Larimar Therapeutics, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Selected Consolidated Financial Data” and the consolidated financial statements and the related notes included elsewhere in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements based upon our current plans, expectations and beliefs that involve risks, uncertainties and assumptions. Our actual results may differ materially from those described in or implied by these forward-looking statements as a result of many factors, including those set forth under the section titled “Risk Factors” and in other parts of this Annual Report. Overview We are 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. There is currently no effective therapy for Friedreich’s ataxia. CTI-1601 is currently being evaluated in Phase 1 clinical trials in patients with Friedreich’s ataxia. In December 2020, we announced the completion of dosing of a SAD trial of CTI-1601. A Safety Review Committee reviewed preliminary blinded data after each cohort of the placebo-controlled SAD clinical trial and recommended continuation of the trial. Based on preliminary data, single subcutaneous injections of CTI-1601 at doses up to 100 mg are thought to have been well tolerated. Injection site adverse events were mild and transient, and no serious adverse events were reported. Analysis of clinical trial results remains ongoing. We expect to complete our phase 1 MAD study in the first quarter of 2021, and we expect to release top line results of both studies in the second quarter of 2021. We have received orphan drug status, fast track designation and rare pediatric disease designation, from the FDA, for CTI‑1601. In addition, we received orphan drug designation for CTI-1601 from the European Commission. The receipt of such designations or positive opinions may not result in a faster development process, review or approval compared to products considered for approval under conventional FDA or EMA procedures and does not assure ultimate approval by the FDA or EMA. Our CPP technology platform, which enables a therapeutic molecule to cross a cell membrane in order to reach intracellular targets, has the potential to enable the treatment of other rare and orphan diseases. We intend to use our proprietary platform to target additional orphan indications characterized by deficiencies in or alterations of intracellular content or activity. Since our inception, we have devoted substantially all of our resources to developing CTI-1601, building our intellectual property portfolio, developing third-party manufacturing capabilities, business planning, raising capital, and providing general and administrative support for such operations. We have never generated any revenue and have, to date, incurred net losses. We incurred net losses of approximately $42.5 million and $23.1 million for the year ended December 31, 2020, and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $65.6 million and a cash, cash equivalents and marketable debt securities balance of $92.6 million. These losses have resulted principally from costs incurred in connection with research and development activities, and general and administrative costs associated with our operations. We expect to incur significant expenses and operating losses for the foreseeable future. We expect to continue to incur expenses in connection with our ongoing activities, if and as we: • Continue to advance the development of CTI-1601 through additional clinical trials; • Seek to identify and advance development of additional product candidates into clinical development and seek new indications for our product candidates; 75 • Seek to obtain regulatory approval for our product candidates; • Identify, acquire or in-license other product candidates and technologies; • Maintain, leverage and expand our intellectual property portfolio; and • Expand our operational, financial and management systems and personnel, including personnel to support our clinical development, our manufacturing operations and future commercialization efforts and our operations as a public company. As a result, we will need additional financing to support our continuing operations. Until such time that we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public equity, private equity, debt financings, or other sources, which may include collaborations with third parties. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may never successfully complete development of any of our product candidates, obtain adequate patent protection for our technology, obtain necessary regulatory approval for our product candidates or achieve commercial viability for any approved product candidates. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability and may never do so. We believe that, based on our current operating plan, our cash and cash equivalents as of the date of this Annual Report will enable us to fund operations for at least twelve months from the issuance of our annual financial statements. COVID-19 Update 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 and mutates. In December 2020, the FDA granted emergency use authorization for two COVID-19 vaccines. Additional Emergency Use Authorizations, or EUAs, are expected to be granted to other pharmaceutical/biotechnology companies. The distribution and administration of the two approved vaccines have been slow. In January 2021, several mutations of the original COVID-19 virus were discovered. These variants are believed to be more contagious and perhaps more deadly than the original COVID-19 virus. The extent of the effect of COVID-19 on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, including the spread of more contagious and deadly variants, the successful distribution and use of current and future COVID-19 vaccines, and governmental, regulatory and other private sector responses, all of which are uncertain and difficult to predict. Although we are unable to estimate the financial effect of the pandemic at this time, if the pandemic remains uncontained or if the current vaccines prove ineffective against future viral mutations, it could have a material adverse effect on our 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 our CTI-1601 Phase 1 clinical trials in patients with Friedreich’s ataxia. In July 2020, we resumed these clinical trials. We completed dosing of the SAD clinical trial in December 2020 and we expect to complete the dosing of the third cohort of the MAD clinical trial in the first quarter of 2021. 76 We conduct these clinical trials at one clinical trial site. 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 locations 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 our clinical trial site for dosing and we expect to incur additional clinical trial costs to safely transport and isolate patients participating in the trial. In addition, additional stoppages or delays in the trial could result from new developments with respect to COVID-19. While top line results from the ongoing Phase 1 clinical trials were originally expected by the end of 2020, the delay in the clinical trial timeline caused by the ongoing impact of COVID-19 resulted in top line results now being expected in the second quarter of 2021. We may experience additional 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. Merger with Zafgen, Inc. On December 17, 2019, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Zordich Merger Sub, Inc., or Merger Sub, our wholly owned subsidiary, Chondrial, and Chondrial Holdings LLC or Holdings, (the sole investor in Chondrial) pursuant to which the Merger Sub would merge with and into Chondrial, with Chondrial surviving the merger as our wholly owned subsidiary, or the Merger. The Merger was completed on May 28, 2020 pursuant to the terms of the Merger Agreement. Pursuant to the terms of the Merger Agreement, upon closing of the Merger, all of Chondrial’s outstanding common stock was exchanged for our common stock and all outstanding options exercisable for units of Holdings were exchanged for options to purchase our common stock. In addition, immediately prior to the closing of the Merger, we effected a 1 for 12 reverse stock split and changed our name from Zafgen, Inc. to Larimar Therapeutics, Inc. Following the Merger, the business conducted by Chondrial became our primary business. The business combination was accounted for as a reverse acquisition in accordance with 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: (i) Chondrial’s stockholders owned a substantial majority of the voting rights in the combined company, (ii) the majority of the board of directors of the combined company was composed of directors designated by Chondrial under the terms of the Merger Agreement and (iii) existing members of Chondrial management comprised the management of the combined company. Accordingly, for accounting purposes, the business combination was treated as the equivalent of Chondrial issuing stock to acquire Zafgen’s net assets. As a result, as of the closing date of the Merger, Zafgen’s net assets were recorded at their acquisition-date fair values, which were then adjusted for the difference between the purchase price and the fair value of the assets acquired, in the financial statements of Chondrial and the reported operating results prior to the business combination are those of Chondrial. As the Merger has been accounted for as an asset acquisition, goodwill has not been recorded within the consolidated balance sheet. Private Placement On May 28, 2020, we entered into a Securities Purchase Agreement with certain accredited investors for the sale by us in a private placement of 6,105,359 shares of our common stock, and pre-funded warrants to purchase an aggregate of 628,403 shares of our common stock, or the Pre-funded Warrants. The Pre-Funded Warrants are immediately exercisable at an exercise price for $0.01 and are exercisable indefinitely. We refer to this sale herein as the Private Placement. The Private Placement closed on June 1, 2020. The aggregate gross proceeds for the issuance and sale of the Private Placement Shares and Pre-Funded common stock Warrants were $80.0 million and, after deducting certain of our expenses, the net proceeds we received in the Private Placement were $75.4 million. We intend to use the net proceeds from the Private Placement for research and development of our product candidates, working capital and general corporate purposes. 77 Financial Operations Overview Revenue To date, we have not generated any revenue from product sales, and do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts result in clinical success and regulatory approval or collaboration agreements with third parties for our product candidates, we may generate revenue from those product candidates or collaborations. Operating Expenses The majority of our operating expenses since inception have consisted primarily of research and development activities, and general and administrative costs. Research and Development Expenses Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of: • third-party contract costs relating to research, formulation, manufacturing, nonclinical studies and clinical trial activities; • employee related costs, including salaries, benefits and stock-based compensation expenses for employees engaged in scientific research and development functions; • external costs of outside consultants and vendors; • payments made under our third-party licensing agreements; • sponsored research agreements; • laboratory consumables; and • allocated facility-related costs. Research and development costs are central to our business and are expensed as incurred. Costs for certain activities, such as manufacturing, nonclinical studies and clinical trials are generally recognized based on the evaluation of the progress of completion of specific tasks using information and data provided by our vendors and collaborators. We expect to increase our investment in research and development in order to advance CTI-1601 through additional clinical trials. As a result, we expect that our research and development expenses will increase throughout the foreseeable future as we pursue clinical development of CTI-1601 or any other product candidates we develop. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of CTI-1601 or any other product candidates we develop. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our product candidates. The duration, costs, and timing of clinical trials and development of CTI-1601 or any other product candidates we develop will depend on a variety of factors, including: • the scope, rate of progress and expense of clinical trials and other research and development activities, including the ongoing impact of COVID-19 on these activities; • clinical trial results; • uncertainties in clinical trial enrollment rate or design; • significant and changing government regulation; 78 • the timing and receipt of any regulatory approvals; • the influence of the FDA or other regulatory authority on our clinical trial design; • establishing manufacturing capabilities or making arrangements with third-party manufacturers and risk involved with development of manufacturing processes, FDA pre-approval inspection practices and successful completion of manufacturing batches for clinical development and other regulatory purposes; • the impact of the on-going COVID-19 pandemic including the mutations of the original virus that may prove more contagious and deadly; • our ability to obtain and maintain patent and trade secret protection and regulatory exclusivity for our product candidates; and • our ability to retain key research and development personnel. A change in the outcome of any of these variables with respect to the development of a product candidate could significantly change the costs, timing and viability associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. General and Administrative Expenses General and administrative expenses consist primarily of personnel costs, consisting of salaries, related benefits and stock-based compensation, of our executive, finance, information technology, and other administrative functions. General and administrative expenses also include the costs of functioning as a public company, specifically audit, directors and officers insurance and other professional and legal expenses, including corporate and intellectual property activities. General and Administrative expenses also include other insurance expenses, and professional fees for, tax and legal services, including legal expenses to pursue patent protection of our intellectual property. We expect that our general and administrative expenses will increase in the foreseeable future as we hire additional employees to implement and improve our operational, financial and management systems. Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, costs and expenses, and related disclosures. We believe that the estimates and assumptions involved in the accounting policies described below may have the greatest potential impact on our consolidated financial statements and, therefore, consider these to be our critical accounting policies. We evaluate these estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses and evaluate payments made to vendors in advance of actual work activities being performed. This process involves reviewing open contracts and purchase orders, communicating with our personnel and outside vendors to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to: • CROs, in connection with clinical trials; 79 • vendors in connection with nonclinical development activities; • contract manufacturing organizations in connection with the production of preclinical and clinical trial materials; and • vendors related to product candidate manufacturing, development and distribution of clinical supplies. We base our expenses related to clinical trials and manufacturing costs on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs or CMOs that conduct and manage clinical trials or manufacture clinical trial material on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense, nonclinical expense or manufacturing activities. Payments under some of these contracts depend on factors such as the completion of milestones. In accruing CRO service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. In accruing CMO costs, we estimate the time period that manufacturing will be completed, the achievement of milestones and the percentage completion of each specific CMO agreement. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us recognizing adjustments in future periods as additional information becomes available. Stock-Based Compensation We measure 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 generally the vesting period of the respective award. Typically, we issue awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We account for forfeitures as they occur. We classify stock-based compensation expense in our 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, we had been a private company and lacked company-specific historical and implied volatility information for our common stock. Therefore, we estimate our expected common stock price volatility based on the historical volatility of publicly traded peer companies and expect to continue to do so until we have adequate historical data regarding the volatility of our own traded stock price. The expected term of our 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 we have never paid cash dividends on common stock and do not expect to pay any cash dividends in the foreseeable future. 80 Results of Operations Comparison of the years ended December 31, 2020 and 2019 The following table summarizes our results of operations for the years ended December 31, 2020 and 2019: Year Ended December 31, Increase 2020 2019 (Decrease) (in thousands) Statement of Operations Data: Operating expenses: Research and development $ 31,407 $ 20,790 $ 10,617 General and administrative 11,397 2,424 8,973 Total operating expenses 42,804 23,214 19,590 Loss from operations (42,804 ) (23,214 ) (19,590 ) Other income, net 322 82 240 Net loss $ (42,482 ) $ (23,132 ) $ (19,350 ) Research and development expenses Research and development expenses for the year ended December 31, 2020 increased $10.6 million compared to the year ended December 31, 2019. The increase in research and development expenses as compared to the prior year period was primarily driven by higher clinical supply manufacturing costs of $3.3 million, an increase in clinical trial costs of $4.8 million, an increase in personnel related costs of $1.7 million due to headcount additions in our research and development functions and an increase in stock compensation expense of $0.7 million associated with stock option grants made in 2020. The remaining increase is primarily related to internal laboratory costs, increased facility costs partially offset by a decrease in toxicology studies costs. General and administrative expenses General and administrative expenses for the year ended December 31, 2020 increased $9.0 million compared to the year ended December 31, 2019. The increase in general and administrative expenses as compared to the prior year period was primarily driven by an increase in professional fees and insurance costs of $6.3 million that are mainly due to the costs of operating as a public company, an increase in personnel related costs of $0.7 million due to increased headcount, and an increase in stock-based compensation of $1.3 million associated with stock option grants made in 2020. The remaining increase is primarily related to additional facility costs related to leases entered in 2020. Liquidity and Capital Resources Since our inception, we have not generated any revenue from any sources, including from product sales, and have incurred significant operating losses and negative cash flows from our operations. We have devoted substantially all of our resources to developing CTI-1601, building our intellectual property portfolio, developing third-party manufacturing capabilities, business planning, capital raising, and providing general and administrative support for such operations. 81 Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented below: Year Ended December 31, 2020 2019 (in thousands) Net cash used in operating activities $ (42,199 ) $ (22,699 ) Net cash provided by (used in) investing activities 17,090 (83 ) Net cash provided by financing activities 93,587 19,395 Net increase in cash, cash equivalents and restricted cash $ 68,478 $ (3,387 ) Net cash used in operating activities During the year ended December 31, 2020, operating activities used $42.2 million of cash, resulting from our net loss of $42.5 million, adjusted for noncash expenses of $2.3 million, and changes in our operating assets and liabilities of $2.0 million. Our net loss was primarily attributed to operating expenses of $42.8 million. The change in operating assets and liabilities was primarily due to an increase in accrued expense and prepaid expenses due to the growth in our operating activities and partially offset by a decrease in accounts payable due to the timing of invoice processing. During the year ended December 31, 2019, operating activities used $22.7 million of cash, resulting from our net loss of $23.1 million, adjusted for noncash expenses of $0.2 million and changes in our operating assets and liabilities of $0.2 million. Our net loss was primarily attributed to operating expenses of $23.2 million. Net cash provided by (used in) investing activities During the year ended December 31, 2020, investing activities provided $17.1 million of net cash, resulting from $41.9 million of cash acquired from our merger with Zafgen and $1.0 million representing maturities and sales of marketable securities, which was offset by transaction costs associated with the Merger of $1.3 million, the purchase of $24.5 million in marketable securities and $0.1 million used for the purchase of equipment. During the year ended December 31, 2019, investing activities used $0.1 million of cash for the purchase of property and equipment. Net cash provided by financing activities During the year ended December 31, 2020, financing activities provided $93.6 million of cash that was the result of proceeds from the sale of common stock of $75.6 million and capital contributions from related parties prior to the merger with Zafgen of $18 million. During the year ended December 31, 2019, net cash provided by financing activities of $19.4 million was the result of capital contributions from related parties of $19.4 million. Operating Capital Requirements CTI-1601 is currently in Phase 1 clinical development, therefore we expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that we will continue to incur expenses, if and as we seek to: • Continue to advance the development of CTI-1601 through additional clinical trials, including the cost of clinical materials as well as manufacturing scale up costs; • Seek to identify and advance development of additional product candidates into clinical development and indications for our product candidates; 82 • Seek to obtain regulatory approvals for our product candidates; • Identify, acquire or in-license other product candidates and technologies; • Maintain, leverage and expand our intellectual property portfolio; and • Expand our operational, financial and management systems and personnel, including personnel to support our clinical development and future commercialization efforts and our operations as a public company. We expect to continue to generate operating losses for the foreseeable future. We completed the Merger on May 28, 2020 which, upon closing, provided cash, cash equivalents, restricted cash and marketable debt securities of $42.9 million concurrent with the Private Placement which provided additional net proceeds of $75.4 million. In August 2020, the Company entered into an Equity Distribution Agreement, or the ATM 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 its common stock from time to time through this investment bank., as sales agent. 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. We believe that, based on our current operating plan, our cash, cash equivalents and marketable debt securities as of the filing date, we will be able to fund operations for at least twelve months. Until such time, if ever, as we can generate substantial revenue, 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. The terms of any financing may adversely affect the holdings or our existing stockholders’ rights. If we are unable to obtain additional funding, we will be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which would adversely affect our business, or we may be unable to continue operations. Off-Balance Sheet Arrangements During the periods presented we did not have, and we currently do not have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets. Contractual Obligations and Commitments The following table summarizes our contractual obligations as of December 31, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods: Payments due by Period Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years (in thousands) Lease Obligations $ 10,101 $ 1,296 $ 2,343 $ 2,148 $ 4,314 Total $ 10,101 $ 1,296 $ 2,343 $ 2,148 $ 4,314 Recently Issued Accounting Pronouncements Please read Note 2 to our consolidated financial statements included in Part , Item,” of this Annual Report for a description of recent accounting pronouncements applicable to our business. Other Company Information None. 83 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and the report of our independent registered public accounting firm are included in this Annual Report on Form 10-K on the pages indicated in Part IV, Item 15. 84 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.