “Term Loan”). The loan agreement requires that the Company maintain certain minimum liquidity at all times, which as of September 30, 2018, was approximately $21.0 million. If the minimum liquidity covenant is not met, the Company may be required to repay the loan prior to scheduled maturity dates. 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.

Based on its current operating plans, the Company believes its cash, cash equivalents and marketable securities of $127.8 million as of September 30, 2018 will be sufficient to fund its anticipated level of operations, capital expenditures and satisfy debt repayments and minimum liquidity requirements for a period of at least one year from the issuance date of this Quarterly Report. 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 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.

6


Unaudited Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2017 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, 2018 and for the three and nine months ended September 30, 2018 and 2017, 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, 2017, included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2017, 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, 2018 and condensed consolidated results of operations and cash flows for the three and nine months ended September 30, 2018 and 2017 have been made. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018.

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 considers its investment portfolio of investments as available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are reported as a component of accumulated other comprehensive 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, 2018 and 2017, from the computation of diluted net loss per share for the three and nine months ended September 30, 2018 and 2017 because they had an anti-dilutive impact due to the net loss incurred for the periods:

 

 

 

As of September 30,

 

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

5,676,861

 

 

 

3,963,480

 

Unvested restricted common stock

 

 

4,465

 

 

 

5,533

 

 

 

 

5,681,326

 

 

 

3,969,013

 

7


 

Recently Issued and Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases. This guidance will require that lease arrangements longer than 12 months result in an entity recognizing an asset and liability equal to the present value of the lease payments in the statement of financial position. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Early adoption is permitted. The Company is evaluating the effect that this guidance will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This guidance addresses the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This standard was effective for the Company in 2018. The adoption of this guidance had no impact on the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. This guidance addresses which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This standard was effective for the Company in 2018. The adoption of this guidance had no impact on the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018.

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. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. The Company is evaluating the effect that this guidance will have on its consolidated financial statements.

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, 2018 and December 31, 2017 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, 2018 and the year ended December 31, 2017, there were no transfers between Level 1 and Level 2 financial assets.

8


The following tables summarize the Company’s cash equivalents and marketable securities as of September 30, 2018 and December 31, 2017:

 

 

 

September 30, 2018

 

 

 

 

 

 

 

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

 

$

33,018

 

 

$

33,018

 

 

$

 

 

$

 

Commercial paper

 

 

5,095

 

 

 

 

 

 

5,095

 

 

 

 

Corporate bonds

 

 

2,554

 

 

 

 

 

 

2,554

 

 

 

 

Total cash equivalents

 

 

40,667

 

 

 

33,018

 

 

 

7,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

24,885

 

 

 

 

 

 

24,885

 

 

 

 

Commercial paper

 

 

47,862

 

 

 

 

 

 

47,862

 

 

 

 

U.S. government securities

 

 

9,944

 

 

 

 

 

 

9,944

 

 

 

 

Total marketable securities

 

 

82,691

 

 

 

 

 

 

82,691

 

 

 

 

Total cash equivalents and marketable securities

 

$

123,358

 

 

$

33,018

 

 

$

90,340

 

 

$

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

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

 

$

15,802

 

 

$

15,802

 

 

$

 

 

$

 

Commercial paper

 

 

998

 

 

 

 

 

 

998

 

 

 

 

Corporate bonds

 

 

549

 

 

 

 

 

 

549

 

 

 

 

Total cash equivalents

 

 

17,349

 

 

 

15,802

 

 

 

1,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

50,844

 

 

 

 

 

 

50,844

 

 

 

 

Commercial paper

 

 

9,951

 

 

 

 

 

 

9,951

 

 

 

 

Certificates of deposit

 

 

480

 

 

 

 

 

 

480

 

 

 

 

Total marketable securities

 

 

61,275

 

 

 

 

 

 

61,275

 

 

 

 

Total cash equivalents and marketable securities

 

$

78,624

 

 

$

15,802

 

 

$

62,822

 

 

$

 

 

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.

9


Marketable Securities

The following tables summarize the Company’s marketable securities as of September 30, 2018 and December 31, 2017:

 

 

 

September 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds (due within 1 year)

 

$

24,897

 

 

$

 

 

$

(12

)

 

$

24,885

 

Commercial paper (due within 1 year)

 

 

47,874

 

 

 

 

 

 

(12

)

 

 

47,862

 

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

 

 

9,948

 

 

 

 

 

 

(4

)

 

 

9,944

 

 

 

$

82,719

 

 

$

 

 

$

(28

)

 

$

82,691

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds (due within 1 year)

 

$

50,892

 

 

$

 

 

$

(48

)

 

$

50,844

 

Commercial paper (due within 1 year)

 

 

9,961

 

 

 

 

 

 

(10

)

 

 

9,951

 

Certificates of deposit (due within 1 year)

 

 

480

 

 

 

 

 

 

 

 

 

480

 

 

 

$

61,333

 

 

$

 

 

$

(58

)

 

$

61,275

 

 

4. Accrued Expenses

Accrued expenses consisted of the following as of September 30, 2018 and December 31, 2017:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Accrued research and development expenses

 

$

2,780

 

 

$

1,647

 

Accrued payroll and related expenses

 

 

1,651

 

 

 

2,229

 

Accrued professional fees

 

 

290

 

 

 

292

 

Accrued other

 

 

180

 

 

 

105

 

 

 

$

4,901

 

 

$

4,273

 

 

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 this Term Loan, the Company is 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 September 30, 2018 was 5.25%. 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 the borrower, is required to maintain a minimum cash, cash equivalents and marketable securities balance at Silicon Valley Bank of no less than 105% of the total outstanding principal balance of the Term Loan, which was $21.0 million as of September 30, 2018 and December 31, 2017.

10


Further, as of 45 days after the Term Loan was entered in, the Company met its obligation to maintain a balance of unrestricted cash, cash equivalents and marketable 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 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; permit 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 September 30, 2018 and December 31, 2017, notes payable was $20.5 million and $20.0 million, respectively. The September 30, 2018 balance consisted of $20.0 million of principal and $0.5 million of accrued interest associated with the final payment, whereas the December 31, 2017 balance consisted of $20.0 million of principal.

As of September 30, 2018, the estimated future principal payments due are as follows:

 

Year Ending December 31,

 

 

 

 

(in thousands)

 

 

 

 

2018

 

$

 

2019

 

 

5,454

 

2020

 

 

7,273

 

2021

 

 

7,273

 

Total

 

$

20,000

 

 

During the three and nine months ended September 30, 2018, the Company recognized $0.5 million and $1.4 million, respectively, of interest expense related to the Term Loan. The effective annual interest rate as of September 30, 2018 on the outstanding debt under the Term Loan is approximately 9.7%.

During both the three and nine months ended September 30, 2017, the Company recognized $0.1 million, of interest expense related to borrowings under the loan and security agreement with Oxford Finance LLC and Midcap Financial (the “2014 Credit Facility”), which was repaid in full in December 2017. The effective annual interest rate of the debt under the 2014 Credit Facility was approximately 10.8%.

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 September 30, 2018, 2,263,902 shares are available for grant under the 2014 Plan, including 1,099,578 shares automatically added to the 2014 Plan on January 1, 2018, and 129,844 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 and six months ended September 30, 2018 and 2017 as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Research and development

 

$

1,027

 

 

$

896

 

 

$

4,263

 

 

$

2,629

 

General and administrative

 

 

1,173

 

 

 

1,200

 

 

 

3,074

 

 

 

3,570

 

 

 

$

2,200

 

 

$

2,096

 

 

$

7,337

 

 

$

6,199

 

11


 

7. Commitments and Contingencies

Leases

The Company has a lease for office space in Boston, Massachusetts, effective as of July 28, 2014, with a term expiring July 31, 2020. In March 2015, the Company entered into an operating lease for additional office space in Boston, Massachusetts, effective as of April 15, 2015, with a term expiring on July 31, 2020, and an option to extend this lease for three additional years. In addition, with the landlord’s consent, the Company has subleased 2,976 square feet of office space in Boston, Massachusetts to an unrelated third party beginning on January 1, 2017 and expiring on June 30, 2019, and the Company expects to receive approximately $0.3 million in sublease rental income. In October 2015, the Company entered into an operating lease for office space in San Diego, California, effective as of October 1, 2015, with a term expiring on September 30, 2019, and an option to extend this lease for five additional years.

Future minimum lease payments for its operating leases as of September 30, 2018 were as follows:

 

Year Ending December 31,

 

 

 

 

(in thousands)

 

 

 

2018 (October - December)

 

$

122

 

2019

 

 

464

 

2020

 

 

226

 

2021

 

 

 

 

 

$

812

 

 

During the three months ended September 30, 2018 and 2017, the Company recognized $0.1 million of rental expense related to office space. During the nine months ended September 30, 2018 and 2017, the Company recognized $0.3 million of rental expense related to office space.

Intellectual Property Licenses

The Company has acquired exclusive rights to develop patented compounds and related know-how for beloranib under two licensing agreements with two third parties in the course of its research and development activities. The licensing rights obligate the Company to make payments to the licensors for license fees, milestones, license maintenance fees and royalties. The Company is also responsible for patent prosecution costs.

As of September 30, 2018, the Company is obligated to make additional milestone payments of up to $12.3 million upon reaching certain pre-commercialization milestones, such as clinical trials and government approvals (including the U.S. Food and Drug Administration, or FDA, approval of a New Drug application, or NDA), and up to $12.5 million upon reaching certain product commercialization milestones related to the development of beloranib. Under one of the license agreements, the Company is also obligated to pay up to $1.3 million with respect to each subsequent licensed product, if any, that is a new chemical entity. In addition, the Company will owe single-digit royalties on sales of commercial products developed using these licensed technologies, if any.

There were no milestones achieved during the three and nine months ended September 30, 2018 and 2017 and the development related to this technology is no longer active. The Company is also obligated to pay to the licensors a percentage of fees received if and when the Company sublicenses the technology. As of September 30, 2018, the Company has not yet developed a commercial product using the licensed technologies and it has not entered into any sublicense agreements for the technologies.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its management team and its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its condensed consolidated financial statements as of September 30, 2018.

12


Legal Proceedings

The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that the Company can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made. In addition, in accordance with the relevant authoritative guidance, for any matters in which the likelihood of material loss is at least reasonably possible, the Company will provide disclosure of the possible loss or range of loss. If a reasonable estimate cannot be made, however, the Company will provide disclosure to that effect. The Company expenses legal costs as they are incurred.

The Company may periodically become subject to other legal proceedings and claims arising in connection with ongoing business activities, including claims or disputes related to patents that have been issued or that are pending in the field of research on which the Company is focused. The Company is not aware of any material claims as of September 30, 2018.

8. Retirement Plan

Effective January 1, 2018, the Company adopted a 401(k) plan for its employees. Under the terms of the plan, the Company contributes 3% of an employee’s annual base salary, up to a maximum of the annual Internal Revenue Service compensation limits, for all full-time employees. The Company terminated its Savings Incentive Match Plan, or SIMPLE IRA as of December 31, 2017.

During the three and nine months ended September 30, 2018, the Company recognized less than $0.1 million and $0.2 million, respectively, of expense related to its contributions to the 401(k) plan.

During the three and nine months ended September 30, 2017, the Company recognized less than $0.1 million and $0.1 million, respectively, of expense related to its contributions to the SIMPLE IRA plan.

9. Australia Research and Development Tax Incentive

The Company’s wholly owned subsidiary, Zafgen Australia Pty Limited, which conducts core research and development activities on behalf of the Company, is eligible to receive a 43.5% refundable tax incentive for qualified research and development activities. For the three months ended September 30, 2018 and 2017, $0.3 million and $0.2 million, respectively, were recorded as a reduction to research and development expenses in the condensed consolidated statements of operations. For the nine months ended September 30, 2018 and September 30, 2017, $1.3 million and $0.5 million, respectively, were recorded as a reduction to research and development expenses in the condensed consolidated statements of operations. These amounts represented 43.5% of the Company’s qualified research and development spending in Australia. The refund is denominated in Australian dollars and, therefore, the related receivable is re-measured into U.S. dollars as of each reporting date. For the three months ended September 30, 2018 and 2017, the Company recorded in its condensed consolidated statements of operations unrealized foreign currency exchange losses of less than $0.1 million and gains of less than $0.1, respectively, related to this tax incentive receivable. For the nine months ended September 30, 2018 and 2017, the Company recorded in its condensed consolidated statements of operations unrealized foreign currency exchange losses of $0.1 million and gains of less than $0.1 million, respectively, related to this tax incentive receivable. As of September 30, 2018 and December 31, 2017, the Company’s tax incentive receivable from the Australian government was $1.2 million and $0.9 million, respectively.

 

13


Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2017 included in our Annual Report on Form 10-K for the year ended December 31, 2017, or Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ‘‘Risk Factors’’ section of this Quarterly Report and in our Annual Report, our actual results could differ materially from the results described, in or implied, by these forward-looking statements.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report, including those risks identified under the “Risk Factors” section and in our Annual Report.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a clinical-stage biopharmaceutical company leveraging our proprietary methionine aminopeptidase 2, or MetAP2, biology platform to develop novel therapies for patients affected by complex metabolic diseases. We have pioneered the study of MetAP2 inhibitors in both common and rare metabolic disorders and we are currently advancing programs for type 2 diabetes, Prader-Willi syndrome, or PWS, and liver diseases.

Our lead product candidate is ZGN-1061, a novel fumagillin-class MetAP2 inhibitor administered by subcutaneous injection, which is currently being profiled for its utility in the treatment of type 2 diabetes. Type 2 diabetes is a prevalent, chronic, progressive, multifactorial disorder that leads to increased microvascular and macrovascular disease, and as such increases risk of death from cardiovascular disease, stroke, and kidney failure. Type 2 diabetes is also a leading cause of lower-limb amputation and blindness. Existing agents, while effective in reducing blood glucose levels, fail to reduce progression of the disease, which is driven by loss of function of insulin-producing beta cells and by loss of sensitivity to insulin action. It is estimated that approximately one-third of patients progress to needing insulin (recently estimated to be a $20 billion market based on annual sales). New therapies are needed to improve glycemic control and reduce comorbidities of type 2 diabetes.

We have also initiated development of a second, highly-optimized MetAP2 development candidate, ZGN-1258, which is administered by subcutaneous injection. We expect that our initial target indication for ZGN-1258 will be PWS. PWS is a rare and complex genetic disorder characterized by physiologic, cognitive and behavioral symptoms including hyperphagia, uncontrollable hunger and its related behaviors, and obesity. Published population studies estimate that the prevalence of PWS in the United States and in the European Union ranges from 1 in 8,000 to 1 in 50,000. The physiological drive to eat in patients with PWS is so powerful that they will go to great lengths to eat large quantities of food, even if it is spoiled, indigestible or unpalatable to others. Unsupervised patients will often eat to the point that it causes serious physical harm or death. As a result, caregivers are often forced to place locks and alarms on refrigerators and pantries that contain food. Despite attempts to control the access to food, the typical adult patient with PWS is morbidly obese and, based on evaluation of published survival data, has an average life expectancy of 32 years of age. Unfortunately, neither dietary intervention nor currently available pharmaceutical therapies bring meaningful benefits to patients with PWS and, as a result, they experience severe and life-threatening consequences of their condition. Furthermore, existing surgical techniques such as bariatric surgery are contraindicated in PWS, as patients with PWS often overeat to a point whereby they can rupture their stomachs, which is frequently a cause of death in this patient population.

14


With respect to ZGN-1258, we initiated investigational new drug application, or IND, enabling nonclinical activities in the first quarter of 2018, in preparation for filing an IND with the U.S. Food and Drug Administration, or FDA, and plan to begin Phase 1 clinical development by the end of the first quarter of 2019. We anticipate our Phase 1 clinical program of ZGN-1258 will be focused on evaluation of drug exposure, safety and tolerability following single doses in healthy subjects, and understanding the dose-responsiveness of changes following repeat dosing for circulating biomarkers of drug effect, body weight change, and changes in hunger-related parameters in overweight or obese but otherwise healthy subjects. Provided the results of the Phase 1 clinical program are supportive of further development, subsequent clinical trials are anticipated to evaluate the effects of treatment with ZGN-1258 on core therapeutic endpoints in PWS such as improvement of hyperphagia-related behaviors. We have launched a co-sponsored four-year natural history study to advance understanding of the medical history of and medical events in people with PWS. The study is a non-interventional, observational study to evaluate occurrences of serious medical events in PWS, intended to inform development and clinical trial design for potential new treatments for PWS, including ZGN-1258.

Both ZGN-1061 and ZGN-1258 were discovered by our researchers as part of a multi-year campaign to identify highly potent and novel compounds with nonclinical safety profiles supportive of continued development. One core element of focus for optimization was to reduce or eliminate the potential for pro-thrombotic effects, a limiting factor that led to termination of development of our first-generation compound. To date, both new compounds have similar intrinsic potency against the MetAP2 pathway and display appropriate activity in animal models of type 2 diabetes and obesity. Both compounds display improved safety profiles relative to beloranib for effects on thrombosis.

ZGN-1061 and ZGN-1258 are differentiated from each other with respect to their tissue distribution and predominant sites of action in animal models. While treatment with both compounds leads to target engagement and MetAP2 inhibition in key organs of relevance to the treatment of type 2 diabetes and obesity, ZGN-1258 also displays enhanced uptake into the brain and displays greater potency and activity in animal models of hyperphagic behaviors than does ZGN-1061. These differences support the development of ZGN-1061 for treatment of type 2 diabetes, in which metabolic effects related to liver, adipose tissue, and muscle effects are likely to be important, and ZGN-1258 in higher need indications such as PWS, in which brain activity is likely to be more important for therapeutic effects.

We completed a Phase 1 clinical trial of ZGN-1061 in the Netherlands, which demonstrated rapid drug absorption and clearance in line with pre-specified criteria established for the molecule. In addition, ZGN-1061 was well-tolerated, with no evidence of pro-thrombotic effects or other safety signals. We are also conducting a Phase 2 clinical trial of ZGN-1061 in Australia and New Zealand, which is designed to demonstrate proof-of-concept efficacy and safety in patients with type 2 diabetes and establish minimally effective doses. The initial part of the Phase 2 clinical trial has met its primary objectives at a 0.9 mg dose as compared to placebo and 12-week data has demonstrated a favorable safety and tolerability profile, with no treatment-related serious adverse events and no cardiovascular safety signals observed. ZGN-1061 was generally safe and well-tolerated, with primarily mild to moderate adverse events and an overall high study completion rate (95%). We expect to report the results of an additional cohort arm dosing up to 1.8 mg early in 2019.

In addition to the Phase 2 clinical data for ZGN-1061, nonclinical data on treatment with both ZGN-1061 and liraglutide suggest that combination therapy with these glucose-lowering agents may yield additive improvement in glycemic control and weight loss than either agent alone in patients with type 2 diabetes, demonstrating the potential effect of two complementary mechanisms – MetAP2 and glucose-dependent insulinotropic peptide, or GLP-1. From nonclinical data in a nonalcoholic steatohepatitis, or NASH, model, we further observed that ZGN-1061 markedly reduced liver weight, NAS score and markers of liver damage (ALT and AST). These NASH-related data, combined with previous gene expression data and clinical liver fat content data from Zafgen’s first-generation MetAP2 inhibitor, suggest potential clinical value in treating liver-specific metabolic conditions. We anticipate that treatment with ZGN-1061 could improve multiple aspects of NASH, and we will evaluate the potential utility of ZGN-1061 as a NASH therapy in the setting of type 2 diabetes.

Since our inception in November 2005, we have devoted substantially all of our resources to developing ZGN-1061, ZGN-1258, beloranib, ZGN-839 and additional MetAP2 inhibitors, building our intellectual property portfolio, developing manufacturing capabilities, business planning, raising capital, and providing general and administrative support for such operations. From our inception through our initial public offering, or IPO, in June 2014, we received gross proceeds of $104.0 million from sales of redeemable convertible preferred stock and, to a lesser extent, through the issuances of convertible promissory notes. In June 2014, we completed our IPO with net proceeds of $102.7 million after deducting underwriting discounts and commissions paid by us. In January 2015, we completed a follow-on offering of our common stock, with net proceeds of $130.0 million after deducting underwriting discounts and commissions paid by us. On July 2, 2018, we completed a public offering of our 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 paid by us.

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We have never generated any revenue and have incurred net losses in each year since our inception. We have an accumulated deficit of $336.4 million as of September 30, 2018. Our net loss was $46.8 million for the nine months ended September 30, 2018 and $52.0 million for the year ended December 31, 2017. These losses have resulted principally from costs incurred in connection with in-licensing of technology, research and development activities and general and administrative costs associated with our operations. We expect to incur significant expenses and operating losses for the foreseeable future.

We expect to continue to incur expenses in connection with our ongoing activities, if and as we:

 

advance the development of ZGN-1061 through Phase 2 clinical trials;

 

advance the development of ZGN-1258 through nonclinical development and into clinical trials;

 

seek to identify and advance development of additional product candidates into clinical development and indications for our product candidates;

 

seek to obtain regulatory approvals for our product candidates;

 

add operational, financial and management information systems;

 

add personnel, including personnel to support our product development and future commercialization; and

 

maintain, leverage and expand our intellectual property portfolio.

As a result, we will need additional financing to support our continuing operations. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public, private equity, debt financings, or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may never successfully complete development of any of our product candidates, obtain adequate patent protection for our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.

We expect that our existing cash, cash equivalents and marketable securities as of September 30, 2018 will enable us to fund our operating expenses, capital expenditure requirements and minimum liquidity requirements associated with our debt facility for a period of at least one year from the issuance date of this Quarterly Report. See “—Liquidity and Capital Resources.”

Financial Operations Overview

Revenue

We have not generated any revenue from product sales since our inception, and do not expect to generate any revenue from the sale of products in the near future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for our product candidates, we may generate revenue from those product candidates or collaborations.

Operating Expenses

The majority of our operating expenses since inception have consisted primarily of research and development activities, and general and administrative costs.

Research and Development Expenses

Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of:

 

personnel costs, including salaries, related benefits and stock-based compensation for employees engaged in scientific research and development functions;

 

third-party contract costs relating to research, formulation, manufacturing, nonclinical studies and clinical trial activities;

 

external costs of outside consultants;

 

payments made under our third-party licensing agreements;

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sponsored research agreements;

 

laboratory consumables; and

 

allocated facility-related costs.

Currently, we are primarily focused on developing ZGN-1061 and ZGN-1258, and are conducting other early research activities. We typically use our employee, consultant and infrastructure resources across our research and development programs. We track outsourced research and development costs by product candidate or development program, but we do not allocate personnel costs, external consultant costs, payments made under our licensing agreements or other internal costs to specific development programs or product candidates unless the payments are specifically identifiable to a development program or product candidate. We record our research and development expenses net of any research and development tax incentives we are entitled to receive from government authorities.

Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase in the foreseeable future as we pursue later stages of clinical development of our product candidates.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

 

the scope, rate of progress, and expense of clinical trials and other research and development activities;

 

clinical trial results;

 

uncertainties in clinical trial enrollment rate or design;

 

significant and changing government regulation;

 

the timing and receipt of any regulatory approvals; and

 

the FDA’s or other regulatory authority’s influence on clinical trial design.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, consisting of salaries, related benefits and stock-based compensation, of our executive, finance, business and corporate development and other administrative functions. General and administrative expenses also include travel expenses, allocated facility-related costs not otherwise included in research and development expenses, insurance expenses, and professional fees for auditing, tax and legal services, including legal expenses to pursue patent protection of our intellectual property. We expect that general and administrative expenses will remain relatively consistent during 2018 as compared to 2017.

Other Income (Expense)

Interest income. Interest income consists of interest earned on our cash equivalents and marketable securities. Our interest income has not been significant due to low interest earned on invested balances. Our interest income increased following the July 2, 2018 public offering of our common stock and we anticipate that it will subsequently decrease as we continue to incur operating losses.

Interest expense. Interest expense during the three and nine months ended September 30, 2018 relates to the loan and security agreement with Silicon Valley Bank, or the Term Loan, of $20.0 million, which closed on December 29, 2017. It bears a variable interest at an annual rate of 1.25% above the prime rate, as well as a final payment equal to 8.0% of the Term Loan, which is being recorded as interest expense over the term through the maturity date using the effective-interest method.

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Interest expense during the three and nine months ended September 30, 2017, relates to outstanding borrowings under the loan and security agreement with Oxford Finance LLC and Midcap Financial, or the 2014 Credit Facility, consisting of the stated interest of 8.1% per year due on outstanding borrowings, a final payment of 6% of amounts drawn down that was recorded as interest expense over the term through the maturity date using the effective-interest method, the amortization of deferred financing costs and the accretion of debt discounts relating to the 2014 Credit Facility, which was repaid in full in December 2017.

Foreign currency gains (losses), net. Foreign currency transaction gains (losses), net consists of the realized and unrealized gains and losses from foreign currency-denominated cash balances, vendor payables and tax-related receivables from the Australian government. We currently do not engage in hedging activities related to our foreign currency-denominated receivables and payables; as such, we cannot predict the impact of future foreign currency transaction gains and losses on our operating results. See “—Quantitative and Qualitative Disclosures about Market Risk.”

Income Taxes

Since our inception in 2005, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2017, we had net operating loss carryforwards for federal and state income tax purposes of $54.0 million and $39.6 million, respectively, which begin to expire in 2026 and 2030, respectively. As of December 31, 2017, we also had available tax credit carryforwards for federal and state income tax purposes of $14.8 million and $2.4 million, respectively, which begin to expire in 2026 and 2021, respectively.

On December 22, 2017, the Tax Cuts and Jobs Act, or the TCJA, was signed into United States law. The TCJA includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from a top marginal rate of 34% down to a flat rate of 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely). The tax rate change resulted in a reduction in the gross amount of our deferred tax assets recorded as of December 31, 2017 with an offsetting reduction in the related valuation allowance, resulting in no income tax expense or benefit being recognized as of the enactment date of the TCJA. In accordance with guidance in SEC Staff Accounting Bulletin No. 118, the final determination of the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the date of enactment of the 2017 Tax Act.

Results of Operations

Comparison of three and nine months ended September 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017:

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

Increase

 

 

 

2018

 

 

2017

 

 

(Decrease)

 

 

 

(in thousands)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,830

 

 

 

9,723

 

 

 

2,107

 

General and administrative

 

 

3,339

 

 

 

3,117

 

 

 

222

 

Total operating expenses

 

 

15,169

 

 

 

12,840

 

 

 

2,329

 

Loss from operations

 

 

(15,169

)