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Item 9A. Controls and Procedures

2021-03-04 compared with 2020-03-05 · 760 added, 168 removed, 27 unchanged (97% of the section changed)

1 unchanged sentence

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed only to provide reasonable assurance that they will meet their objectives.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of December 31, 2019, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e).

Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020.

The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on their evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Remediation of Previously Reported Material Weaknesses

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

As previously reported on Form 8-K/A filed with the SEC on June 26, 2020 and in our subsequent Form 10-Q reports for the periods ending June 30 and September 30, 2020, management identified material weaknesses in internal control over financial reporting during the audit of our consolidated financial statements for the years ending December 31, 2019 and December 31, 2018.

The material weaknesses that were previously identified related to the following:

We did not maintain an effective control environment commensurate with our financial reporting requirements.

We lacked a sufficient number of professionals with an appropriate level of accounting and controls knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely, completely and accurately.

Additionally, the limited personnel resulted in our inability to consistently establish appropriate authorities and responsibilities in pursuit of our financial reporting objectives, as demonstrated by, amongst other things, our insufficient segregation of duties in our finance and accounting functions.

This material weakness contributed to the following material weakness.

We did not design and maintain adequate controls over the preparation and review of certain account reconciliations and journal entries.

Specifically, we did not design and maintain controls to ensure (i) appropriate segregation of duties in the preparation and review of account reconciliations and journal entries, and (ii) account reconciliations and journal entries were reviewed at the appropriate level of precision.

This material weakness resulted in adjustments to prepaid expenses and accrued expenses which were identified and recorded as part of the audit of our consolidated financial statements as of and for the years ended December 31, 2019 and December 31, 2018.

Management has been actively engaged in remediating the above-described material weaknesses.

During the year ended December 31, 2020, we implemented measures designed to improve our internal control over financial reporting to remediate these material weaknesses, including:

Hiring a Chief Financial Officer with extensive public accounting and public company experience;

Evaluating the corporate finance and accounting organization and hiring additional qualified accounting and finance personnel including financial consultants to enable the implementation of internal control over financial reporting including adequate segregation of duties among accounting and finance personnel;

Engaging professional accounting consultants to assist management in the documentation of policies, procedures, and the identification, documentation, and evaluation of our internal control over financial reporting including testing the operating effectiveness of the organization’s internal controls;

Developing a risk assessment framework to identify and evaluate sources of potential risks to our financial statements and adding or modifying controls as needed to address such risks;

Documenting the step-by-step processes and controls necessary to ensure appropriate segregation of duties in the preparation and the review of account reconciliations and journal entries at an appropriate level of precision;

Enhancing documentation and controls supporting the account reconciliations and journal entries;

Providing increased oversight and review of the account reconciliations and journal entries by personnel with U.S.

GAAP knowledge and experience .

Management has concluded that the actions taken to strengthen our internal control over financial reporting, as well as the results of our testing over the design and operating effectiveness of these controls remediated the previously identified material weaknesses as of December 31, 2020.

However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with applicable policies, processes and documentation requirements may deteriorate.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act.

Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations.

Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.

In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its 2013 Internal Control—Integrated Framework.

Based on this assessment, our management has concluded that as of December 31, 2019 our internal control over financial reporting is effective.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on our evaluation under that framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(d) under the Exchange Act) during the fourth quarter of the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

OTHER INFORMATION

On March 3, 2020, Zafgen and Jeffrey S.

Hatfield, our chief executive officer, executed an amendment to his performance-based option to acquire 1,100,000 shares of our common stock, granted October 9, 2017, which will vest and become exercisable if our stock price meets certain performance targets on or prior to October 9, 2020 (the “Performance Option”) to provide that, in the event Mr.

Hatfield’s employment terminates prior to achievement of the performance vesting conditions, the Performance Option will continue to remain outstanding and eligible to vest according to its terms and, to the extent it meets the performance criteria on or prior to October 9, 2020, shall remain outstanding and exercisable for two years after the termination of Mr.

Hatfield’s employment with us.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2019.

The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2021 annual meeting of stockholders.

EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2021 annual meeting of stockholders.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2021 annual meeting of stockholders.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2021 annual meeting of stockholders.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2021 annual meeting of stockholders.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Consolidated Financial Statements.

For a list of the consolidated financial statements included herein, see Index on page 64 of this report.

Financial Statements

See Index to the Consolidated Financial Statements on page F-1 of this Annual Report.

Financial Statement Schedules

All required information is included in the financial statements or notes thereto.

List of Exhibits.

See the Exhibit Index in Item 15(b) below.

None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements.

Reference is made to the Exhibit Index below for a list of exhibits required by Item 601 of Regulation S-K to be filed as part of this Annual Report.

The following exhibits are being filed herewith:

EXHIBIT INDEX

Agreement and Plan of Merger, dated as of December 17, 2019, by and among the Registrant, Chondrial Therapeutics, Inc., Chondrial Therapeutics Holdings, LLC, and Zordich Merger Sub, Inc.

(incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K (File No.

001-36510) filed on December 18, 2019)

Ninth Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on June 24, 2014)

Amended and Restated By-laws of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K filed on June 24, 2014)

Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Third Amended and Restated Investors’ Rights Agreement by and among the Registrant and certain of its stockholders dated November 25, 2013 (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Description of Registrant’s Securities

Amended and Restated 2006 Stock Option Plan and forms of award agreements thereunder (incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

2014 Stock Option and Incentive Plan and forms of award agreements thereunder (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Exclusive License Agreement by and between the Registrant and Chong Kun Dang Pharmaceutical Corp.

of South Korea, dated July 6, 2009, as amended (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

* Filed Herewith

** Certain confidential portions (indicated by brackets and asterisks) have been omitted from this exhibit

Agreement and Plan of Merger, dated as of December 17, 2019, by and among Zafgen, Inc., Chondrial Therapeutics, Inc., Chondrial Therapeutics Holdings, LLC, and Zordich Merger Sub, Inc.

(incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on December 18, 2019).

Amendment No.

4 to Exclusive License Agreement by and between the Registrant and Chong Kun Dang Pharmaceutical Corporation, dated October 29, 2014 (incorporated by reference to Exhibit 10.3(b) of the Registrant’s Registration Statement on Form S-1 (File No.

333-201439) filed on January 12, 2015)

Subscription Agreement by and between the Registrant and Chong Kun Dang Pharmaceutical Corporation, dated November 20, 2014 (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on Form S-1 (File No.

333-201439) filed on January 12, 2015)

Letter by and between the Registrant and Thomas E.

Hughes, dated July 25, 2008 (incorporated by reference to Exhibit 10.5 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement by and between the Registrant and Thomas E.

Hughes, dated July 29, 2008 (incorporated by reference to Exhibit 10.6 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Letter by and between the Registrant and Dennis D.

Kim, dated August 23, 2011 (incorporated by reference to Exhibit 10.7 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement by and between the Registrant and Dennis D.

Kim, dated August 29, 2013 (incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Letter by and between the Registrant and Patricia L.

Allen, dated December 10, 2012 (incorporated by reference to Exhibit 10.9 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Employee Non-Competition, Non-Solicitation, Confidentiality and Assignment Agreement by and between the Registrant and Patricia L.

Allen, dated August 29, 2013 (incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Form of Indemnification Agreement, to be entered into between the Registrant and its directors (incorporated by reference to Exhibit 10.11(a) of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Form of Indemnification Agreement, to be entered into between the Registrant and its officers (incorporated by reference to Exhibit 10.11(b) of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Senior Executive Cash Incentive Bonus Plan (incorporated by reference to Exhibit 10.12 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Exclusive License Agreement by and between the Registrant and Children’s Medical Center Corporation, dated January 4, 2007, as amended January 15, 2007 (incorporated by reference to Exhibit 10.13 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Commercial Lease by and between the Registrant and Minerva Holdings, LLC, dated May 15, 2014 (incorporated by reference to Exhibit 10.14 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Commercial Lease by and between the Company and Contour LLC, dated March 30, 2015 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No.

001-36510) filed on May 14, 2015)

2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.15 of the Registrant’s Registration Statement on Form S-1 (File No.

333-195391) filed on June 18, 2014)

Severance and Change in Control Agreement by and between the Registrant and Thomas E.

dated as of June 30, 2016 (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No.

001-36510) filed on August 5, 2016)

Severance and Change in Control Agreement by and between the Registrant and Patricia Allen dated as of June 30, 2016 (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q (File No.

001-36510) filed on August 5, 2016)

First Amendment to Severance and Change-in-Control Agreement by and between Registrant and Patricia Allen dated September 12, 2019 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No.

001-36510) filed on September 10, 2019)

Severance and Change in Control Agreement by and between the Registrant and Dennis Kim, M.D., M.B.A.

dated as of June 30, 2016 (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q (File No.

001-36510) filed on August 5, 2016)

Loan and Security Agreement between the Registrant, as borrower, and Silicon Valley Bank, as lender dated December 29, 2017 (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (File No.

filed January 5, 2018)

Employment Offer Letter Agreement by and between the Registrant and Jeffrey S.

Hatfield, effective as of October 9, 2017 (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (File No.

001-36510) filed on October 12, 2017)

Severance and Change in Control Agreement by and between Registrant and Jeffrey S.

Hatfield, effective as of October 9, 2017 (incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K (File No.

001-36510) filed on October 12, 2017)

Non-Qualified Stock Option Agreement Inducement Award by and between Registrant and Jeffrey S.

Hatfield granted on October 9, 2017 (incorporated by reference to Exhibit 10.23 of the Registrant’s Annual Report on Form 10-K (File No.

001-36510) filed on March 3, 2018)

Non-Qualified Stock Option Agreement Inducement Award by and between Registrant and Jeffrey S.

Hatfield granted on October 9, 2017 (incorporated by reference to Exhibit 10.24 of the Registrant’s Annual Report on Form 10-K (File No.

001-36510) filed on March 3, 2018)

Waiver to Financing Condition by and between Registrant and Jeffrey S.

Hatfield, effective as of December 29, 2017 (incorporated by reference to Exhibit 10.25 of the Registrant’s Annual Report on Form 10-K (File No.

001-36510) filed on March 3, 2018)

First Amendment to Severance and Change-in-Control Agreement by and between Registrant and Jeffrey S.

Hatfield dated September 12, 2019 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No.

001-36510) filed on September 10, 2019)

First Amendment to Non-Qualified Stock Option Agreement Inducement Award by and between Registrant and Jeffrey S.

Hatfield granted on October 9, 2017

Employment Offer Letter Agreement by and between the Registrant and Brian P.

McVeigh, effective as of May 29, 2018 (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K (File No.

001-36510) filed May 30, 2018)

Severance and Change in Control Agreement by and between Zafgen, Inc.

McVeigh, effective as of May 29, 2018 (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (File No.

001-36510) filed May 30, 2018)

Non-Qualified Stock Option Agreement Inducement Award by and between Registrant and Brian P.

McVeigh granted on May 29, 2018 (incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q (File No.

001-36510) filed August 9, 2018)

First Amendment to Severance and Change-in-Control Agreement by and between Registrant and Brian P.

McVeigh dated September 12, 2019 (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K (File No.

001-36510) filed on September 10, 2019)

Employment Offer Letter Agreement by and between the Registrant and Priya Singhal, M.D., M.P.H., effective as of March 4, 2019 (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q filed on May 9, 2019)

Severance and Change in Control Agreement by and between the Registrant and Priya Singhal, M.D., M.P.H., effective as of March 4, 2019 (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Form 10-Q filed on May 9, 2019)

First Amendment to Severance and Change-in-Control Agreement by and between Registrant and Priya Singhal dated September 12, 2019

Non-Qualified Stock Option Agreement Inducement Award by and between the Registrant and Priya Singhal, M.D., M.P.H.

granted on April 2, 2019 (incorporated herein by reference to Exhibit 10.3 of the Registrant’s Form 10-Q filed on May 9, 2019)

Commercial Lease by and between the Registrant and Shigo Center Plaza Owner, LLC dated as of February 12, 2019 (incorporated herein by reference to Exhibit 10.4 of the Registrant’s Form 10-Q filed on May 9, 2019)

Letter of Edelstein and Company LLP (incorporated by reference to Exhibit 16.1 of the Registrant’s Registration Statement on Form S-1 (File No.

333-201439) filed on January 12, 2015)

Subsidiaries of the Registrant

1 to Agreement and Plan of Merger, dated as of March 6, 2020, by and among Zafgen, Inc., Chondrial Therapeutics, Inc, Chondrial Therapeutics Holdings, LLC, and Zordich Merger Sub, Inc.

(incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on March 6, 2020).

Ninth Amended and Restated Certificate of Incorporation of Larimar Therapeutics, Inc.

(formerly known as Zafgen, Inc.) (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on June 24, 2014) .

Certificate of Amendment of Ninth Amended and Restated Certificate of Incorporation of Zafgen, Inc.

related to the Reverse Stock Split, dated May 28, 2020 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on June 2, 2020).

Certificate of Amendment of Ninth Amended and Restated Certificate of Incorporation of Zafgen, Inc.

related to the Name Change, dated May 28, 2020 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on June 2, 2020).

Amended and Restated By-laws of Larimar Therapuetics, Inc.

(formerly known as Zafgen, Inc.) (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on June 24, 2014).

Form of Company Pre-funded Warrant to Purchase Common Stock by and among the Company and certain investors (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on June 2, 2020).

Description of the Company’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.

Larimar Therapeutics, Inc.

2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 29, 2020).

Amended and Restated 2006 Stock Option Plan and forms of award agreements thereunder (incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-1 filed on June 18, 2014) .

2014 Stock Option and Incentive Plan and forms of award agreements thereunder (incorporated by reference to Exhibit 10.2 of the Registrant’s Registration Statement on Form S-1 filed on June 18, 2014) .

Equity Distribution Agreement by and between the Company and Piper Sandler & Co.

(incorporated by reference to Exhibit 1.2 of the Company’s Registration Statement on Form S-3 filed on August 14, 2020).

Larimar Therapeutics, Inc.

Form of Stock Option Grant Notice and Award Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on September 29, 2020).

Securities Purchase Agreement, dated as of May 28, 2020, by and among the Company and the investors listed on the Schedule of Investors attached thereto (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on June 2, 2020).

Registration Rights Agreement, dated as of June 1, 2020, by and among the Company and certain Investors (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on June 2, 2020).

Registration Rights Agreement, dated as of June 8, 2020, by and among the Company and certain Investors (incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-3 filed on June 26, 2020).

Form of Indemnification Agreement between the Company and its directors (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on June 2, 2020).

Employment Agreement, dated July 31, 2020, by and between the Company and Carole Ben-Maimon (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 6, 2020).

Employment Agreement, dated June 1, 2020, by and between the Company and Michael Celano (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on June 2, 2020).

License Agreement, by and between the Company and Wake Forest University Health Sciences, effective as of November 30, 2016.

(incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q filed on August 14, 2020).

Amendment 1 to License Agreement, by and between the Company and Wake Forest University Health Sciences, effective as of November 28, 2017 (incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q filed on August 14, 2020).

Amendment 2 to License Agreement, by and between the Company and Wake Forest University Health Sciences, effective as of March 29, 2019 (incorporated by reference to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q filed on August 14, 2020).

License Agreement, by and between the Company and Indiana University Research and Technology Corporation, effective as of November 30, 2016 (incorporated by reference to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q filed on August 14, 2020).

First Amendment to License Agreement, by and between the Company, the Trustee of Indiana University and Indiana University Research and Technology Corporation, effective as of August 16, 2019 (incorporated by reference to Exhibit 10.10 of the Company’s Quarterly Report on Form 10-Q filed on August 14, 2020).

Notice of Substitute Option Grant between the Company and a certain Optionee (incorporated by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-8 filed on June 26, 2020).

Commercial Lease by and between the Company and Shigo Center Plaza Owner, LLC dated as of February 12, 2019 (incorporated herein by reference to Exhibit 10.4 of the Registrant’s Form 10-Q filed on May 9, 2019) .

Sublease, dated October 27, 2020 by and between the Company and Massachusetts Municipal Association, Inc.

(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 30, 2020).

Subsidiaries of Larimar Therapeutics, Inc.

Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm .

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Interactive Data Files regarding (a) our Consolidated Balance Sheets as of December 31, 2019 and 2018, (b) our Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2019, 2018 and 2017, (c) our Consolidated Statements of Changes in Stockholders’ Equity, (d) our Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017 and (e) the Notes to such Consolidated Financial Statements

Filed herewith.

Furnished herewith.

Certain confidential portions have been omitted from this exhibit.

Represents management compensation plan.

Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer.

Rule 13a-14(a)/15d-14(a) certification of Principal Financial Officer.

Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Form 10-K Summary

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

March 5, 2020

/s/ Jeffrey Hatfield

Jeffrey Hatfield

Chief Executive Officer

(Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the Unincorporated Community of Bala Cynwyd , Commonwealth of Pennsylvania, on the 4 th day of March 2021.

LARIMAR THERAPEUTICS, INC.

/s/ Carole Ben-Maimon

Carole Ben-Maimon

President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

/s/ Carole Ben-Maimon

President, Chief Executive Officer and Director (principal executive officer)

March 4, 2021

/s/ Patricia L.

Carole Ben-Maimon

/s/ Michael Celano

Chief Financial Officer

(principal financial and accounting officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Jeffrey Hatfield

Jeffrey Hatfield

Chief Executive Officer and

(Principal Executive Officer)

March 4, 2021

/s/ Patricia L.

Chief Financial Officer

(Principal Financial and

Accounting Officer)

March 5, 2020

/s/ Peter Barrett, Ph.D.

Peter Barrett, Ph.D.

Chairman of the Board of Directors

Michael Celano

/s/ Joseph Truitt

Chairman, Board of Directors

March 4, 2021

/s/ Thomas O.

Joseph Truitt

/s/ Peter Barrett

March 4, 2021

/s/ Wendy Everett

Wendy Everett Sc.D.

Peter Barrett

March 4, 2021

LaMattina, Ph.D.

/s/ Jonathan Leff

March 4, 2021

/s/ Cameron Geoffrey McDonough, M.D.

Cameron Geoffrey McDonough, M.D.

Jonathan Leff

/s/ Thomas E.

March 4, 2021

/s/ Robert J.

/s/ Thomas O.

March 4, 2021

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019

Consolidated Statements of Changes in Stockholders Equity (Deficit) for the years ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Larimar Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Larimar Therapeutics, Inc.

and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, of changes in stockholders’ equity (deficit) and of cash flows for the years then ended including the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accrued Research and Development Expenses

As described in Notes 2 and 7 to the consolidated financial statements, the Company recognizes external research and development costs based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its service providers.

Within accrued expenses, total accrued research and development expenses amounted to $3.4 million as of December 31, 2020.

As disclosed, management’s process involves reviewing open contracts and purchase orders, communicating with personnel and outside vendors to identify

services that have been performed, and estimating the level of service performed and the associated costs incurred for the services when invoices or other notification of actual costs have not been received.

The principal considerations for our determination that performing procedures relating to accrued research and development expenses is a critical audit matter are the significant judgment by management in developing the estimates of accrued research and development expenses, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s estimates of the level of service performed and the associated costs incurred for the services when invoices or other notification of actual costs have not yet been received.

As disclosed by management, a material weakness existed during the year related to this matter.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included, among others, testing management’s process for developing the estimates of accrued research and development expenses, which included (i) evaluating the reasonableness of management’s estimates of the level of service performed and the associated costs incurred for the services when invoices or other notification of actual costs have not yet been received;

and (ii) testing the completeness and accuracy of data used by management in accrued research and development expenses calculations by comparing amounts, on a test basis, to contracts and invoices.

Evaluating the reasonableness of management’s estimate of the level of service performed and the associated costs incurred involved assessing management’s ability to reasonably estimate the level of service and associated costs by comparing such estimates to invoices received, provisions in the contracts and other evidence including communications the company received from third-party vendors.

/s/ PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

March 4, 2021

We have served as the Company's auditor since 2020.

PART I-FINANCIAL INFORMATION

Financial Statements

LARIMAR THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

Current assets:

Cash and cash equivalents

Marketable debt securities

Prepaid expenses and other current assets

Total current assets

Property and equipment, net

Operating lease right-of-use assets

Restricted cash

Liabilities and Stockholders’ Equity (Deficit)

Current liabilities:

Accounts payable

Accrued expenses

Operating lease liabilities, current

Total current liabilities

Operating lease liabilities

Total liabilities

Commitments and contingencies (See Note 9)

Stockholders’ equity:

Preferred stock;

$0.001 par value per share;

5,000,000 shares authorized

as of December 31, 2020 and December 31, 2019;

no shares issued and

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

Common stock, $0.001 par value per share;

115,000,000 shares

authorized as of December 31, 2020 and December 31, 2019;

15,367,730 and 6,091,250 shares issued and outstanding as of

December 31, 2020 and December 31, 2019, respectively

Additional paid-in capital

Accumulated deficit

Accumulated other comprehensive gain

Total stockholders’ equity (deficit)

Total liabilities and stockholders’ equity (deficit)

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

LARIMAR THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

Year Ended December 31,

Operating expenses:

Research and development

General and administrative

Total operating expenses

Loss from operations

Other income, net

Net loss per share, basic and diluted

Weighted average common shares outstanding, basic and diluted

Comprehensive loss:

Other comprehensive loss:

Unrealized gain on marketable debt securities

Total other comprehensive gain

Total comprehensive loss

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

LARIMAR THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share data)

Comprehensive

Stockholders’

Equity (Deficit)

Balances as of December 31, 2018

Capital contributions from related party

Stock-based compensation expense

Balances as of December 31, 2019

Comprehensive

Stockholders’

Equity (Deficit)

Balances as of December 31, 2019

Capital contributions from related party

Merger with Zafgen Inc.

Private Placement, net of transaction costs

Issuance of Common Stock to placement agent for advisory fees in lieu of cash and other issuances of common stock

Stock-based compensation expense

Unrealized gain on marketable debt securities

Balances as of December 31, 2020

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

LARIMAR THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Cash flows from operating activities:

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

Stock-based compensation expense

Depreciation expense

Amortization of premium on marketable securities

Changes in operating assets and liabilities:

Prepaid expenses and other current assets

Accounts payable

Accrued expenses

Right-of-use assets

Operating lease liabilities

Net cash used in operating activities:

Cash flows from investing activities:

Purchase of property and equipment

Purchase of marketable securities

Maturities and sales of marketable securities

Cash, cash equivalents, and restricted cash acquired in connection with the Merger

Merger transaction costs

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Capital contribution from related party

Proceeds from sale of common stock and prefunded warrants, net of issuance costs

Net cash provided by financing activities

Net increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

Cash, cash equivalents and restricted cash at end of period

Supplemental disclosure of non-cash investing and financing activities:

Fair value of net assets acquired in the Merger, including $1.0 million of marketable debt securities and excluding cash acquired

Property and equipment included in accounts payable and accrued expenses

Leased assets obtained in exchange for new operating lease liabilities

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

LARIMAR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Organization, Nature of the Business, COVID-19 Risk and Basis of Presentation

Larimar Therapeutics, Inc., together with its subsidiaries (the “Company” or “Larimar”), is a clinical-stage biotechnology company focused on developing treatments for patients suffering from complex rare diseases using our novel cell penetrating peptide technology platform.

Our lead product candidate, CTI-1601, is a subcutaneously administered, recombinant fusion protein intended to deliver human frataxin, or FXN, an essential protein, to the mitochondria of patients with Friedreich’s ataxia.

Friedreich’s ataxia is a rare, progressive and fatal disease in which patients are unable to produce sufficient FXN due to a genetic abnormality.

The Company is subject to risks and uncertainties common to pre-commercialization companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with governmental regulations, failure to secure regulatory approval for CTI-1601 or any other product candidates and the ability to secure additional capital to fund operations.

Drug candidates currently under development will require extensive nonclinical and clinical testing and regulatory approval prior to commercialization.

These efforts require significant amounts of additional capital, adequate personnel, and infrastructure and extensive compliance-reporting capabilities.

Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic.

This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads.

The extent of the effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, the impact of known and future variants of the COVID-19 virus, the effectiveness and availability of vaccines against all variants and mutations of the COVID-19 virus, the willingness of individuals to avail themselves of the vaccines, and governmental, regulatory and private sector responses, all of which are uncertain and difficult to predict.

Although the Company is unable to estimate the financial effect of the pandemic at this time, if the pandemic remains uncontained or worsens, it could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

The financial statements do not reflect any adjustments as a result of the pandemic.

The pandemic resulted in the temporary stoppage of the Company’s Phase 1 clinical trials studying CTI-1601 in patients with Friedreich’s ataxia after the completion of two cohorts .

In July 2020, the Company resumed its Phase 1 clinical trials of CTI-1601.

The Company is conducting these clinical trials at one clinical trial site in New Jersey.

Because Friedreich’s ataxia is a rare disease, there are a limited number of patients in close proximity to the clinical trial site and clinical trial patients travel from throughout the United States to the clinical trial site to participate.

After dosing, patients remain in isolation in the clinical research unit for a period of time.

The travel advisories and risk of infection related to COVID-19 have presented increased risks to patients traveling to the Company’s clinical trial site for dosing and the Company expects to incur additional clinical trial costs to safely transport and isolate patients participating in the trial.

Top line data from these clinical trials are currently expected in the second quarter of 2021.

The Company may experience delays in clinical trial timelines as a result of additional travel and hospital restrictions related to the COVID-19 pandemic which may be imposed, including as a result of resurgences of COVID-19 cases in certain geographic areas, the impact of the known and future virus variants, and the efficacy of vaccines against all variants and mutation of the COVID-19 virus.

Merger with Zafgen

On December 17, 2019, Zafgen, Inc.

(“Zafgen”), Chondrial Therapeutics Inc.

(“Chondrial”), Zordich Merger Sub, Inc.

(“Merger Sub”) and Chondrial Holdings, LLC (“Holdings”), the sole stockholder of Chondrial, entered into an Agreement and Plan of Merger, as amended on March 9, 2020 (the “Merger Agreement”), pursuant to which Merger Sub merged with and into Chondrial, with Chondrial surviving as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the “Merger”).

The transaction was accounted for as a reverse acquisition in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Under this method of accounting, Chondrial was deemed to be the accounting acquirer for financial reporting purposes.

This determination was primarily based on the facts that, immediately following the Merger:

(1) former shareholders of Chondrial own a substantial majority of the voting rights of the post-merger company;

(2) the majority of the board of directors of the combined company is composed of directors designated by Chondrial under the terms of the merger agreement ;

and (3) existing members of Chondrial management constitute the management of the combined company.

Because Chondrial has been determined to be the accounting acquirer in the Merger, but not the legal acquirer, the Merger is deemed a reverse acquisition under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ ASC ”) Topic 805 , Business Combinations .

As a result, the historical financial statements of Chondrial are the historical financial statements of the combined company.

As the M erger has been accounted for as an asset acquisition, goodwill has not been recorded within the consolidated balance sheet.

The Merger was completed on May 28, 2020 pursuant to the terms of the Merger Agreement.

In addition, immediately prior to the closing of the Merger, Zafgen effected a 1-for-12 reverse stock split (the “Reverse Stock Split”) of Zafgen’s common stock, par value $0.001 per share (the “Zafgen Common Stock”).

At the effective time of the Merger (the “Effective Time”), each share of Chondrial’s common stock, par value $0.001 per share (“Chondrial Common Stock”), outstanding immediately prior to the Effective Time was converted into the right to receive shares of Zafgen Common Stock based on an exchange ratio set forth in the Merger Agreement.

At the Effective Time following the Reverse Stock Split, the exchange ratio was determined to be 60,912.5005 shares of Zafgen Common Stock for each share of Chondrial Common Stock (the “Exchange Ratio”).

At the closing of the Merger on May 28, 2020, Zafgen issued an aggregate of 6,091,250 shares of its common stock to Holdings (the “Merger Shares”), based on the Exchange Ratio after giving effect to the Reverse Stock Split described below.

Holdings subsequently distributed the Merger Shares to its members.

In addition, all outstanding options exercisable for common units of Holdings became options exercisable for the shares of common stock of Zafgen based on the conversion factor discussed within the Merger Agreement.

In connection with the Merger, Zafgen changed its name to Larimar Therapeutics, Inc.

Following the closing of the Merger, Chondrial Therapeutics, Inc.

became a wholly owned subsidiary of the Company.

In December, Chondrial Therapeutics was legally merged into Larimar Therapeutics, Inc.

As used herein, the words “the Company” refers to, for periods following the Merger, Larimar, together with its subsidiaries, and for periods prior to the Merger, Chondrial Therapeutics Inc., and its direct and indirect subsidiaries, as applicable.

Basis of Presentation

The consolidated financial statements include the accounts of Larimar and its wholly owned subsidiaries.

All intercompany balances and transactions have been eliminated.

The accompanying consolidated financial statements have been prepared in conformity with GAAP.

Unless otherwise noted, all references to common stock share and per share amounts have also been adjusted to reflect the Exchange Ratio.

Reverse Stock Split

On May 28, 2020, immediately prior to the closing of the Merger, Zafgen effected the Reverse Stock Split.

Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the Reverse Stock Split.

No fractional shares were issued in connection with the Reverse Stock Split.

Unless otherwise noted, all references to common stock share and per share amounts have also been adjusted to reflect the Exchange Ratio.

Going Concern Assessment

In accordance with Accounting Standards Update (“ASU”) No.

2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

As of the issuance date of these consolidated financial statements, the Company expects that its cash, cash equivalents and marketable securities will be sufficient to fund its forecasted operating expenses and capital expenditure requirements for at least the next twelve months from the issuance date of these financial statements.

Since its inception, the Company has incurred significant operating losses and negative cash flows from operations.

The Company has incurred recurring losses since inception, including net losses of $ 42.

5 million and $ 23.

1 million for the years ended December 31, 2020, and 2019, respectively.

In addition, as of December 31, 2020, the Company had an accumulated deficit of $ 65.

The Company expects to continue to generate operating losses for the foreseeable future.

As of December 31, 2020, we have approximately $ 92.6 million of cash, cash equivalents and marketable securities available for use to fund our operations.

The Company expects that its research and development and general and administrative expenses will continue to increase.

The Company has not yet commercialized any products and does not expect to generate revenue from the commercial sale of any products for several years, if at all.

Until such time, if ever, we expect to seek additional funding through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements.

We may not be able to obtain financing on acceptable terms, or at all, and we may not be able to enter into collaborations or other arrangements.

If the Company is unable to obtain future funding when needed, the Company may be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or pre‑commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

There is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

Additionally, the terms of any financing may adversely affect the holdings or our existing stockholders’ rights.

In the event the Company is not successful in obtaining sufficient funding, the Company has discretion in delaying certain research and development programs and personnel expenses, which would provide further flexibility in managing liquidity .

The Company has funded its operations to date primarily with proceeds from sales of common stock, prefunded warrants for the purchase of common stock and contributions from Holdings.

In 2020, the Company completed the Merger and acquired $42.9 million of cash, cash equivalents, restricted cash and marketable debt securities that were held by Zafgen immediately prior to the Merger.

The Company also raised $75.4 million, net of offering costs, through a private offering of common stock and prefunded warrants to purchase shares of common stock in connection with and immediately after the closing of the Merger.

In addition, in 2020, prior to the Merger, the Company received $18.0 million in capital contributions from Holdings.

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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.

Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual of research and development expense, valuation of stock-based awards and valuation of leases.

Due to inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in these estimates.

On an ongoing basis, the Company evaluates its estimates and assumptions.

Concentrations of Credit Risk and Significant Suppliers

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents.

The Company generally maintains cash balances in various operating accounts at financial institutions that management believes to be of high credit quality in amounts that may exceed federally insured limits.

The Company has not experienced losses related to its cash and cash equivalents.

The Company is highly dependent on third-party manufacturers to supply products for research and development activities in its programs.

The Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs.

These programs could be adversely affected by a significant interruption in these manufacturing services or in the supply of active pharmaceutical ingredients and formulated drugs.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.

Cash equivalents consisted of commercial paper, corporate bonds with maturity dates of less than three months at the date of acquisition and money market funds as of December 31, 2020.

As of December 31, 2019, the Company did not have cash equivalents.

Marketable debt securities

Marketable debt securities consist of debt investments with original maturities greater than ninety days.

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.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.

Depreciation expense is recognized using the straight-line method over a five or seven-year estimated useful life for equipment, furniture and fixtures and office equipment.

Leasehold improvements are amortized over the shorter of the asset life or the term of the lease agreement.

Expenditures for repairs and maintenance of assets are charged to expense as incurred.

Upon retirement or sale, the cost and related accumulated depreciation of assets disposed of are removed from the accounts and any resulting gain or loss is included in loss from operations.

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment, net¸ and the net operating lease asset.

Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.

Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets.

If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value.

Any impairment loss, if indicated, is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Segment Information

The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions.

The Company’s focus is on the research, development and commercialization of novel therapeutics for the treatment of rare diseases.

Research and Development Costs

Costs associated with internal research and development and external research and development services, including drug development and nonclinical studies, are expensed as incurred.

Research and development expenses include costs for salaries, employee benefits, subcontractors, facility-related expenses, depreciation, stock-based compensation, third-party license fees, laboratory supplies, and external costs of outside vendors engaged to conduct discovery, nonclinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials, and other costs.

The Company recognizes external research and development costs based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its service providers.

Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses.

Such prepaid expenses are recognized as an expense when the goods have been delivered or the related services have been performed, or when it is no longer expected that the goods will be delivered, or the services rendered.

Upfront payments, milestone payments and annual maintenance fees under license agreements are currently expensed in the period in which they are incurred.

All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure.

Amounts incurred are classified as general and administrative expenses.

Stock-Based Compensation

The Company measures all stock-based awards granted to employees, non-employee consultants and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model.

Compensation expense of those awards is recognized over the requisite service period, which is the vesting period of the respective award.

Typically, the Company issues awards with only service-based and market-based vesting conditions and records the expense for these awards using the straight-line method.

The Company accounts for forfeitures as they occur.

The Company classifies stock-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

Prior to May 28, 2020, the Company had been a private company and lacked company-specific historical and implied volatility information for its common stock.

Therefore, the Company estimated its expected common stock price volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until it has adequate historical data regarding the volatility of its own traded stock price.

The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options.

The risk-free interest rate is determined by reference to the U.S.

Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.

Expected dividend yield considers the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns.

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Changes in deferred tax assets and liabilities are recorded in the provision for income taxes.

The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense.

Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized.

First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities.

If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements.

The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders.

For the years ended December 31, 2020 and 2019, the Company’s only element of other comprehensive income was unrealized gain on marketable securities.

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.

Basic shares outstanding includes the weighted average effect of the Company’s prefunded warrants issued in June 2020, the exercise of which requires little or no consideration for the delivery of shares of common stock.

Basic and diluted weighted average shares of common stock outstanding for the twelve months ended December 31, 2020 includes the weighted average effect of 628,403 prefunded warrants for the purchase of shares of common stock, which were issued in June 2020, and for which the remaining unfunded exercise price is $0.01 per share.

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 2,008,902 and 0 options to purchase common stock, outstanding as of December 31, 2020 and 2019, respectively, from the computation of diluted net loss per share for the twelve months ended December 31, 2020 and 2019, respectively, because they had an anti-dilutive impact due to the net loss incurred for the periods.

Prior to the Merger the Company did not have options to purchase common stock or unvested restricted common stock to exclude from the calculation of earnings per share as all outstanding options were for common units of Holdings that upon the Merger converted into options exercisable for the shares of common stock of the Company.

Recently Issued and Adopted Accounting Pronouncements

In June 2016, the FASB issued 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.

This standard requires 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.

The Company adopted the standard on January 1, 2020.

The adoption of this standard did not have a material impact on the Company’s 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.

Merger Accounting

On May 28, 2020, the Company completed its merger with Zafgen.

Based on the Exchange Ratio, immediately following the Merger, former Zafgen stockholders, Zafgen option holders and other persons holding securities or other rights directly or indirectly convertible, exercisable or exchangeable for Zafgen Common Stock (collectively, the “Zafgen Securityholders”) owned approximately 34% of the outstanding capital stock of the combined company, and Holdings, the former Chondrial stockholder, owned approximately 66% of the outstanding capital stock of the combined company.

At the closing of the Merger, all shares of Chondrial Common Stock were exchanged for an aggregate of 6,091,250 shares of Zafgen Common Stock, after giving effect to the Reverse Stock Split.

In addition, pursuant to the terms of the Merger Agreement, the Company assumed all outstanding stock options to purchase shares of Zafgen common stock at the closing of the Merger.

At the closing of the Merger, such stock options became options to purchase an aggregate of 328,770 shares of the Company’s common stock after giving effect to the Reverse Stock Split.

The total purchase price paid in the Merger has been allocated to the tangible and intangible assets acquired and liabilities assumed of Zafgen based on their fair values as of the completion of the Merger.

Transaction costs primarily included bank fees and professional fees associated with legal counsel, auditors and printers.

The following summarizes the purchase price paid in the Merger (in thousands, except share and per share amounts):

Number of shares of the combined organization owned by Zafgen stockholders (1)

Multiplied by the fair value per share of Zafgen common stock (2)

Fair value of consideration issued in effect of the Merger

Transaction costs

Purchase price:

The number of shares of 3,124,337 represents the historical 37,492,044 shares of Zafgen common stock outstanding immediately prior to the closing of the Merger, adjusted for the Reverse Stock Split.

Based on the last reported sale price of Zafgen common stock on the Nasdaq Global Market on May 28, 2020, the closing date of the Merger, and after giving effect to the Reverse Stock Split.

The allocation of the purchase price for the Merger was based on estimates of the fair value of the net assets acquired, which was then adjusted for the difference between the purchase price and the fair value of the assets acquired.

The following summarizes the allocation of the purchase price to the net tangible and intangible assets acquired (in thousands):

Cash and cash equivalents

Marketable debt securities

Other current and noncurrent assets

Property and equipment, net

Restricted cash

Right-of-use asset

Current liabilities

Lease liability, net of current portion

Purchase price

Fair Value Measurements and Marketable Debt Securities

Fair Value Measurements

The Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019 are measured in accordance with the standards of ASC 820, Fair Value Measurements and Disclosures , which establishes a three-level valuation hierarchy for measuring fair value and expands financial statement disclosures about fair value measurements.

The valuation hierarchy is based on upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

The three levels are defined as follows:

Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts payable and accrued liabilities.

For accounts payable and accrued liabilities, the carrying amounts of these financial instruments as of December 31, 2020 and December 31, 2019 were considered representative of their fair values due to their short term to maturity.

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

There were no cash equivalents and marketable debt securities as of December 31, 2019:

December 31, 2020

(in thousands)

Cash equivalents:

Money market funds

Commercial paper

Corporate bonds

Total cash equivalents

Marketable securities:

U.S Government securities

Commercial paper

Total marketable debt securities

Total cash equivalents and marketable debt securities

Marketable Debt Securities

The following tables summarize the Company’s marketable debt securities as of December 31, 2020.

There were no marketable debt securities as of December 31, 2019:

December 31, 2020

(in thousands)

U.S Government securities (due within 1 year)

Commercial paper (due within 1 year)

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

All investments with unrealized losses at December 31, 2020 have been in a loss position for less than twelve months or the loss is not material and were temporary in nature.

The Company does not intend to sell the investments that are in an unrealized loss position before recovery of their amortized cost basis.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

(in thousands)

Prepaid research and development expenses

Prepaid insurance

Payroll tax receivable

Capitalized transaction costs

Research and development tax credit sale receivable

Other prepaid expenses and other assets

Capitalized transaction costs as of December 31, 2019 consists of capitalized legal and proxy fees incurred by the Company, related to the Merger.

These costs were included in the purchase price allocation when accounting for the Merger.

Fixed assets, net consisted of the following:

(in thousands)

Computer equipment

Lab equipment

Furniture and fixtures

Accumulated depreciation

Depreciation expense was $0.2 million and $0.1 million for the years ended December 31, 2020 and 2019, respectively.

Accrued Expenses

Accrued expenses consisted of the following:

(in thousands)

Accrued research and development expenses

Accrued payroll and related expenses

Accrued professional fees

Accrued other

Stockholders’ Equity and Stock Options

Common Stock and Prefunded warrants

As of December 31, 2020, the Company’s Certificate of Incorporation, as amended and restated, authorized the Company to issue 115,000,000 of $0.001 par value common stock and 5,000,000 of $0.001 par value preferred stock.

The voting, dividend and liquidation rights of the holders of the Company’s common stock are subject to and qualified by the rights, powers and preferences of the holders of the preferred stock.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders.

Common stockholders are entitled to receive dividends, as may be declared by the board of directors of the Company (the “Board”), if any.

No cash dividends have been declared or paid to date.

On May 28, 2020, the Company entered into a securities purchase agreement with certain accredited investors (the “Purchasers”) for the sale by the Company in a private placement of 6,105,359 shares of the Company’s common stock and prefunded warrants to purchase an aggregate of 628,403 shares of the Company’s common stock, for a price of $11.88 per share of the common stock and $11.87 per prefunded warrant.

The prefunded warrants are exercisable at an exercise price of $0.01 and will be exercisable indefinitely.

The Purchasers may exercise the prefunded warrants on a cashless basis in the event that there is no effective registration statement covering the resale of the shares of common stock underlying the prefunded warrants on the date in which the Company is required to deliver the shares.

The private placement closed on June 1, 2020.

The aggregate gross proceeds for the issuance and sale of the common stock and prefunded warrants were $80.0 million;

transaction costs totaled $4.6 million and resulted in net proceeds of $75.4 million.

The Company’s Registration Statement on Form S-3, filed with the SEC on June 26, 2020, registered the resale of 6,105,359 shares of common stock sold and the 628,403 shares of common stock underlying the prefunded warrants.

MTS Health Partners served as placement agent to the Company in connection with the private placement.

As partial compensation for these services, we issued MTS Health Partners 35,260 shares of common stock.

Equity Distribution Agreement

On August 14, 2020, the Company entered into an Equity Distribution Agreement (the “Agreement”) with an investment bank, in connection with the establishment of an “at-the-market” offering program under which the Company may sell up to an aggregate of $50,000,000 of shares of common stock (the “ATM Shares”) from time to time (the “Offering”).

Under the Agreement, the Company will set the parameters for the sale of ATM Shares, including the number of ATM Shares to be issued, the time period during which sales are requested to be made, limitations on the number of ATM Shares that may be sold in any one trading day and any minimum price below which sales may not be made.

Sales of the ATM Shares, if any, under the Agreement may be made in transactions that are deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act.

The Company will pay its investment bank a commission equal to 3.0% of the gross proceeds of any ATM Shares sold through the investment bank under the Agreement and will reimburse investment bank for certain specified expenses.

The Agreement contains customary representations, warranties and agreements by the Company, indemnification obligations of the Company and its investment bank, other customary obligations of the parties and termination provisions.

The Company has no obligation to sell any of the ATM Shares and may at any time suspend offers under the Agreement.

As of December 31, 2020, 11,524 Shares of common stock have been sold under the Agreement for net proceeds of $0.2 million at an average gross price per share of $21.89.

Summary of Plans

Upon completion of the Merger with Zafgen, Zafgen’s 2014 Stock Option and Incentive Plan (the “2014 Plan”) and Zafgen’s 2006 Stock Option Plan (the “2006 Plan” and together with the 2014 Plan the “Prior Plans”) were assumed by the Company.

As described below, the Company adopted a new equity incentive plan in July 2020 that was approved by the stockholders in September 2020.

These three plans are administered by the Board or, at the discretion of the Board, by a committee of the Board.

2020 Equity Incentive Plan

The Company’s Board of Directors adopted the 2020 Equity Incentive Plan (the 2020 Plan) on July 16, 2020 and the stockholders of the Company approved the 2020 Plan on September 29, 2020.

The 2020 Plan replaces the 2014 Plan.

Option outstanding under the Prior Plans will remain outstanding, unchanged and subject to the terms of the 2014 Plan and the respective award agreements, and no further awards will be made under the 2014 Plan.

However, if any award previously granted under the Prior Plans, expires, terminates, is canceled or is forfeited for any reason after the approval of the 2020 Plan, the shares subject to that award will be added to the 2020 Plan s hare p ool so that they can be utilized for new grants under the 2020 Plan.

The 2020 Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options (”NSO”), stock appreciation rights, restricted stock awards, restricted stock unit awards, and cash or other stock-based awards.

ISOs may be granted only to the Company’s employees, including the Company’s officers, and the employees of the Company’s affiliates.

All other awards may be granted to the Company’s employees, including the Company’s officers, the Company’s non-employee directors and consultants, and the employees and consultants of the Company’s affiliates.

As of December 31, 2020, 893,700 shares of common stock were available for grant under the 2020 Plan.

The maximum number of shares that may be issued in respect of any awards under the 2020 Plan is the sum of:

(i) 1,700,000 shares plus (ii) an annual increase on January 1, 2021 and each anniversary of such date thereafter through January 1, 2030, equal to the lesser of (A) 4% of the shares issued and outstanding on the last day of the immediately preceding fiscal year, and (B) such smaller number of shares as determined by the Board (collectively, the “Plan Limit”).

The maximum aggregate number of shares that may be issued under the 2020 Plan in respect of incentive stock options is 8,000,000 over the ten-year term of the 2020 Plan.

Subject to this provision, the Company added 614,709 shares available for grant to the 2020 Plan effective January 1, 2021 increasing the maximum number of shares of the Company’s common stock that may be issued under the 2020 plan to 2,314,709 shares.

2014 Stock Option and Incentive Plan and 2006 Stock Option Plan

In 2014, the Board and stockholders of Zafgen adopted the 2014 Plan.

The 2014 Plan provided 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 and consultants of the Company.

The number of shares initially reserved for issuance under the 2014 Plan was 180,685 shares of common stock.

As the 2020 Plan was adopted by the Company and approved by the Company’s stockholders, no further awards will be made under the Prior Plans.

2016 Equity and Incentive Plan

Under the 2016 Equity Plan adopted by Holdings on November 30, 2016, (the “2016 Equity Incentive Plan”), the Board of Managers of Holdings (the “Board of Managers”) or a committee thereof was authorized to issue 122,133 Common Units of Holdings or combination of Common Units, Common Unit options or profit interest units.

On March 23, 2018, the Board of Managers increased the number of Common Units reserved for grant and issuance pursuant to the 2016 Plan from 122,133 to 138,133 and on April 29, 2019 increased the number of Common Units reserved for grant and issuance pursuant to the 2016 Plan by an additional 101,500 to 239,633.

The Company has recorded costs incurred as stock-based compensation with a corresponding capital contribution from Holdings.

From January 1, 2020 through the Merger date Holdings did not issue options to purchase Common Units to employees of the Company.

During the twelve months ended December 31, 2019 Holdings issued 73,986 options to purchase Common Units to employees of the Company.

The Company assumed all of the outstanding and unexercised options to purchase units of Holdings upon consummation of the Merger .

Pursuant to the terms of the Merger Agreement, options to purchase 330,818 shares of the Company’s common stock at a weighted average exercise price of $12.14 per share were substituted for the 202,392 options to purchase Common Units , with a weighted average exercise price of $10.36 per Common Unit, that were outstanding immediately prior to the Merger.

The Company treated the conversion as a modification pursuant to ASC 718, Compensation—Stock Compensation, and calculated the pre- and post-modification value of the options.

The increase in fair value of the options was calculated to be $1.2 million.

As $0.7 million related to vested options the expense was recognized immediately on the Merger date, and the remaining $0.5 million will be recognized over the remaining vesting term with the original grant date fair value remaining of $0.1 million.

Stock Valuation

The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted to employees:

Risk-free interest rate

Expected term (in years)

Expected volatility

Dividend yield

Stock Options

The following table summarizes the Company’s stock option activity for the twelve months ended December 31, 2020 (amounts in millions, except for share and per share data):

Weighted Average

Term (in years)

(in millions)

Outstanding as of December 31, 2019

Assumed as part of the Merger with Zafgen

Modification of stock options

Outstanding as of December 31, 2020

Exercisable as of December 31, 2020

Vested and expected to vest as of December 31, 2020

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the fair value of the common stock for the options that were in the money at December 31, 2020.

2020 Option Grants

On July 16, 2020, the Company granted options to purchase 549,774 shares of common stock to employees under the 2014 Plan.

The options have an exercise price equal to the closing stock price as of the grant date, and vest over four years, with 25% vesting on the first anniversary of the grant and the remainder vesting in equal monthly installments thereafter.

In addition, in 2020 the Company granted options to purchase 806,300 shares of common stock to employees and directors under the 2020 Plan.

The options granted to employees have an exercise price equal to the closing stock price as of the grant date, and vest over four years, with 25% vesting on the first anniversary of the grant and the remainder vesting in equal monthly installments thereafter.

The options granted to directors have an exercise price equal to the closing stock price as of the grant date, and vest monthly in equal installments over three years.

January 2021 Option Grants

On January 19, 2021, the Company granted options to purchase 280,150 shares of common stock to employees under the 2020 Plan.

Stock-Based Compensation

Stock-based compensation expense was classified in the consolidated statements of operations as follows:

Year Ended December 31,

(in thousands)

Research and development

General and administrative

As of December 31, 2020, total unrecognized compensation expense related to unvested stock options and restricted stock units was $13.5 million, which is expected to be recognized over a weighted average period of 3.45 years .

Intellectual Property Licenses

The Company is party to a License Agreement (the “WFUHS License”), dated November 30 , 2016 with Wake Forest University Health Sciences (“WFUHS”) and a License Agreement (the “IU License”), dated November 30, 2016, as amended, with Indiana University (“IU”) .

Such agreements provide for a transferable, worldwide license to certain patent rights regarding technology used by the Company with respect to the development of CTI-1601.

In partial consideration for the right and license granted under these agreements, the Company will pay each of WFUHS and IU a royalty of a low single digit percentage of net sales of l icensed p roducts depending on whether there is a valid patent covering such p roducts.

As additional consideration for these agreements, the Company is obligated to pay each of WFUHS and IU certain milestone payments of up to $2.6 million in the aggregate upon the achievement of certain developmental milestones, commencing on the enrollment of the first patient in a Phase 1 clinical trial.

The Company will also pay each of WFUHS and IU sublicensing fees ranging from a high single digit to a low double-digit percentage of sublicense consideration depending on the Company’s achievement of certain regulatory milestones as of the time of receipt of the sublicense consideration.

The Company is also obligated to reimburse WFUHS and IU for patent-related expenses.

In the event that the Company disputes the validity of any of the licensed patents, the royalty rate would be tripled during such dispute.

The Company is also obligated to pay to IU a minimum annual royalty of less than $0.1 million per annum starting in the 2020 calendar year for the term of the agreement.

In the event that the Company is required to pay IU consideration, then the Company may ded uct 20 % of such IU consideration on a dollar-for-dollar basis from the consideration due to WFUHS.

In the event that the Company is required to pay WFUHS consideration, then the Company may deduct 60 % of such WFUHS consideration on a dollar-for-dollar basis from the consideration due to IU .

During the twelve months ended December 31, 2020 and 2019, no milestones were achieved and no expense was recognized.

Both agreements continue from their effective date through the last to expire of the licensed patents unless earlier terminated by either party.

On August 8, 2019, the Company entered into an operating lease for office space in Bala Cynwyd, Pennsylvania, effective as of December 15, 2019, for a period of three years and six months with an option to extend the lease for three additional years.

Due to required tenant improvements to be completed by the landlord, the Company did not take immediate possession of the leased property and the lease term commenced on February 15, 2020.

In the quarter ended March 31, 2020, the Company recorded an operating lease right-of-use asset and operating lease liability of $0.4 million.

On May 28, 2020, as part of the Merger with Zafgen, the Company acquired a non-cancellable operating lease for approximately 17,705 square feet of office space (the “Premises”).

The lease expires on October 30, 2029.

As part of the agreement, the Company is required to maintain a letter of credit, which upon signing was $1.3 million and is classified as restricted cash within the consolidated financial statements.

In addition to the base rent, the Company is also responsible for its share of operating expenses, electricity and real estate taxes, which costs are not included in the determination of the leases’ right-of-use assets or lease liabilities.

The right-of-use asset is being amortized to rent expense over the remaining lease term.

On October 27, 2020, the Company entered into a sublease agreement (the “Sublease”) with Massachusetts Municipal Association, Inc.

(the “Subtenant”), whereby the Company subleased the entire Premises to the Subtenant.

The term of the Sublease commenced on the December 4, 2020 and continues until October 30, 2029.

In connection with this sublease, we evaluated the need for impairment under ASC 360 and determined that there was no impairment.

The Sublease provides for an initial annual base rent of $0.8 million, which increases annually up to a maximum annual base rent of $1.0 million.

The Subtenant also is responsible for paying to the Company future increases in operating costs (commencing on January 1, 2022), future increases in annual tax costs (commencing July 1, 2021) and all utility costs (commencing March 1,2021) attributable to the Premises during the term of the Sublease.

As part of the Sublease, the subtenant deposited a letter of credit in the amount of $0.8 million to assure their performance under the sublease.

If there are no uncured events of default under the sublease, the amount of this security deposit decreases over time to $0.4 million on the sixth anniversary of the Sublease.

On November 5, 2018, the Company entered into an operating lease for office and lab space in Philadelphia, Pennsylvania, effective as of January 1, 2019, and expiring on December 31, 2020 with an option to extend the lease for each of the two additional years.

On August 4, 2020, the Company executed the first option to extend the lease for an additional year, expiring on December 31, 2021.

We have determined this lease extension qualifies as a short-term lease, as the remaining renewal option is not considered reasonably certain, for which we have applied the accounting policy election to not record the related right-of-use asset and lease liabilities.

Expense arising from operating leases was $0.7 million and less than $0.1 million during the twelve months ended December 31, 2020 and 2019, respectively.

For operating leases, the weighted-average remaining lease term for leases at December 31, 2020 and December 31, 2019 was 8.6 and 3.3 years, respectively.

For operating leases, the weighted average discount rate for leases at December 31, 2020 and December 31, 2019 was 11.0% and 12.0%, respectively.

The Company has not entered into any financing leases.

Maturities of lease liabilities due under these lease agreements as of December 31, 2020 are as follows:

Year Ending December 31,

(in thousands)

Total lease payments

imputed interest

Present value of lease liabilities

During the years ended December 31, 2020, and 2019, the Company recorded no income tax benefits for the net operating losses incurred in each year due to its uncertainty of realizing a benefit from those items.

The domestic and foreign components of loss before income taxes are as follows.

Years ended December 31,

A reconciliation of the U.S.

federal statutory income tax rate to the Company’s effective income tax rate is as follows:

Year Ended December 31,

Federal statutory income tax rate

State taxes, net of federal benefit

Federal and state research and development tax credit

Nondeductible permanent differences

Change in deferred tax asset valuation allowance

Effective income tax rate

Net deferred tax assets as of December 31, 2020 and 2019 consisted of the following:

Deferred tax assets:

Capitalized R&D Expenses

Stock Based Compensation

Net operating Loss Carryforwards

Tax credit carryforwards

Other Temporary Differences

Fixed Assets & Intangibles

Operating Lease Liability

Total deferred tax assets

Deferred tax liabilities:

Operating Right of Use Asset

Total deferred tax liabilities

Valuation allowance

Net deferred tax assets / (liabilities)

Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2020 and 2019 related primarily to deferred tax assets acquired as a result of the Merger with Zafgen, increase in net operating loss carryforwards, and tax credit carryforwards and were as follows:

Years ended December 31,

Valuation allowance as of the beginning of the year

Increases acquired as a result of the Merger with Zafgen

Increases recorded to income tax provision

Valuation Allowance at end of Year

As of December 31, 2020, the Company had net operating loss carryforwards that expire for federal, foreign and state income tax purposes of $113.2 million, $1.2 million and $113.2 million, respectively.

The federal and state operating losses begin to expire in 2026 and 2030, while the foreign net loss carryforward can be carried forward indefinitely.

As of December 31, 2020, the Company had federal net operating loss carryforwards that were generated after December 31, 2017 of $74.0 million that do not expire, however these carryforwards are limited to 80% of the taxable income in any one tax period.

As of December 31, 2020, the Company also had available tax credit carryforwards for federal and state income tax purposes of $8.9 million which begin to expire in 2039.

Utilization of the pre-Merger net operating loss carryforwards attributable to Zafgen, of approximately $33.5 million, are subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes occurred during the tax year associated with the Merger.

In addition to the limitation of the pre-Merger NOL’s of Zafgen, the net capitalized R&D deferred tax assets in the amount of $73.0 million is subject to the built-in loss rules under Section 382 and may not be realized if the underlying asset associated with the R&D is disposed within five years of the Merger, or May 28, 2025.

In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period.

The ownership changes will limit the amount of pre-merger Zafgen carryforwards that can be utilized annually to offset future taxable income with an annual limitation of approximately $35 thousand per year.

The Company has reduced their NOL and R&D tax credit deferred tax assets associated with the pre-Merger Zafgen operations as a result of the 382 analysis.

The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception associated with the pre-Merger Chondrial tax attributes.

If the Company experienced a change of control, as defined by Section 382, at any time since inception, utilization of the pre-Merger Chondrial net operating loss carryforwards or tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required.

Any limitation may result in expiration of a portion of the net operating loss carryforwards or tax credit carryforwards before utilization.

Further, until a study is completed, and any limitation is known, no amounts are being presented as an uncertain tax position.

As of December 31, 2020 and 2019, the Company’s net deferred tax asset balance before the valuation allowance was $115.3 million and $11.7 million, respectively, and was comprised principally of net operating loss carryforwards, capitalized research and development expenses and tax credit carryforwards.

During the years ended December 31, 2020, and 2019, gross deferred tax assets increased due to deferred tax assets acquired as a result of the Merger with Zafgen, additional net operating loss carryforwards, research and development tax credits generated.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets.

Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets.

Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2020 and 2019.

Management reevaluates the positive and negative evidence at each reporting period.

The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2020 and 2019.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates.

In the normal

course of business, the Company is subject to examination by federal and state jurisdictions, where applicable.

There are currently no pending income tax examinations.

The Company’s tax years are still open under statute from 2016 to the present.

Earlier years may be examined to the extent that tax credit or net operating loss carryforwards are used in future periods.

The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision.

Related Party Transactions

In November 2016, the Company entered into a consulting agreement with Mark Payne, M.D (the “Consulting Engagement”).

Payne was a director of Chondrial at that time, a full-time employee of IU and one of the inventors of the licensed IU intellectual property, and as such is entitled to a certain share of the revenues received by IU under the IU License.

Pursuant to the terms of his consulting agreement the Company agreed to pay Dr.

Payne $0.1 million per year over the term of the agreement and granted Dr.

Payne 123,853 restricted Common Units in Holdings.

On November 30, 2016, 30% vested and was associated with Chondrial Therapeutics IP, LLC (“IP LLC”) becoming a subsidiary of Holdings, which subsequently contributed to the Company on December 31, 2018.

The remaining 70% is associated with future services (see Note 8) vesting ratably over 48 months beginning on December 1, 2016.

The consulting agreement has a four-year term, subject to earlier termination.

On November 30, 2020, The Company entered into a 1-month extension of the Consulting Engagement, expiring on December 31, 2020.

During the twelve months ended December 31, 2020 and 2019, the Company recognized $0.1 million, related to this consulting agreement, recorded as research and development expense in the Statement of Operations.

On January 1, 2021, the Company entered into a new consulting agreement with Mark Payne, M.D.

which extended the term of the Consulting Engagement for a four-year term beginning on January 1, 2021.

The funding to the Company originated from Holdings’ sale of Series A Preferred Units and Series B convertible preferred units with Deerfield Private Design Fund IV, L.P., Deerfield Private Design Fund III, L.P.

and Deerfield Health Innovations Fund, L.P.

(together, the “Deerfield Funds”), and certain other purchasers, from inception through May 28, 2020 and the contribution of the proceeds received by Holdings on such sales to the Company in order to fund the Company’s operations.

Under a November 30, 2016 Series A Preferred Unit Purchase Agreement, as amended on September 8, 2017, November 15, 2017, November 14, 2018 and April 29, 2019, Holdings sold Series A Preferred Units for gross proceeds of $35.6 million.

The gross proceeds were then contributed to the Company.

On November 21, 2019 (as amended on December 20, 2019), Holdings entered into a Second Amended and Restated LLC Agreement and entered into a Series B Bridge Unit Purchase Agreement with the Deerfield Funds and certain other purchasers to sell Series B convertible preferred units (“Series B Bridge Units”) for gross proceeds of up to $10.0 million.

The gross proceeds were then contributed to the Company.

On January 16, 2020, Holdings entered into a Third Amended and Restated LLC Agreement and entered into a Second Series B Bridge Unit Purchase Agreement with the Deerfield Funds and certain other purchasers to sell Second Series B convertible preferred units (“Second Series B Bridge Units”) for gross proceeds of up to $15.0 million.

The gross proceeds were contributed to the Company.

During the twelve months ended December 31, 2020 and 2019, Holdings provided the Company non-interest bearing, permanent funding from the above Series A and Series B preferred unit transactions, totaling $18.0 million and $19.4 million, respectively, which has been recorded as capital contributions with the balance of combined equity and additional paid in capital on the consolidated balance sheets and consolidated statements of changes in stockholders’ equity for each respective period.

No contributions were made by Holdings subsequent to the Merger.

In December 2020, the Company purchased a piece of laboratory equipment for $0.5 million from a supplier that one of our Board members is also a member of this supplier’s board of directors.

This purchase was billed at market rates with market payment terms.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures